Indigo’s March quarter result must have given a lot of comfort to its investors despite the turbulence that the aviation industry continues to face.

The Gurgaon-based airline’s quarterly revenue rose at its slowest pace since listing as flight services were suspended in the last week of March amid the coronavirus outbreak. Revenue rose 5.27% YoY to Rs 8,299 crore. The airline slipped into a loss of Rs 873 crore in Q4 on the back of a decline in passenger volumes along with lower airfares, higher fixed costs, and rupee depreciation.

Yields rose but at the slowest pace in six quarters and average fare per passenger per kilometre rose 1.1% to Rs 3.74. Despite a government-mandated 67% reduction in capacity, the airline is expected to maintain passenger load factor (PLF) at a subdued level in Q1FY21. Government’s restriction on fare bands leaves little room for the airline to earn higher yields in the near future.

Added customer safety precaution measures post Covid-19 has increased fixed expenses on already cost elevated models of airlines. The passengers are provided with PPE kits costing Rs 200 per PAX i.e. per passenger. Further, all flights are being sanitised which has increased the overhaul time by ~10 minutes on the ground.

The management further indicated to persist with the origins plan of replacing older Current Engine Option (CEOs) with cost effective New Engine Option (NEOs). IndiGo is expecting to cut up to Rs 4,000 crore in costs and speed up the return of ~120 older planes to leasing companies over the next two years. Also, total employee cost has been reduced by ~25% to create extra liquidity of Rs 3,000-4,000 crore.

Superior cash flow and reserves gives Interglobe a much needed edge in a tightly contested industry. In the current turmoil, Cash generation continues to remain robust with a cash balance of Rs 20,300 crore in Q4FY20 of which Rs 8,900 crore is free cash. Debt, excluding lease liabilities, stands at Rs 2400 crore; debt including lease liability rentals stands at Rs 22,700 crore. High liquidity on the balance sheet provides enough fuel for Indigo to survive the on-going crisis. IndiGo is also expected to continue growing faster than the industry in FY22E while its peers ability to grow and maintain market share is under serious threat.

While currently, corporate demand is almost nil, Cargo has emerged as a bright spot. Management plans to convert 10 of its aircraft into cargo freighters to utilise the pent up demand. Fuel cost is a tailwind currently leading to a positive contribution to margins even with low occupancy. Over the longer term, IndiGo expects a market-share shift from rail to air.

IndiGo’s strategy to focus away from metro routes and expand into higher yielding Tier-2/Tier-3 domestic routes and international routes. The strategy has already started to benefit Interglobe in terms of Revenue per Available Seat-Kilometer (RASK). In Q3FY20, RASK for IndiGo was higher than SpiceJet, a rare occurrence which is also a function of SpiceJet going aggressively into Metro routes post Jet bankruptcy.

Going forward, sharp uptick in aviation turbine fuel (ATF) prices and Rupee depreciation are the major risks for the airline. ATF cost accounts for 40% to the total revenue and bulk of the airline cost is USD denominated.

Pressure on demand for corporate/ leisure travel will continue to impact load factors as domestic traffic is unlikely to see V-shape recovery. Uncertainty and unpredictability of the policy/regulatory framework also continues to remain a concern.

Final Thoughts:

Aviation industry across the globe continues reeling from the covid infused pain. Air traffic in China, a leading indicator of demand, is still less than half of the normal level.

Indian domestic aviation market is the fastest growing market in the world. With rising income levels and lower penetration, the industry will continue to post robust growth numbers. On the other hand, intense competition, lack of pricing power and capital intensive business model continues to be the pain point for the industry.

Indigo continues to remain better placed than its peers and is likely to emerge stronger from the current crisis. Covid-19 led challenges will only reimpose its position as a market leader and enough triggers are visible for the airline to gain the market share further.

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