Indigo Q2FY20 results: clear air turbulence or something more?

Indigo reported its Q2FY20 results on Friday. With a loss of 1,062 crores, the results caught many by surprise. It is too early to tell whether the results reflect challenges with the strategic direction the airline is taking (compare this to the profit of INR 1203 crore in Q1FY20) or if this was a one-off driven largely driven by operational challenges. The airline had several explanations for the results which touched all aspects.

Overall this was one of the few instances where the cost of flying each seat (CASK) exceeded the revenue earned per seat (RASK) by INR 0.40. That is, the airline lost 40 paise for each seat it flew each kilometre. Take the total capacity flown of 24.2 billion ASKs and the operational loss figure is clear.

The quarter also witnessed two arbitration cases filed by one of the promoters (Rahul Bhatia) as a part of the dispute that emerged. The dispute as it relates to impact to the company seems to be settled for now. The Annual General Meeting (AGM) saw several proposals being approved and implemented – many of them being the ones that were highlighted as a matter of concern in the promoter dispute.

By the numbers:

  • Revenues: INR 8539 crores (up by 31.1%)
  • Costs: INR 9571 crores (up by 27.6%)
  • Capacity: 24.2 billion ASKs (up by 24%)
  • EBITDAR: 3.2%
  • RASK: INR 3.42 (up by 5.7%)
  • CASK: INR 3.85 (up by 2.8%)
  • Load factor: 83.5% (down by 0.9 percentage points)

International growth, mixed results

The quarter saw Indigo launch a number of international routes including to China, Middle East, Hong Kong and Vietnam. This continues to be a focus area and for the half-year, approximately 50 per cent of the new capacity has been deployed on international routes. These routes take time to mature and the impact has been seen in the operational cash-flow.

Additionally, not all international routes are a net positive. Much like the Istanbul flight which continues to see challenges – for some of the routes the sector length is far too long. This eats into the cost base as crews cannot be flown back, the yields are lower compared to the full-service carriers (though the cost base is lower as well), and the routings essentially are non-EDTO (Extended Diversion Time Operations) if flown on the A320NEO. Substituting routes with an A320 CEO aircraft is an option but leads to higher utilization on the fleet and has to be balanced against maintenance and lease considerations.

On the longer flight lengths, Indigo has decided to revisit its plans of flights to London. This after assessing the commercial viability of such flights and also getting their hands burnt with flights to Istanbul which have been an operational nightmare.

Going forward the international expansion spree by Indigo will continue.

The surprising increase in maintenance costs

Total expenses for the quarter were up by 27.6% compared to the same period last year. Yet the real details are in the line items.

The total unit cost of flying CASK increased by 2.8% which if one factors in the fuel and forex exchange fluctuations are well within range. However, it was the CASK excluding fuel which showed an increase of 17.2% over the same quarter. This included mark to market loss on capitalized operating leases and revised provisioning for future maintenance costs. Both of these are non-cash charges.

Engine maintenance on Indigo’s VT-IEA at Bangalore Airport.

The revised provisioning of maintenance costs leads one to believe that the CEO fleet is being flown more aggressively. This is driven both by delay in the inductions and also the fact that the A320NEOs are being flown only on certain routes. Effectively this leads to the aircraft requiring a second shop visit with Indigo bearing the costs. This is also in contravention of their own fleet strategy but is driven by the aircraft they inducted on short-term leases to maintain capacity growth when the A320NEOs were delayed. Provisioning could also mean a change in how the deferred incentives are being applied.

Unanswered questions on fleet & expansion

Indigo continues with its aggressive fleet expansion. Forecasts call for the airline inducting thirty aircraft (gross inductions) per year through the next decade. This quarter saw a net addition of ten aircraft making Indigo’s fleet size 245 aircraft.

By the airlines own admission there has been a delay in aircraft induction and this is out of their control.

Indigo has indicated that beginning 2022 it will have an all NEO fleet. This will help both the balance sheet and P&L considerably given the cash-accretive nature of the financing of the aircraft coupled with the lower operating costs. 2020 will also see the first CFM powered A320NEO enter the Indigo fleet.

Read our article on the Engines that power Indian aviation.

Notably, the deliveries of A321neo planes are behind schedule. IndiGo currently has seven A321neo planes in its fleet and the target of having 15 A321neos by January next year will likely not materialize.

Finally, the intensely debated question of wide-bodies versus narrow-bodies on international routes remains and the jury is out on whether Indigo will go in for a wide-body aircraft order.

A weakening revenue environment: a cause for concern

The quarter saw weaker revenue environment where pricing was significantly depressed. Most of this can be attributed to seasonality where Q2 is the weakest quarter of the year. Yet against this backdrop growth is also slowing down. By Indigo’s own admission the market is softening and unit revenue will likely remain flat.

At the same time, competition is increasing with new domestic capacity in several cities. Fare wars are prevalent including a fare-sale in Diwali which has many in the yield-management space perplexed. The booking curve is shifting towards later bookings and this is a double-edged sword. Because, later bookings can be charged a higher fare – but in a weakening market beyond a certain price-point the bookings just fall off. The airline is then left with a choice of tactical interventions which given the stated capacity growth of 25% are limited.

Read: The great Indian aviation paradox – low fares fueled by unsustainable capacity

The market weakness continues as reflected in fares and pricing for the following quarter. At the same time road and rail are improving exponentially and technology adoption is leading to an entire generation of travellers that know how to source the best deals forcing airlines to match fares. Indeed it is quite telling that an airline with almost 47% domestic market share is not able to lead pricing. This situation is not expected to reverse itself in the near term.

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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