Indigo’s fourth quarter results were far below expectations, reflecting the intensely competitive market and irrational market and also Indigo’s challenges as it continues its growth path. The results were announced along with the full year results, however we present an analysis only of the fourth quarter as it is reflective of certain trends in the market (a full year analysis will be forthcoming when all airlines have reported full year results).
Quarter saw financials trending adversely
Revenues were higher by 19% compared to the same quarter last year but costs rose by 30% for the same period. EBITDAR margins saw a compression of 8.1% while profit margins saw a decline of 7.1%. The overall profit was 73% lower than the same quarter last year.
- Passenger Revenue – Rs. 5799 crores
- Operating Cost – Rs. 5890 crores
- EBITDAR – Rs. 1132 crores
- Net Earnings – Rs. 117 crores
- RASK: 3.40
- CASK: 3.30
- EBITDAR margin – 19.5%
- Net Margin – 2%
- Passengers carried – 14.3 mn
- ASKMs – 17,072 mn
Market witnessing intense discounting – a great time for travellers
The quarter was market by intense yield pressures. Specifically, the pricing power in the market was diminished. Airlines, especially low cost carriers such as Indigo, operate with the philosophy that prices rise as you get closer to the departure date. That is, the same seat when booked 30 days out will be much cheaper than if booked seven days out.
However, in a sign of the competitive pressures in the market, airlines were discounting tickets booked in a zero to 15 day window. What this means is that travel agents and passengers alike waited to book tickets until closer to departure and often got discounted tickets. This then had impacts on overall quality of revenue (usually bookings closer to departure tend to be corporate travellers and less price sensitive travellers).
Not offering the same fare is not an option as most passengers and agents gravitate towards the lower fares (exception being frequent flyer program where Jet Airways is a clear leader). Yields for the quarter were down 5.6% and only partially offset by higher load factors (that is Indigo made up for some of the revenue loss per seat by selling more seats).
Rising costs compounded financial impact
Against a falling yield environment, costs for Indigo grew largely driven by fuel costs and also weakness of the rupee. Fuel costs rose by 10.2% with fuel constituting 40.1% of the airlines total costs. Fuel costs can only be mitigated via hedging (which Indigo chooses not to do as it is speculative) and via fuel efficient technology (where Indigo is deploying more and more Airbus A320 NEOs (new engine option) aircraft with a goal to be a predominantly NEO fleet). Employee expenses also grew in the quarter by 2% reflecting organizational buildup costs and costs related to talent and other benefits. Finally, the rupee weakness led to a forex loss of 92 crores.
Capacity induction also saw challenges
Indigo added 6 aircraft during the quarter however, the quarter also saw the grounding of the NEO fleet.
Capacity addition compared to Q3FY18 was 5% (by available seat kilometers) and compared to the same quarter last year was 20%. The capacity addition is critical for Indigo to blocking slots and parking and indeed one saw Indigo bring in short-term leases including wet-leases to bridge the capacity
Management changes as the airline scales
The quarter also saw the departure of Indigo’s CEO Aditya Ghosh. Sources indicate that this was planned as Indigo prepares for its next phase of expansion including international expansion. Key management changes include the following personnel:
- President and Chief Executive Officer : Greg Taylor (previously worked with United Airlines overseeing a joint network of large jets and regional jet flying with a focus on cost control)
- Chief Planning Officer: Michael Swaitek (previously worked with Qatar Airways, Air New Zealand and United Airlines looking at all aspects of corporate planning)
- Chief Strategy Officer: Willy Boulter (previously worked with Etihad, Virgin Atlantic and a variety of carriers including a 20 year tenure at Cathay Pacific)
- Chief Operating Officer: Wolfgang Prock-Schauer (previously worked with GoAirlines, Jet Airways and Air Berlin)
- Head of HR: Raj Raghavan (previously worked with Amazon and GE)
These appointments are critical as they clearly illustrate Indigo’s desire towards international expansion and also a focus now towards managing scale and complexity (people, processes and procedures).
The ATR flying and UDAN flights still in nascent phase
The quarter also saw Indigo scale up its ATR flying mostly in the South. The airline continued its strategy of dominating cities including where it flies its regional jets.
By Indigo’s own admission, for any city it flies to it wants to have the lowest CASK (Cost per available seat kilometer) and large amount of capacity to few stations is one of the ways to leverage this. As of now, Indigo has not disclosed the CASK of its ATR flying however, our estimates indicate that it will be higher than the CASK of the A320 flying. This is due to more seats on the A320 and also lower aircraft ownership costs (Indigo is buying the ATRs while the A320s are on a sale and leaseback model). While Indigo was awarded 20 RCS routes in phase 2 of the UDAN scheme it yet has to start any flights
Going forward, Indigo has given a guidance of 25% capacity growth. Point to note that this capacity growth is in ASKs and not fleet which means that Indigo can also derive some of this growth by flying its fleet at higher utilization levels.
Given that metro airports are saturated, much of this capacity will go towards cities in the South and the East where the markets may not have the depth to absorb this capacity – that is passenger numbers will have to be stimulated via intense discounting.
International flying is a given and Indigo has already announced flights to Dhaka and will likely also announced additional flights to Qatar and Maldives. That said, revenue pressures will remain and costs are again trending upwards (a fuel hike of 6% by the Indian oil Companies was announced the day of the results).
All in all, it is to be a turbulent few months for Indigo.
Stay tuned for updates