IndiGo Q4 Preview: Can the airline report profit for the second quarter in a row despite input cost pressure?

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IndiGo, the country’s largest carrier by fleet and domestic market share, will declare its Q4 and FY 22 earnings on May 18 after bouncing back to profitability in the preceding three months.

The airline had sprung a surprise in the quarter ended December 31 by posting a profit after seven straight quarters of losses.

In the first three quarters of the year, IndiGo ran up a cumulative loss of Rs 4,479.3 crore. The last financial year was the worst for airlines. when IndiGo had recorded a loss of Rs 5,806 crore.

The airline closed Q3 with a market share of 53.9 percent, and carried 13.368 million passengers in the period. Its market share was the lowest for any quarter of the last financial year and passenger numbers dropped by 20 percent from the previous three months, which had been its best quarter since the COVID-19 lockdown.

Going by past trends, IndiGo could be looking at revenue in the range of Rs 7,300-7,800 crore for the three months ending March 2022.

Changing traffic peaks, rising input costs  

India typically experiences two air traffic peaks: the April -June quarter and the October-December quarter. The April-June quarter of 2021 (Q1-FY22) was marred by the deadly second wave of COVID-19, while that in 2020 (Q1-FY21) was washed out because of the lockdown.

While Q4 (January-March) is traditionally a weak quarter, the traditional ups and downs have been replaced with traffic increasing when COVID cases are low and vice versa.

January had seen an uptick in cases driven by the Omicron variant that led to a momentary slump in travel. Traffic was back in March, largely driven by long weekends like that of Holi.

Input costs have gone up drastically since the end of December until now. Aviation Turbine Fuel (ATF), which comprises about 37 percent of all costs for airlines, is priced at Rs 1,13,202.33 per KL in Delhi -- the largest airport in the country. This is up 48.8 percent over the price of January 1. It will be interesting to see what percentage this makes up of total costs in Q4. Fuel prices are double their levels in the past year and have steadily increased sequentially in almost all months of the previous financial year.

Employee costs 

The airline has been in the news for partially restoring the pay of pilots. Employee cost made up 9.38 percent of total expenditure in the December quarter. However, on a standalone basis employee cost increased 9.3 percent QoQ. It will be interesting to see the increase this time around, if any.

Tail Note

IndiGo has been in the news lately and not all of them were for the right reasons. While the bitterness between the co-founders may not have ended, it definitely has made some headway towards resolution with Rakesh Gangwal stepping down from the board and deciding to sell his stake in the airline over a period of time.

The airline appointed a former Indian Administrative Service officer as principal advisor to Managing Director Rahul Bhatia and appointed two new independent board members, including a former air chief. But more importantly it saw another change in the critical function of finance amid the worst turbulence in years. The airline appointed its fourth chief financial officer in six years. There also was unhappiness over the restoration of salaries.

With another year behind, the next financial year could be more turbulent for the airline on the people front. The imminent stake sale by one of the co-founders, departure of the Chief Commercial Officer Willy Boulter scheduled in July and a likely churn in workforce as two new airlines take to the skies are what will dictate the way forward. Coupled with increasing costs and no respite from COVID, one wonders if the airline’s international game plan will go as planned!

But with half the domestic market cornered by itself, does IndiGo have the pricing power to increase yields? Ideally, it should, but in reality?