India's largest airline IndiGo announced its second quarter results on Thursday. The low-cost carrier (LCC) reported net losses of Rs 1,062 crore on revenues of Rs 8,539.8 crore for the quarter. The airline said that losses were incurred on account of forex losses on operating lease liabilities and higher maintenance costs. This is a sharp swing from the previous quarter when the LCC reported highest-ever net profits (of Rs 1,203 crore) in its 13-year history.
Firstly, the IndiGo management deserves appreciation for successfully managing to keep the fight at the promoter level away from the investors' attention. In a nearly hour-long call, and with over a dozen analysts questioning the management on the quarterly results, not a single question was asked on the ongoing fight between the promoters - Rahul Bhatia and Rakesh Gangwal - which is surprising given that it's one of the most crucial issues at the airline.
The other major issue is that IndiGo is getting older, which is costing the airline a huge sum. For instance, the LCC reported higher maintenance cost of Rs 319 crore in the September quarter. This cost relates to the shop visits of its Airbus A320ceo aircraft. A320ceos are the older version of new generation A320neos. IndiGo's initial fleet was full of A320ceos, and the airline has started adding A320neos from March 2016 onwards. These A320ceos with IndiGo are now making second shop visits for maintenance. IndiGo's fleet of 245 aircraft includes 129 A320ceos, 89 A320neos, six A321neo and 21 ATRs. Due to A320ceos, the airline will keep incurring higher maintenance costs until 2022 until their strength in its fleet goes down considerably.
"A320ceos will start retiring from next year, and in higher volumes in 2022. The engines of these older aircraft are undergoing second shop visits, which are significantly more expensive than first shop visits. These second shop visits resulted in maintenance spikes in our costs," says IndiGo's CFO Aditya Pande.
Much like other sectors, the airline is also witnessing a slump in demand. CEO Ronojoy Dutta said that the market is softening, and there are apparent signs of it. "July and August were strong months. In September, we started seeing some weakness but September has always been weak. It was difficult to separate seasonal weakness from economic weakness. October typically is a strong month. There are two big holidays in India this month. You don't see anyone coming out with [flash] sales in this month because the demand is strong. This October was unusual. In middle of Dussehra, one of our competitors did a sale, and another competitor has just done a sale in Diwali. That shows weakness otherwise why there would be [flash] sales. We are seeing it in our numbers as well," says Dutta.
In the September quarter, the airline recorded 5.7 per cent increase in unit revenues; however, it expects the growth to be flat in the December quarter. In fact, IndiGo's revenues would have been flat in the September quarter had the company not taken network optimisation, revenue management and sales initiatives earlier this year. These steps, as the airline claims, have given it 5 per cent boost in the unit revenues over and above the sector trend.
The slots rush
Being the largest airline doesn't help much - at least in getting additional slots from the government. IndiGo is much bigger airline than SpiceJet in most aspects. Its fleet of 245 is more than double of SpiceJet's 111. Its market share is three times that of SpiceJet. Yet, as things turned out, both SpiceJet and IndiGo have got same amount of slots in Delhi and Mumbai from the ministry of civil aviation, which were vacated by the grounded Jet Airways. Jet ceased operations in April, and since then, the airlines are hurtling to grab its slots - some of which are really prime ones. These slots were given for 90 days initially but the date has been extended since Jet's lenders are unable to find a buyer.
While SpiceJet got more slots in Mumbai, IndiGo received more in Delhi. "We got additional 22 slots in Delhi airport, and slightly less in Mumbai. Our position is that we as a bigger carrier should have gotten higher share. A special SOP [standard operating procedure] gave SpiceJet and IndiGo same number of additional slots in two big cities. In bilateral rights, SpiceJet and IndiGo got approximately the same amount of traffic rights," said Wolfgang Prock-Schauer, president and chief operating officer at the airline, in the call.
IndiGo started the current financial year with a capacity increase guidance of 30 per cent, which was higher than the capacity hike of 27.6 per cent in the previous fiscal. The airline had 217 airplanes at the beginning of the year, and it was adding close to six planes every month. That number has gone down to about three-four planes now. Why? In the past, the airline had softer capacity growth due to uncertainty around temporary allocation of Jet's slots. When the civil aviation ministry was deciding on who will get what slots, IndiGo was holding on with its capacity plans.
Going forward, the slowdown in capacity addition will be related to issues with the global supply chain. The delays in aircraft deliveries, as Dutta pointed out, are beyond his control. "We are in no way pushing back deliveries. We are hungry for more airplanes. There are a lot of routes we would like to fly. We are after Airbus. Worldwide, there seems to be a problem with supply chain. People are talking of casting and forging not available. Aircraft manufacturer and engine makers are struggling with keeping demand," Dutta said.
The fortunes of IndiGo have taken a drastic turn in just one quarter. The company has to deal with a lot of external and internal challenges to swing back to profitability.