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How IndiGo weathered the pandemic and joined a select global league of profit-making airlines

The airline benefitted from factors such as higher utilisation, the opening up of tourism, festival and holiday travel, and a favourable change in policies.

February 07, 2022 / 10:31 AM IST
Representative image

Representative image

IndiGo, India’s largest carrier by fleet size and domestic market share, joined global peers in financial recovery in the third quarter of FY22.

The airline reported a profit of Rs 129.8 crore on Rs 9,294.7 crore of revenue from operations. This helped trim the nine-month loss to Rs 4,480 crore. This is the airline's first profit after seven straight quarters of losses and marks a much-deserved reversal from the loss of Rs 1,435.6 crore in second quarter of FY22. In days of gloom, a profitable quarter offers hope and is a sign of the times to come when the world returns to normal.

Along with the results came the announcement of co-promoter Rahul Bhatia being appointed as the managing director of the company, a hitherto vacant position.

The results were aided by a combination of factors such as higher utilisation, the opening up of tourism in India and beyond, passengers travelling for festivities and holidays, and a favourable change in government policies.

Removing restrictions

The government, which had capped capacity since the restart of flights, decided to withdraw the restriction, allowing airlines to operate their entire approved winter schedule. The change came into effect on October 18, 2021, which meant airlines were free to add flights based on demand. As a result, some airports saw more traffic than in pre-COVID times.

Additionally, states reduced or removed restrictions as vaccinations picked up speed. The cost of travel was reduced as double-vaccinated passengers were exempted from producing negative test results on arrival.

The fare-cap duration was reduced to 15 days on a rolling basis. Allowing airlines to price at will on the 16th day on a rolling basis meant that they could go back to stimulating demand by pricing. However, demand was so strong in November and December that airlines made the most of the window – increasing fares on most routes and flights beyond the 15-day window of fare caps.

Increased utilisation, higher revenue and fuel efficient fleet

For a capital-intensive business to succeed, the focus has always been utilisation. The more an asset is utilised, the better is the cost distribution. Over the years, airlines have focused on pushing utilisation beyond the 12-hour mark. This helps distribute costs and reduce the cost per available seat kilometre (CASK) and aids profitability.

The airline increased its utilisation to 10.7 hours in the third quarter as the government allowed the entire capacity to be deployed. This still is lower than pre-COVID times since international services are restricted under the air bubble arrangement.

The airline deployed 45.2 percent additional capacity in the third quarter, which helped spread its fixed costs and led to the airline returning to a profit. Airline officials said on the analyst call that IndiGo wants to reach 13-hour utilisation soon and that it would be subject to international operations being given a go-ahead. The airline has started operating flights under the air bubble to the United Arab Emirates, Qatar, Saudi Arabia and Kuwait.

The airline said domestic revenue has crossed pre-pandemic levels and international services are also performing better. Both revenue streams will be a challenge to maintain as the world opens up. On the international side, there will be more competition, which will put pressure on yields, and when the fare caps wither away, a few airlines could get into a price war, which IndiGo will be forced to join.

The airline returned 16 A320ceo aircraft in the quarter, three more than in the previous quarter, and its A320ceo fleet is now almost half of what it was in December 2020. Fuel expenses were 34.97 percent of total spending and significantly higher than in the previous quarter. Yet the switch to the fuel-efficient “neo” aircraft family is helping save up to 15 percent of fuel costs.

Tail Note

IndiGo has always said it does not focus on market share and that it is a function of capacity deployed and passengers who prefer the airline. However, the real question is if the airline can use its much-touted flawless execution strategy and brand image to charge a premium.

There have been headwinds in the current quarter, with traffic dropping drastically as restrictions at the state and city level returned and passengers staying away. As the COVID wave subsides, the combination of rising oil prices and falling air traffic would hurt the airline in the fourth quarter. If there is no new variant or wave in the first quarter of FY23, it would be a quarter to watch out for and the airline may not only repeat this performance but surpass it.

 
Ameya Joshi runs the aviation analysis website Network Thoughts.