Indigo second quarter FY2018-19 results analysis

Indigo, reported its second quarter results of the fiscal year 2018-2019 (Q2FY19) this Wednesday. The result was a net loss of 652.1 crores and highlighted the challenges facing Indian aviation. Incidentally, this is the first time since its listing in the public markets Indigo reported a loss of 652.1 crores and it is fair to say that all airlines will report losses for this quarter.

Indigo Q2FY19 results snapshot (in INR) comparisons to Q2FY18

  • Revenues ₹6185 crores (up 16.9%)
  • Costs ₹7,502 crores (up 58.2%)
  • EBITDAR ₹220 crores (down 86.1%)
  • Profit/Loss before tax (PBT) (₹652.1 crores) (down 218.2%)
  • Revenue per available seat kilometre (RASK) ₹3.23 (down 8.1%)
  • Cost per available seat kilometre (CASK) ₹3.74 (up 24.1%)
  • Capacity (measured in available seat kilometres) 19.5 billion (up 28.9%)
  • Passenger load factor 84.5% (up 0.5 percentage points) 

Fuel price rise and rupee weakness continue to affect the cost base

Fuel, as a cost item, now is 40% of the cost base for the entire industry. The fuel cost rose by a whopping 84.3% compared to the same quarter last year. To add to this the rupee fell against the dollar further affecting cost. These costs can be passed on to consumers via a fuel surcharge however Indigo was not successful in doing so as competitors did not levy this charge. Thus there is a situation where costs are rising but fares are not rising in the same proportion and this has a direct effect on airline margins. Accordingly, this was reflected in the much lower EBITDAR margins for Indigo.

The rupee weakness further added to Indigo’s price pressures. 50% of Indigo’s costs are denominated in dollars. Thus any change in the exchange rate has an impact on cash-outflows. Given the size of Indigo and the model where majority of aircraft are leased (lease payments are usually in USD), the rupee weakness adds to the cash-outflows of Indigo. This is reflected in the mark-to-market adjustments where Indigo reported a 340 crore loss on foreign exchange.

Competition forces fares to remain low

In this environment of rising costs, the ability to raise fares remains low. This is driven both by capacity (new flights into markets) and competition (all airlines fighting over passengers). Interestingly Indigo stated that it has never been its philosophy to be the carrier offering the lowest fares, however adding that if competitors do this Indigo is forced to react. This highlights the very price sensitive nature of demand where price continues to be a key consideration for choice of airline.

The challenge with fares is also coming in the D0 – D15 window. This means fares offered 1 day prior to departure to 15 days prior to departure. These are last minute fares that are usually higher. The mantra in the low cost airline business has always been, “the price is never cheaper tomorrow” but this seems to have been missed by Indian carriers. When there are discounts on D0 – D15 fares, it reflects significant weakness in the market as airlines forsake yield (higher fares) for the sake of volumes (higher load factors). Indeed, this can be witnessed by the fact that while airlines are reporting losses the load factors are rising and planes and airports are quite full.

Fleet additions continue

For the quarter Indigo continued with aggressive expansion adding 20 aircraft to its fleet. This addition was during Q2 which is traditionally the weakest quarter and where airlines usually schedule maintenance checks to reduce capacity. The reason for this addition is twofold. First, the capacity addition is to cater to the demand growth (which is growing at 18% – 20%); and second towards capturing valuable infrastructure (slots and parking).  Going forward Indigo has revised its capacity guidance indicating that it will end the year with 30% higher capacity. This will be driven by more deliveries by Airbus which were delayed due to issues with the Pratt & Whitney GTF engines and also the induction of the airline’s first A321s which will have 15% higher seat capacity than the existing A320 NEOs.

(Read our article on the effect of the engine issues on Indigo.)

Long haul international likely delayed

Indigo earlier had expressed desires to move into international long-haul (8 hours+) flying. During the current results announcement, it was indicated that “long-haul at this point is more of an aspiration then a plan” – which shows the market weakness. That said, Indigo’s plans to expand international flights continue. They announced 5 destinations during the quarter including Male, Phuket, Kuwait, Dhaka and AbuDhabi and more are to come.

(Read our article to learn more about aircraft selection for long-haul)

The international flying helps move away from the domestic market and usually brings in higher fares and a natural hedge (as tickets are priced in foreign currencies if bought overseas and thereby the rupee weakness is bypassed).

The market environment continues to be tough

Overall, Indigo’s results reflect the market environment which continues to be very tough. All airlines are expected to report losses for the quarter and for competitors like Jet Airways the situation may be even more challenging as they don’t have significant amount of cash on-hand. Indigo in that regards is well positioned with a strong balance sheet but even-so this situation for the industry is unsustainable.

Upcoming Diwali and Christmas travel will offer some respite and indeed fares have risen 8% – 10% on average. However, compare this against costs that have risen 30% – 40% and one soon realizes that unless other income streams (such a sale-and leasebacks and ancillary revenues) start to compensate for the difference, airlines will continue to report losses.

In summary

In summary, Q2FY19 may have marked a turning point in Indian aviation and forced both airlines and the government to stand up and taken notice of the fragile state of airlines. As of this writing, Jet Airways continues to grapple with financial challenges, SpiceJet has asked for lease moratoriums, GoAir is likely looking to sublease aircraft to reduce capacity and AirIndia and Vistara both have reported sizeable losses.

Overall, the situation will get worse before it becomes better. As always Bangalore Aviation will be the first to report.

Stay tuned.

About External Analyst

The writer(s) are external experts. Bangalore Aviation may not agree with the views expressed by the author. Authors prefer to remain anonymous for a variety of reasons but mostly since they are not authorised by their employers to express their views publicly on the record.

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