Wednesday , 12 August 2020

Indigo’s Q1FY21 results analysis: Highlighting the depth of the challenges

India’s largest airline reported its first-quarter results yesterday. If Q4FY20 losses of 870 crores were of concern, Q1FY21 has only made this much worse. The loss at 2,844 crores was three times the loss of the previous quarter.

This was in the most part not surprising given that much of the quarter had aircraft sitting on the ground due to the Coronavirus lockdown. For Indigo, it meant that they had the largest number of aircraft (274 as of June 30th) for which they had to pay lease rents, airport charges etc. In a scenario where revenues were trickling in while costs stayed constant this loss was to be expected.

Indigo Q1FY21 results snapshot (in INR) comparisons to Q1FY20

  • Revenues ₹1,143 crores (down 92%)
  • Costs ₹3,986 crores (down by 51%)
  • EBITDAR ₹-1421 crores (not comparable due to change in accounting treatment)
  • Loss after tax (PBT) ₹2844 crores (-3366%%)
  • Revenue per available seat kilometre (RASK) ₹4.19
  • Cost per available seat kilometre (CASK) ₹17.69
  • Capacity (measured in available seat kilometres) 2.1 billion (down 90%)
  • Passenger load factor 61.3%

The challenges of fixed costs

Indigo’s challenges can be seen by examining the cost per available seat kilometre or the CASK. This means that for the airline to fly one seat for one kilometre, it costs Indigo INR 17.69. Against this Indigo earned only INR 4.19 which meant each kilometre was flown at a loss.

Yet examining this deeper, it does not mean that each flight was operated at a loss. What this means is that the fixed costs of having a large fleet and sizeable operations were spread out over a fewer number of aircraft. And this causes the extremely high per kilometre cost. Ironically, this is partly driven by Indigo’s strategy as well where it likes to maximize the use of its fixed costs.

Thus, for most routes, the airline will target a 30% – 50% capacity share of the market on that route because it can utilize the assets to put more flights in the air and thereby earn more revenue. But in a lockdown scenario, this is reversed.

To get this cost down, the only solution is to fly more and also cut expenses via shrinking the fleet. Indigo will likely resort to both measures.

A strong balance sheet and cash will be critical

Indigo is far better positioned than its peers due to a strong balance sheet and a strong cash position. The focus on cash was also highlighted per their CEO’s statement, “The aviation industry is going through a crisis of survival and therefore, our cash balance remains our number one priority…”

The cash balance is important as Indigo needs a buffer to get it through these trying times. Because even though the revenues have slowed down, the costs continue to build up. To pay these costs, the airline needs cash and/or credit. And given the nature of the airline industry, whereof the six Indian airlines – two are down to one to three days of cash reserves, one is fighting to survive, one is hoping for disinvestment and one is already in the NCLT, banks are unwilling to lend unless the airline shows significant collateral.

For India’s airlines including Indigo this challenge is compounded as most of the aircraft are leased. Thus they cannot be used towards collateral demanded by banks.

To survive the crisis, Indigo will no doubt renegotiate leases, cut salaries, cut staff and right-size the operation. While doing this however, it still burns through cash each day that the fleet sits idle. For the quarter, using the numbers published and back-of-the-envelope estimates this cash-burn was 30 crores per day.

The weak rupee continues to be a curse

The weakness of the rupee continued to haunt Indigo much like other airlines. This because lease expenses and maintenance expenses are for the most part priced in USD. Further, for dollar-denominated loans which are largely serviced by rupee-denominated cash, as the rupee weakens the airline is forced to pay more to service the same loans.

Compared to the same quarter last year, the dollar was up by 9.6%. For Indigo this meant an additional hit of 75.9 crores over and above other reconciliations.

Going forward the situation is expected to get worse before it becomes better.

We reiterate: the results speak to the wider market: one or more airline failures are likely

It is worth restating as we did the last time around that the Indigo results are likely to make other airlines sit up in shock. Especially the weaker airlines that neither have cash-balances nor a strong parent company support.

The failure to save for a rainy day have only exacerbated the situation with airlines like SpiceJet already facing litigation by OEMs and others like GoAir. Concurrently SpiceJet also reported results (although these were for Q4FY20) and the loss they reported was 807 crores.

As it stands demand continues to be very weak and it is not expected to recover anytime soon. This is confirmed by the 50% – 60% load factors as reported by airlines which too are misleading as they are arrived at after clubbing and cancellation of flights. Which means that actual load factors are even weaker.

The price-floor ironically is hurting airlines now as well as their ability to stimulate demand is limited. Fuel has risen by 30 % and the dollar continues to strengthen against the rupee. And as of now, airlines are only allowed to fly 45% of their filed flight schedule. Again the largest airline stands to be impacted disproportionately.

Overall, a very challenging situation and it will likely get worse before it gets any better.

About Vedant Agarwal

A frequent flyer for both work and pleasure - Vedant has held elite status on many of the major alliances and airlines. Also an avid aviation photographer, his pictures have been published in and on the covers of many international publications.

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