Indigo Q1FY20 results: the greatest quarter in Indian aviation?

Indigo reported its Q1FY20 results on Friday. With a profit of INR 1203 crore it is the highest net profit for any airline in Indian aviation. The airline looked good on all metrics ranging from financial to strategic and operational.

Interestingly, while this quarter was indeed driven by the collapse of Jet Airways, Indigo’s contention is that this did not have a significant impact as majority of Jet’s capacity, ~65% was focused on international routes. Thus, Indigo contends, the uptick was driven by stronger revenue management, stronger demand and a more rational pricing environment. This was partially true as Indigo has several advantages and has been able to build a few moats that are surely helping towards greater revenue capture.

By the numbers (and quarter over quarter change):

  • Revenues: INR 9786 crores (up by 43.5%)
  • Costs: INR 8277 crores (up by 22%)
  • Capacity: 23.3 billion ASKs *(up by 30%)
  • EBITDAR: 29.5%
  • RASK: INR 4.10 (up by 10%)
  • CASK: INR 3.45 (down by 6.3%)
  • Load factor: 88.9% (down by 0.4 percentage points)

Strong growth but macro conditions are changing

The quarter saw strong demand growth but also coincided with the strongest travel period of the year. The current quarter Q2FY20 will confirm if the growth is here to stay and by most macro-measures the consumer sentiment is eroding. On the liquidity front, the markets are down and liquidity is a matter of much concern. But with a strong balance sheet Indigo has planned ahead securing a INR 2500+ crore credit line already.

The uses of these funds will likely be towards fleet, financing and expansion measures. On the demand side, whether it is car sales, capital expenditure or discretionary spending, the consumer and corporates are tightening their wallets. Air travel is likely to see the impact. Add to that the strength of the dollar and fuel price fluctuations which will hit costs. There may just be a storm brewing.

Against this backdrop, Indigo is planning to continue with its stated capacity growth of 30% for the year. Majority of this capacity will go towards international expansion. Strategically this is the right move given the gap in the market (with the collapse of Jet) and the saturation in core markets where Indigo already leads by capacity. International expansion also consumes more aircraft per segment given the higher stage lengths. Yet, international growth may also have to be tempered depending on how demand patterns emerge.

The revenue environment & Indigo’s pricing power

In the current revenue environment, Indigo is now well positioned to set the agenda. With a 50%+ market-share coupled with its schedules and frequencies offering, there is no competitor that can force revenue dilution. Interestingly, none of the releases from Indigo mention market-share. Presumably because it is well aware of its market power. This is likely to continue in the near future.

The booking curves have trended in the right direction with the 0-15 day window now showing more rational pricing. Indigo also has fine tuned its revenue management practices with a more accurate forecast of minimum sales required before entering the 0-15 day window. What this allows is for more capacity to be allocated to flyers at a later date (that normally pay higher). Digital marketing efforts have been stepped up and with interventions attempts are being made to smooth out cyclicality.

Overall, the pricing environment has been strong and will remain so for the near term.

Unanswered questions on fleet and expansion

Indigo ended the quarter with 235 aircraft. These included 88 NEOs including of 5 A321 NEOs. The NEOs now constitute 38% of the total fleet and are both cash-accretive and cost effective. As fuel rises and as competitors are rushing to plug capacity plans driven by the 737MAX grounding and the dry lease market, Indigo remains well positioned on the fleet.

The deployment of the fleet is a matter of debate. While the CEO insists that there is no disagreement on the international expansion strategy between the promoters – it is now public knowledge that at least one of the promoters was not involved in the OEM negotiations on the latest engine order. International expansion will have its own requirements so while both may agree that international is the way to go many questions remain including those on cabin configurations, thrust requirements, technical specifications, product offering and structuring of deals.

The intensely debated question of wide-bodies versus narrow-bodies on international routes remains and the jury is out on whether the low-cost-long-haul model will succeed.

The irony: strong earnings & a bitter dispute

The strongest quarter in Indian aviation may also be the one with the highest contrast. As the airline soared to greater heights, the dispute between the promoters came out to the public. Approaching the SEBI and the highest levels of government for intervention indicates that this is far from over. Decisions like not making the E&Y report on related party transactions public is understandable but has also thrown up some protests by shareholders.

The dispute will also force parties to choose sides. Management is already being spoken about as being aligned to one promoter or the other and the board expansion (that is all but confirmed) may actually exacerbate this situation. Corporate governance issues like the independence of the board, the role of the board and even those of Substantial Ownership and Control (SOEC) may surface. And as more information is put forth, some industry veterans indicate that, it may get worse before it gets better.

While the nature of the dispute, it is argued, centers on the articles of association – it has thrown up issues that will force a closer look into Indian aviation. In the best case the issues are resolved and the airline continues to build on its successes, yet in other scenarios this could have implications that at this time cannot even be determined because there are far too many parties and far too many variables.

Pilots often say that flying is pure joy until you land and get to the airport gate. It’s then that you have to deal with the myriad issues – several of them fairly acrimonious. Indigo’s quarter has been very similar.

About Satyendra Pandey

Satyendra Pandey is an India market expert and has held a variety of roles across aviation. An author and a certified pilot, his most recent book is titled: Dissonant dispatches: Indian aviation’s emergent flightpath.

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