IndiGo hammered by high costs, low fares

Anand Kalyanaraman BL Research Bureau | Updated on July 31, 2018

The near decimation (97 per cent y-o-y decline) of IndiGo Airlines’ profit in the June 2018 quarter to ₹28 crore follows a similar huge crash (73 per cent y-o-y) in the March 2018 quarter to ₹117 crore.

But for ‘other income’, the airline would have ended in the red in both the quarters.

The rout in these two quarters is due to the twin bugbears in the aviation sector – rising costs (primarily aviation turbine fuel) and inability to pass on costs due to cut-throat competition and capacity additions in the sector. Adding to the pain in the June quarter was the sharp fall in the rupee that increased costs and led to significant forex losses.

Two key metrics reflect the airline’s woes in the June 2018 quarter. Its CASK (cost per available seat kilometre) rose nearly 20 per cent y-o-y.

In contrast, the airline’s RASK (revenue per available seat km) fell 3 per cent and its yield (passenger ticket revenue/revenue passenger km) fell more than 5 per cent.

The irony is the airline’s inability to increase fares to meet higher costs, despite healthy growth in passenger traffic (revenue passenger km was up more than 20 per cent).

To boot, the June quarter is traditionally considered a strong one for airlines in India.

This lack of pricing power is reflective of the intense competition in the sector, with airlines seemingly in a race to the bottom with discounted fares to woo passengers.

A key reason for this is the sharp increase in seat supply, a result of ramp-up in fleet capacity led by IndiGo.

The airline’s capacity (available seat km) growth that under check at about 15 per cent y-o-y in the nine months ended December 2017 due to engine troubles.

But it increased to 21 per cent in the March 2018 quarter and was more than 18 per cent in the June 2018 quarter.

IndiGo expects capacity increase of 28 per cent in the September quarter and 25 per cent in fiscal 2018-19.

IndiGo’s capacity addition has a bearing on fares not only for itself but the entire sector.

Other airlines too, are adding to their fleet. These additions in capacity could keep fares under check and prevent pass-through of costs, that remain high due to elevated oil prices and a weak rupee.

The turbulence for IndiGo and the sector seems set to continue.

Published on July 31, 2018

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