"Every crisis also has a benefit," said Wolfgang Prock-Schauer, COO at the country's largest carrier IndiGo, at the recent quarterly earnings call. Struck by the coronavirus pandemic, IndiGo reported a bad set of numbers in the last quarter of FY20. For instance, the consolidated loss in the fourth quarter stood at Rs 871 crore and Rs 234 crore for the full FY21. Wolfgang's statement is not just a cliche that's used by every industry captain in these troubled times, there are enough pieces of evidence which suggest that IndiGo's management is indeed walking the talk. Over the past two months, the airline has taken a series of steps that will minimise the impact of the current pandemic-related issues.
To begin with, the airline has converted its 10 aircraft into freighters which resulted in higher throughput. How? IndiGo, and many other airlines, carry cargo in the belly of the plane, the average carrying capacity is between 6 and 9 tonnes. Compare that to these 10 all-cargo planes which can carry 17-20 tonnes per flight. As passenger revenues tanked during the lockdown, IndiGo and its rival ramped up their cargo operations due to high demand for transporting essential supplies. The sharp rise in the international cargo rates - from about $1,000 per tonne to $3,000 per tonne - during the lockdown has further improved the viability of cargo flights. Though it's not clear how much IndiGo benefitted from the high cargo rates.
Over the past 18 months, the no-frills carrier has been focussing a lot on cargo operations. For instance, in one year to December 2019, IndiGo's share in the domestic cargo market has risen from 27 per cent to 40 per cent.
But the recent bump in revenues has largely come from the international cargo flying. Since the lockdown, IndiGo has been flying to China, the Middle East and other countries carrying a decent amount of cargo. "I am also pleasantly surprised by this trend. I didn't expect it. A lot of it is driven by the international expansion. As international expanded, the cargo expanded faster than we had anticipated. Our management team in the cargo has turned out to be a high-performance team. It has been, during the shutdown, one of our few bright spots. Even when we come back to full operations, [we will be doing] all-cargo operations to international destinations," said Ronojoy Dutta, CEO, IndiGo at the recent investors' call.
Even though IndiGo has been flying planes since May 25, a large part of its fleet is still not utilised. These are primarily due to the ministry of civil aviation (MoCA) restricting the commercial flying capacity to 33 per cent for three months. IndiGo is flying even lower at around 20 per cent capacity because of state-specific restrictions on top of MoCA orders. With smart planning, IndiGo seems to have overcome the challenge of capacity restrictions. How?
IndiGo's fleet has a mix A320neos, A320ceos, A321neos and ATRs. The airline has been facing efficiency issues with A320ceos for the past few years. Though it added about 50 of them (from the secondary market) some years ago, and extended the leases for some of those in 2016, A320ceos are essentially old-generation aircraft that not only burn more fuel but also require higher maintenance cost. IndiGo usually fly planes for 5-6 years before returning them to lessors, but it had to extend A320ceo leases because of issues with A320neos.
But in a depressed market like today, no airline wants such planes in their fleet. With about 120 A320ceos in its fleet, IndiGo too wants to return them to lessors as quickly as possible, and at the same time, induct more A320neos which are more fuel-efficient, and have a low maintenance cost. However, there is a limit to which it can add them. Why?
So while IndiGo is a priority customer for aircraft maker Airbus, the backlog orders for A320neos are huge, and IndiGo can get as many planes. Also, IndiGo is already facing problems with A320neos in its fleet that are equipped with Pratt & Whitney (PW) engines.
But since the current restrictions and circumstances have suppressed the demand; it has given IndiGo a chance to keep its inefficient planes (A320ceos) grounded, and fly A320neos which are compliant with aviation regulator directorate of civil aviation (DGCA) rules. Had there been no flying restrictions, IndiGo would have been flying A320ceos as well (or even extended their leases) - to keep its market share intact - even if they would have burned a hole in the airline's pocket.
"We are keeping a sharp eye on the maintenance cost of A320ceos. We will fly them only if we have to, and try and avoid the engine shop visits. In terms of how quickly we return them, we will try and follow the schedule," said CEO Dutta.
The airline also got a reprieve recently from DGCA which has extended the deadline to replace the faulty PW engines in its A320neos by August 31. The earlier deadline was May end. Currently, IndiGo has about 106 PW-powered A320neos, out of which 40 needs engine replacements. Together with DGCA relief, the pandemic gives a buffer to IndiGo to manage its fleet better.
Going After Costs
That airlines have been badly affected by the pandemic is evident across their financials; it's a depressing trend when legacy carriers like Virgin Australia, Avianca, LATAM, and others are not able to withstand the shock and have filed for bankruptcies. Back home, all domestic carriers have got their financial performance hampered too. Some came too close to insolvency that the aviation ministry had to take a quick decision of resuming flights last month.
Before May 25, rating agency ICRA had estimated that domestic airlines were losing Rs 75-90 per day. But even as airlines fly with curtailed operations, passenger traffic at airports will remain under pressure for the first half of FY21. Though some recovery is likely in the second half. "On a full-year basis, passenger traffic is estimated to decline by 45-50 per cent in FY21," an ICRA note said.
As revenues have pummelled, airlines like IndiGo rushed to bring down their costs. Nearly 40 per cent of the airline's costs are fixed, and out of which, employees' costs and supplementary rentals are the biggest items. Let's look at the employees' costs where the low-cost carrier (LCC) has taken three big steps: salary cuts of 5 to 25 per cent across the organization (except for certain employees with lower pay grades), deferment of all merit-based salary increments, and leave without pay for three months starting May. Because of these decisions, IndiGo believes that it will save 25 per cent on the employees' expenses for the full year.
Then, the airline has gone into hard negotiations with its suppliers and lessors. Supplementary rentals, which accounts for 17 per cent costs, have been frozen for nine months since a large part of the fleet is grounded. In tight liquidity conditions, IndiGo reached out to its suppliers and asked for substantial cost reductions. "Many of them have, as a result of negotiations, agreed to that. We are continuing with negotiations to reduce our purchase costs by a substantial amount," said Dutta.
IndiGo expects that by introducing these measures and cutting back on discretionary spending, it could generate additional liquidity of Rs 3,000-4,000 crore around the end of FY21.
Opportunities in the post-COVID World
When the global and domestic restrictions on air travel are lowered, IndiGo expects that there are going to be new opportunities for domestic airlines. For instance, in the long term, there could be a shift from train travel to air travel which is considered a safer and faster mode of transport. Airlines like Southwest Airlines became successful because they could pull more people out of road travel. Would it happen to rail transport? Nobody knows but as IndiGo's Dutta pointed out, as the economy recovers, and the fear factor goes down, the train traffic substitution could be long-term growth potential for IndiGo.
The pandemic has also come as a blessing in disguise for the Indian carriers. How? India, being at a geographically advantageous position, has never been able to make itself a global hub for the international carrier. It was never used as a connecting hub between East and West, especially since the emergence of Dubai and Abu Dhabi in the past decade. Several efforts were being made by the government and aviation community to bring India into the forefront but they didn't go anywhere.
But there's a problem with these hubs which lends India a strong position in the post-COVID world. Many of these neighbouring hubs are large which makes them unsafe as transit points. The future of aviation would likely discourage large aviation hubs, and there will be more point-to-point air travel.
Domestic carriers like SpiceJet and IndiGo have been mulling over building a hub outside of India. While SpiceJet had announced plans last October to develop Ras al-Khaimah (in UAE) as its first international hub, IndiGo was reportedly looking at an eastern European destination.
With large global hubs like Dubai and Abu Dhabi losing prominence, Indian carriers have an opportunity to expand their international presence and draw traffic from some of these large hubs.