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

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.