After suffering losses for 3 quarters, IndiGo on a flight path to profit

Cooling fuel prices and rupee depreciation and rising demand could help the country's largest airline by market share to reverse successive quarters of losses

After suffering losses for three quarters, IndiGo is expected to return to profitability in Q3 of FY23 on the back of cooling fuel prices and rupee depreciation, rising demand, relatively weak competition and airfare discipline which is being maintained.

“While fuel, forex, and inflation continue to pose headwinds, we are reasonably confident that we will return to operational profitability in the third quarter,” IndiGo told Business Standard.

The airline has been making losses for the last three quarters amid high fuel prices and weak rupee. However, its yield — which is average revenue earned from each passenger per kilometre of air travel — has been growing steadily, indicating that the carrier is maintaining discipline while setting the airfares (See Chart).

Ameya Joshi, aviation analyst and founder of aviation blog “Network Thoughts”, said, “The airline seems to be holding on to higher fare even if it comes at a lower load factors than others, indicating that the focus is on higher yields and not higher passenger numbers since it has no threat to its market share at any point of time.”

The airline faces less threat as other low-cost carriers have their own set of troubles. Financially beleaguered SpiceJet is in the process of taking more loans under the Centre’s modified Emergency Credit Line Guarantee Scheme to help clear its dues, pay lessors on time, and induct new Boeing 737 Max planes.

SpiceJet is currently operating about 1,781 flights per week, which is 27 per cent fewer compared to November 2021 figures, according to aviation analytics company Cirium.

About half of Go First’s 57-odd planes are currently grounded due to delay in supply of engines by US-based Pratt & Whitney. Therefore, Go First is currently operating 1,429 flights per week as compared to 2,070 flights per week in November 2021, Cirium’s data showed.

“Competition remains weak (particularly Spicejet: able to use only a portion of capacity, and Go: IPO did not progress) and there may be supply constraints from global recovery and a below-target production run rate (of planes and engines),” Credit Suisse said in its report on IndiGo after Q2 results.

Engine supply issues have affected IndiGo, too, but not as badly as Go First. About 10 per cent of IndiGo’s 282 aircraft are grounded due to engine supply issues. Still, IndiGo is currently operating 8.9 per cent more services at 11,288 flights per week compared to November last year, the data showed.

Asked about the impact of grounded planes in Q3FY23, IndiGo said air travel was going through a strong period of recovery and demand would continue to rise in the upcoming winter season.

“To address planned capacity and expansion for growth, we are looking at all levers to offset the headwind posed by the global supply chain disruption. Some of the measures being evaluated include slowing down of redeliveries through lease extensions, exploring reinduction of aircraft into the fleet and evaluating the wet lease options within the regulatory guidelines,” it added. In “wet lease”, the lessor provides flight crew along with the plane to the lessee.

Arun Agarwal, deputy vice-president - fundamental research, Kotak Securities, said IndiGo’s festival season experience suggests healthy trends for yields for Q3.

“If yields remain firm, and if ATF (aviation turbine fuel) prices see a correction, it would have a positive effect on IndiGo as well as the Indian aviation industry going ahead,” Agarwal added.

About 40 per cent of an Indian carrier’s expenditure is for purchasing ATF.

After touching the peak of about Rs 141 per litre in July due to the Russia-Ukraine war, ATF prices have gradually cooled in India. Currently, ATF is available in Delhi at about Rs 115 per litre, which is still significantly higher as compared to Rs 77 per litre on December 1 last year.

Added to this is the fact that the rupee has slightly strengthened from its position of last quarter, so there is a real chance of a break-even for IndiGo in Q3, Joshi said.

“A lot depends on how oil prices swing and the rupee dollar parity. Whether the airline will be compensated for the engine issues or not will also dictate the profit and loss,” he added.

During Q2, IndiGo’s CASK (cost of available seat kilometre) increased by 1.3 per cent to Rs 5.15 compared to Q1 primarily due to an increase in fuel costs, the airline stated. CASK is the money spent by a company to operate each seat per kilometre of air travel.

“Another positive change on the ATF front that is being effected is fuel pricing in line with MOPAG (Mean of Platts Arab Gulf). Over a period, with more transparency in this space with ATF being linked to MOPAG, will help in bringing parity in fuel prices as per global developments, especially during low price cycles,” IndiGo said.

MOPAG is a type of global ATF price benchmark. Airlines believe that linking Indian ATF prices with MOPAG will bring down the prices by about 15 per cent.

Though airfares are significantly higher than last year, demand remains strong. IndiGo said, “We have seen 100 per cent recovery in corporate or business travel in April and May. Passengers are even exploring offbeat markets like Pantnagar, Agra and Bareilly, apart from the popular destinations like Srinagar, Leh, Dehradun, Bagdogra and Goa.”

In terms of passenger numbers, IndiGo’s Q3 performance may turn out to be its best ever. “The airline carried 17.51 million passengers in Q2, whereas going by its market share in current months it seems to have crossed 61 per cent of that (about 10.68 million) already. With another 40 days to go, which includes the holiday season, it looks all set to beat its previous best of 18.31 million,” Joshi said.

IndiGo’s yield in Q2 “remained strong”, Credit Suisse said, adding that it expects “strong profitability” in the second half (2H) of FY23 on lower fuel and seasonality.

“IndiGo may post a profit of Rs 2,800 crore in 2H, thus wiping out 1H losses,” it added. The airline’s management hopes so, too.