IndiGo could report the highest-ever revenue in its history, but will it be profitable?

Indigo

IndiGo, India’s largest airline by fleet and domestic market share, will declare its earnings for the third quarter of FY23 on Friday, February 3. The results and subsequent investor call are much awaited by the aviation and investment community for more than one reason this time.

The results will be coming within days of the airline starting wet-leased (plane + crew) widebody operations, the first of which started operations yesterday (February 1) to Istanbul, from Delhi. This is also the first full quarter of results with Pieter Elbers, who joined in early September, in charge.

All eyes will definitely be on the profit column. In Q1-FY23, the airline had recorded its best ever revenue since inception. That quarter was also characterised by its highest-ever flights as well as passengers. And yet, despite revenue crossing Rs 13,000 crore, it ended up with a loss of over Rs 1,000 crore due to foreign exchange losses.

The airline has had two consecutive quarters of revenue crossing the 10,000 crore mark. In Q3, the airline recorded 9% more passengers than in Q1 in the domestic segment, with 199.7 lakh passengers taking to the air. The international passenger numbers for December are awaited. The airline recorded a few days this quarter with 1,700 flights a day, another record. On the back of record passenger numbers, IndiGo is certain to report the highest-ever revenue in its history. And going by the glimpse from Vistara’s announcement, an operating profit is assured too.

Q3 highlights

The airline closed the quarter with a market share of 55.7%, a loss of 2.3% over the last quarter, on the back of increased capacity from competition and its own issues with the grounding of aircraft due to lack of replacement engines. The airline carried 1.99 crore passengers in Q3-FY23, which is 14% more than the previous quarter, when the passenger numbers carried by IndiGo stood at 1.75 crore. This 14% growth, though, was lower than the industry-wide growth of 18.6% sequentially, which saw IndiGo losing market share over the previous quarter.

The airline carried 20% more passengers in Q3-FY23 than Q3-FY22, when it last recorded a profit (Rs 129.7 crore). The headwinds haven’t stabilised. The rupee has depreciated 8.7 percent, which impacts leasing costs since they are dollar denominated. While oil is down from its peak in July, it hasn’t gone back to pre-COVID levels. With oil comprising anywhere between 35-40 percent of airline expenses, the pressure on the airline mounts.

What is certain is that IndiGo will again cross the Rs 13,000 crore income mark this quarter, on the back of the passenger numbers that it has carried and the fares prevalent in the market. The airline has been able to maintain yields even after fare caps were abolished, though this has come at the risk of lower load factors compared to the competition.

What to watch for

The airline has progressively announced the reinstatement of salaries. Employee costs were 8% of total expenditure last quarter, but the costs keep changing. In isolation, the costs went up 9% sequentially.

The airline has seen a couple of aircraft being grounded due to supply chain issues with the engine manufacturer. Is there compensation built in for that? IndiGo has had to extend the lease of some of the aircraft that were to return to lessors and in a few cases re-inducted aircraft that were already returned. Is there any compensation built into this, directly or indirectly?

Tail note

The airline has not had the best of load factors, which is an indicator that it has decided to hold on to yields over passengers. This has also been possible due to a large part of the network being monopoly or near monopoly.

Last year was fairly in line with past seasonality and not affected by Covid. This gives the airline better control over inventory management, aircraft cycles and maintenance plans, and as things stabilise worldwide, it could focus again on fleet renewal.

With higher fares, record passengers and without the shadow of the pandemic, if IndiGo still cannot make a net profit due to forex losses, one will be left wondering how this industry will ever make money in India.