InterGlobe Aviation Ltd, which runs budget airline IndiGo, announced its October-December earnings on Monday and surprised many by posting a healthy set of numbers. Its net profit rose 168 percent on-year to Rs 496 crore. Total expenses for the airline increased by 25.5 percent on-year to Rs 9,773.6 crore. Revenue from operations was also up by 25.5 percent to Rs 9,931.7 crore and other income rose 27.3 percent to Rs 398.5 crore.
Benign fuel prices helped the airline as its fuel expenses fell two percent on to Rs 3,341.9 crore in the December quarter when compared to the previous fiscal. The airline now has a total cash balance of Rs 20,068.7 crore including free cash of Rs 9,412.8 crore as on December 31. The airline did not disclose the compensation it has received from Airbus and Pratt & Whitney due to disruption caused by delay in aircraft and engine glitches.
The airline's management held a conference call with analysts after announcing the earnings. Here are ten important takeaways.
The airline has been able to replace both engines of 60 percent of its total neo fleet of 106 aircraft. It is confident that it will complete the engine replacement exercise by the end of May. IndiGo initiated the engine replacement process in November 2019 after DGCA directed the carrier to replace both the engines of its entire A320neo fleet by Jan 31 "at all costs" or face grounding. The deadline was extended by four months earlier this month.
In light of the outbreak of coronavirus, the airline said that it has been monitoring the situation in China on a daily basis and has witnessed some cancellations in travel to China. It is expected to take a decision on whether to continue the same frequency, reduce the frequency or temporarily suspend operations for flights to China after assessing the travel data of the next 2-3 days.
Currently, IndiGo operates daily flights on Kolkata-Guangzhou and Delhi-Chengdu. It recently announced that it will operate a direct flight between Mumbai and Chengdu daily from March 15, exactly six months after it launched Delhi-Chengdu in September 2019.
Non-metro routes vs metro routes
Non-metro routes and mature markets in the international segment are emerging as a new strength of IndiGo. The low-cost carrier blamed "other LCCs" and competitors for aggressive pricing on metro-to-metro routes, leading to a decline in yields. The airline also said that there is no predatory pricing in the market and fares are set in direct proportion to the demand.
The airline has guided for approximately 20 percent growth in capacity or available seat kilometers for the next financial year starting April 1 and 20 percent for the current quarter of January-March. The airline expects to end the current financial year of 2019-20 (April-March) with capacity growth of 23 percent. The capacity growth will be equally distributed between the domestic and international markets. Earlier, the airline had given a capacity growth outlook of 30 percent for 2019-20 but had to reduce it in October to 25 percent and then further to 22-23 percent in December as the pace of aircraft delivery from Airbus has slowed down.
While IndiGo management expressed irritation at not being able to expand capacity at a faster pace due to slow pace of delivery from Airbus and issues in Pratt & Whitney engines, as far as compensation is concerned, they said that they are protected by "good contracts" with Airbus and Pratt & Whitney and they are pursuing those contracts.
IndiGo continues to assess the wide-body aircraft model and has not taken a decision yet on inducting this segment in their fleet. IndiGo is confident that it will be able to operate flights to destinations such as Seoul, Barcelona, and Bali by flying A321 and A321XLR. In fact, CEO Ronojoy Dutta commented that IndiGo would not have preferred to fly India-US non-stop flights even if it had wide-body aircraft in its fleet because there is "just too much fuel burn."
The company has seen an improvement in revenue performance with RASK or revenue per available seat kilometers showing the growth of 5.6 percent in the third quarter with December being a strong month. It is believed that a year-on-year improvement in unit revenue for the current quarter will be difficult as the comparison will be against a base period when Jet Airways' capacity started to decline. While the yield has started improving since November, the incoming months of February and March will be challenging owing to seasonal weakness. Yield for IndiGo stood at Rs 3.88 per km in December quarter, up 1.2 percent compared annually.
When asked if the airline wishes to bid for Air India, IndiGo CEO Ronojoy Dutta said "no comment on Air India." When the government had offered a 76 percent stake in national carrier Air India in 2018, IndiGo had said that it is only interested in the international segment of Air India. Air India, which has more than 50 percent share among Indian carriers in the international segment, has been put for sale on January 27 with a 100 percent stake on offer and a reduced debt burden of Rs 23,286.5 crore.
The much-awaited extraordinary general meeting of IndiGo shareholders will take place on Jan 29. On being asked about the EGM, Dutta said that Rakesh Gangwal group wants to remove the right of refusal from articles of association but it is not for the company to have a say on the matter, it is for the shareholders to decide.
The EGM has been requisitioned by Rakesh Gangwal, who holds about 36.7 percent stake in IndiGo, to seek the nod of at least 75 percent shareholders for changing the rules on the sale and purchase of shares, including the tag-along right. Gangwal wants to delete rules in articles of association that give his partner Rahul Bhatia the right of first refusal should Gangwal choose to sell his shares.
Gangwal also wants to remove an article that restricts either of the co-founders from purchasing publicly listed shares in InterGlobe. The agenda will need the approval of at least 75 percent shareholders hence it remains to be seen whether the Rahul Bhatia group is ready to lend the support of their 38.3 percent share or not.
The company cautioned that it is working through continuing cost headwinds with the drivers bring the cost of old CEO engines and several of its pilots in training. Pilots in training, in addition to engine issues, have held back aircraft utilisation at IndiGo but it expects to improve the rate from June 2020. Employee cost per available seat kilometers increased from Rs 0.40 to Rs 0.48 in the third quarter against the same period last year due to pilots in training, salary hikes and impact of its airport services subsidiary Agile. There are still 400 additional pilots undergoing training as compared to 600 in the same period last year.