The COVID-19 pandemic was unprecedented for the global economy. In the history of the Indian economy too, a major event like this is few and far between. Even although it's still far from over, the pandemic has claimed casualties across different sectors, and aviation is no different. But as soon as the sector emerges from its worst period, IndiGo is likely to strengthen its leadership position. How?
In the pre-COVID period, IndiGo had a substantial market share in the domestic segment but it never crossed a particular threshold (50 per cent). Since the resumption of domestic flights from May 25, IndiGo is gaining momentum faster than its rivals. As per DGCA's last released monthly report for August, the LCC (low-cost carrier) had a market share of 59.4 per cent (IndiGo's monthly market share before COVID-19 curbs were imposed in March stood at 47.9%, 48%, 48.9%, respectively). Although the overall air traffic market has shrunk substantially over the past six months, IndiGo is playing the right moves to emerge from the pandemic-induced crisis quicker than other airlines.
Firstly, it's retiring its old-generation Airbus A320ceo aircraft which require high maintenance cost and use more ATF per flight. In its place, the airline is inducting A320neos and A321neos which are more efficient aircraft. The airline plans to replace all A320ceo aircraft by December 2022 at the rate of 30-40 aircraft per year. This will make its fleet a lot younger.
Instead of taking aircraft on lease (operational or finance), IndiGo had been buying planes in recent years out of its cash reserves. But when the COVID struck, the airline quickly changed its plan, and started putting these planes (both ATRs and A320s) under the sale-and-leaseback structure. How does it help? Since IndiGo's flying at just about 58 per cent capacity, its revenues have tanked. Despite a slew of measures to bring down costs, they still remain quite high. For instance, IndiGo's total income in the September 2020 quarter was Rs 32.92 crore per day whereas the total expenses were Rs 45.91 crore per day. The change in the structure of aircraft along with other asset monetisation initiatives, vendor renegotiations, and taking deliveries of A320neos have generated cash flow for the airline which is going into plugging this income-cost gap.
According to analysts, as and when the air traffic picks up in the country, IndiGo is going to be the largest beneficiary. Investment banking firm BOB Capital Markets says that IndiGo will outperform the entire sector during FY20 to FY23 with 11 per cent growth in passenger traffic share as against 7 per cent for the industry. That's not all. Its market share, as per BOB Capital Markets, is likely to be 58 per cent in FY21, and 56 per cent in FY22 and FY23.
"Benign crude prices along with a stable rupee, the vulnerability of most of its peers (negative net worth and massive cash burn), a strong balance sheet, and cost-benefit advantage over the railways are some of the key factors that put IndiGo in a sweet spot for growth over the next three years," said BOB Capital Markets in a recent report.
This is despite the fact that IndiGo's CEO Ronojoy Dutta's recent remarks that the airline's fleet counts will be flat or down till FY23. "We will continue to take deliveries of new airplanes. We will continue to push out A320ceos. Our fleet count will go down a little. But from 2023, we will be back up again," said Dutta. For instance, the LCC currently has a fleet of 282 planes which is expected to come down to 272 in FY22, and likely rise to 342 in FY23.
"It seems that the airline is now waiting for the government to relax capacity constraints on the domestic side (currently at 60 per cent), and ease restrictions on international flights. As soon as those happen, the airline is expected to take a lead to reach pre-COVID levels among domestic carriers," says an aviation consultant.
But, of course, there are caveats. The aviation sector's performance is hugely dependent on crude oil prices - ATF (aviation turbine fuel) to be precise - which, during the pandemic period, has remained under control. But as the global economy is expected to bounce back from late next year, the crude oil prices are likely to rise - by how much is anybody's guess.