IndiGo first A320neo VT-ITC touches down at New Delhi's IGI airport after a non-stop flight from Toulouse, France
IndiGo first A320neo VT-ITC touches down at New Delhi's IGI airport after a non-stop flight from Toulouse, France

Indigo Q3FY20 results analysis

Monday, January 27th was quite a newsday for Indian aviation. In what is becoming a tale of two airlines, while the national carrier came out with its Preliminary Information Memorandum looking for someone to take over 23,286 crores of debt and 8556 crores of losses (for FY19) the other airline Indigo reported profits of 496 crores with another 20,000 crores on the balance sheet.

Indigo is making a habit of catching the street by surprise. We highlighted this in its Q2FY20 results as well but this time the surprise was the magnitude of the profits. As before, the airline had several explanations for the results.

By the numbers:

  • Revenues: INR 10,332 crores (up by 25.5%)
  • Costs: INR 9773 crores (up by 21.5%)
  • Capacity: 25.8 billion ASKs (up by 19%)
  • EBITDAR: 19.7%
  • RASK: INR 3.91 (up by 5.7%)
  • CASK: INR 3.69 (up by 2.1%)
  • Load factor: 87.6% (down by 2.3 percentage points)

Indigo clearly positioned to leverage market capacity challenge

The quarter saw Indigo continue to add capacity. Indigo added twelve aircraft added during the quarter while its rivals continued to suffer. Further given the load-factors it seems that Indigo is not only flying three times the fleet of its closest rival but also filling up the aircraft. This was no doubt helped with the exit of Jet Airways in the market as well.

Indigo’s mantra now seems to be that we simply fly more frequencies to more cities than any other carrier. And indeed, Indigo leads in capacity from the metro cities. In Delhi and Mumbai it has a capacity share of 29% while in Bengaluru, Kolkata, Hyderabad and Chennai its share is in excess of 45%. That is not all, the gap between its closet rival is such that industry analysts indicate, ”its not even comparable.”

This strategy of dominance not only helps capture a premium, but it will also help Indigo with better flows as it expands its international presence.

Going forward the international expansion spree by Indigo will continue.

Revenues are in full-throttle mode

Indigo’s revenues surged during the quarter. This included ticket sales, ancillary revenues and even other income. Accordingly, its total income was up by 25.5% to ₹10,330.2 crore on a year on year basis. Of this, passenger ticket revenue was 85% and that too rose by 24.1% y-o-y. Ancillary revenue during the quarter was 10% of total revenue and stood at ₹1,037.30 crore. This too grew by 28.8% YOY.

Interestingly other income also surged. This surge could be attributed to the strong financing environment which is a consequence of the Boeing 737MAX grounding. Financiers are chasing liquid assets and the A320neos and A321neos are top of the list. There may also be accounting treatment that has helped recognize higher non-operational income.

But several challenges could still come up

As Indigo continues with its aggressive fleet expansion, significant capacity is going to be allocated to international operations. As their CEO expounded, for the quarter, the airline started operations on seven new international routes and 17 new domestic routes.

Yet international expansion is not as easy as the risk profiles are significantly different. Further, the number of variables that impact the operation change exponentially and for a low-cost carrier, this poses quite a challenge.

Indigo has already had to revisit flights to Hong Kong. China flights stand suspended due to the Coronavirus outbreak and an impact to demand in the near term is all but certain. In the Middle East, it is now battling emerging carriers such as Jazeera that too have a strong business model and are delivering. Malaysia continues to be challenging because of competition from Air Asia and the geopolitical dynamics. Doha routes are money spinners but only time will tell how this plays out. Vietnam now has VietJet launching direct flights which will chase the same passenger base. And other destinations like Central Asia are still waiting to mature so launching here requires extensive marketing and planning.

Promoter discord continues

While operationally Indigo continues to deliver, the fight between the promoters continues. An Extraordinary General Meeting (EGM) called for by one of the promoters saw a proposal on the amendment of voting rights being rejected.

Effectively, the amendment was geared towards selling a stake. Currently, one of the promoters has a veto right and thus can block any such sale.

It doesn’t help that Indigo is a listed company and this fight is being played out very publically. Internally too there were management changes including the elevation of the CEO to a whole-time director and the return of the former CCO as Chief Strategy and Revenue Officer. Other management changes may also be on the anvil.

Finally, new reports indicate that minority shareholders have already expressed concern about the erosion of the share price of the company due to the public spat. And there does not seem to be any resolution in sight.

What’s next – a widebody order or Air India?

While Indigo continues its expansion spree, the next phase of its growth may include a wide-body order. Our contention is still that if and when this happens the A330neo is likely to be the asset that Indigo chooses.

We also believe that a bid for Air India is not entirely out of the question but will include only specific parts. Readers may recall that Indigo was the first airline to put in an unsolicited bid for Air India. This, as expected, was rejected by the government. Even now, parts of Air India may be very attractive to Indigo. But that is not how the Air India PIM has been structured – for now.

Interestingly, the Air India Engineering Services division which includes hangars and maintenance facilities will be a great fit for Indigo given its large fleet size and maintenance spends. To have these spends be captive to the Indian market will be a boon for the airline and stakeholders alike.

Overall, more surprises by Indigo cannot be ruled out. As always we will keep you updated.

About Satyendra Pandey

Satyendra Pandey has held a variety of management roles in aviation. Most recently he was the Head of Strategy & Planning at a fast growing LCC. Previously he was with CAPA (Centre for Aviation) where he led the Advisory and Research teams. Having lived and worked across four continents, he is an alumnus of the University of New South Wales and the London Business School. He is also a certified pilot with an Instrument rating.

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