Govt needs to take a clear stand on airline capacity cap: IndiGo chief

We have set for ourselves a minimum threshold of cash, come hell or high water, said Dutta

Post its latest earnings call, IndiGo Chief Executive Rono Dutta spoke to Anjuli Bhargava on how his airline was weathering this storm and how it hopes things will shape up. Edited excerpts:
 
Why have you added a net of 23 aircraft amid the pandemic? The aircraft count went up from 262 to 285 by March 2021. This defies all logic as I see it...
 
Yes, we ended up adding aircraft. Twenty-three A320ceos went back and were replaced by A320neos. We planned to send back more of the Classics — we wanted to return around 40 a year — but the aircraft have to be sent back with certain checks and so on. The closure of our maintenance, repair, and operations (MROs) in the Philippines, Indonesia, and Turkey on account of Covid till almost August 2020 impacted the speed at which we could send them back. Going forward, our fleet count from now will be flat for the next two years (till March 2023). We will replace all our ceos with neos, making our fleet newer and more fuel-efficient. The efficiency goes up every time we make that switch.

 

It’s not linked to the airline’s tighter cash position due to the crisis and the need to bring in sale and leaseback proceeds to bolster cash?
 
Sale leaseback does generate cash for us. Unquestionably. So, we are looking at our cash flows and assessing how to best manage and there are different elements to it. Try and reduce costs, try and raise revenue, do a QIP, sale leaseback is one of the levers. But it’s putting the cart before the horse. We are trying to make the fleet more efficient; in the process, we are doing sale and leaseback, not the other way round. Our focus is on getting rid of Classics and replacing them with Neos.

 
How much is the cost-saving for you every time you replace one?
 
The fuel consumption is 15 per cent lower. If you look at just fuel consumption per flying hour, in the last few months, this has gone down by 10 per cent for us, which is a big number. Newer planes and more fuel-efficient ones have helped.
 
If you have Rs 7,000 crore of free cash, what is the need for a QIP?
 
We have set for ourselves a minimum threshold of cash, come hell or high water. For many airlines globally, that minimum is four months of revenue in cash. That’s the global standard. For IndiGo, it is much higher, although we don’t reveal how much. But let me reiterate that this threshold is sacrosanct for us.

 
So now with the present crisis, we looked at various scenarios. Optimistic, realistic, and pessimistic and even under the worst-case scenario, we need to maintain our threshold level. The money we are raising for the QIP is not a working capital need but the board felt given the environment, it is prudent to raise money through the QIP like an insurance policy. What if there’s a third wave and no domestic flying for, say, four months or if scheduled international flights don't open up for two years. These are extreme scenarios but we don’t want to be caught flat-footed. The QIP is an insurance policy against such disasters. I think the shareholders look favourably on it: raise some cash through equity. We have increased our debt levels by taking credit lines from various banks. But the QIP is not for paying for debt, it’s only disaster insurance.

 
In your view, should the government leave capacity and fares alone? Let the market decide what’s best.
 
When we were in the first wave, the industry and the government worked well together to work out the SOPs and rules post the shutdown of flights, be it web bookings only, face masks and safety. In terms of capacity, nobody knew then what the right answer was. We had no data and no past precedent. It would have been a little dysfunctional if we decided and said one airline will do 60 per cent or 80 per cent so it was a good cooperative effort. As the traffic went up, we’d send a letter asking them to raise the capacity levels and it would happen.

 
Now, however, in July we are planning at 50 per cent capacity, as mandated by the Ministry of Civil Aviation. This capacity cap is supposed to go away by July 31. We have written to the government asking them to announce the removal, as in August and September we are building up for higher loads. If by July 31, they don’t remove the cap, we would be hurt. Also, it needs to be clear in advance as we work on advance bookings. In July, I’m selling 50 per cent but how much can I go up in August. So, the government needs to take a clear call on this soon. I also think that if any of our airlines had to go bust, it would have happened already. This should not be an overriding worry.

 
How well in your opinion has the ultra-low-cost carrier (ULCC) model worked in the US and what scope does this have here in India?
 
Both Spirit and Frontier have found niches and those have been fulfilled. It’s not as if there’s a huge segment to be exploited in the US either. Growth for both is constrained currently too.
 
In India, the scope for being lower cost than what we are is very limited. We are already as low cost as it gets. There’s no magic bullet or scope for being much lower. We have the highest seat density and the lowest cost per askm as it is. There has been a proposal for introducing a no-bag fare with the government and if it goes through, the rule applies to us all. IndiGo and SpiceJet would introduce a no-bag fare as would others.

 
Indian aviation is in a very hostile environment and there are two reasons. The yields are among the lowest in the world and that’s not changing as we are a low-income country. We are also the most highly taxed as the government continues to treat flying as a luxury good. An airline seat is not whiskey. This needs to change. Why should I pay excise on a new engine and then if the engine goes out to be fixed post, say, a bird hit, pay excise again when it comes in? Some of our rules don’t make sense and these need to be changed.

 
If one looks at IndiGo’s history, wouldn’t this be the toughest time it’s seen and lived through? Forget relative to others, isn’t IndiGo also at its most precarious.
 
No doubt. This has also been a major threat to us. But we didn’t use these two years to just sit and bemoan how bad things were but we used the opportunity to get fit and in good form. Our fleet is newer, our network has penetrated more and more into two-tier which are showing robust growth (more than the metros). We have grown from strength to strength internally and structurally and these changes will remain with us. There’s only one factor that remains a worry: load factors and this is cyclical and will change. So I am hopeful we will weather this storm and emerge stronger post it.