IndiGo's Revival Bid
Business Today|April 18, 2021
After a brutal year, India's largest airline looks to bounce back, but there could be surprises ahead
Manu Kaushik

On March 25, 2020, all 259 aircraft of India’s largest airline by market share, IndiGo, were grounded as the government suspended commercial flights — domestic and international —indefinitely due to rising Covid cases. While Indian aviation has seen numerous ups and downs, the MarchMay 2020 period was the worst-ever.

As the market leader and the country’s largest low-cost carrier (LCC), the scale of damage for IndiGo was bigger than the rest. While revenues stopped coming, fixed costs started eating into profits, and in turn, cash reserves. In April, agencies such as CAPA India predicted a loss of $1.5 billion for IndiGo and SpiceJet over the next six months. The impact was so brutal that some brokerages stopped tracking the sector, and IndiGo in particular. “We believe the impact on aviation sector will be severe and the ability to forecast financial consequence is difficult today, given the evolving nature of the situation. We are dropping the stock (IndiGo) from our coverage in the short-to-medium term,” Geojit Financial Services said in a note issued in May.

Not surprisingly, during the nine months between April and December 2020, IndiGo reported net losses of ₹4,659 crore (against a net profit of ₹698 crore a year ago), while revenues shrank 67.5 per cent year-on-year.

Yet, CEO Ronojoy Dutta remains confident. In the March 2020-quarter earnings call, he told a bunch of harried investors that IndiGo wants to emerge from this crisis stronger than ever. “In that context we are paying particular attention to our product, our costs, our brand and our employee culture,” Dutta had said.

In February 2021, the airline registered a 54.2 per cent market share in an 11-player market — up from 48 per cent in February 2020. Costs are going down, and revenues are rising quarter after quarter. But even though it is making a strong comeback from its low, it needs to tackle challenges such as subdued international travel demand, permanent loss of some business traffic, rising crude prices, and high cost to make the revival sustainable.

Weathering The Storm

• IndiGo is currently operating at over 70 per cent capacity; hopes to touch 100 per cent in few months once capacity restrictions are fully lifted

• Due to many cost-cutting measures, daily cash burn is down from 40 crore in April to 15 crore in December

• It is retiring older A320ceos with newer A320neos and A321neos to cut down on fuel costs

• Analysts expect the airline to outperform the sector during FY20-23 with 11 per cent growth in passenger traffic share, against 7 per cent for the sector

• Rising crude prices and heightened competition could, however, hamper profitability going forward

What Next?

Going by monthly data from the Directorate General of Civil Aviation (DGCA), it seems the worst is over for the aviation sector. There is gradual improvement in all parameters — number of flights, number of passengers flying, and as a result, number of passengers per flight. In May, when scheduled airline services resumed, domestic airlines flew 8,554 passengers across 109 flights in a month. In January, this has shot up substantially to 7.6 million passengers across 2,190 flights. Yet, it is still about a third lower than the 3,080 average daily departures in January 2020.

IndiGo expects to reach pre-Covid levels by 2021-end. “We have different trajectories for domestic and international. In domestic, the only thing holding us back is government restrictions. As soon as they go to 100 per cent, we will be 100 per cent. International is difficult because every country has its own rules. Hopefully, the vaccine should make a change. But right now, everyone has got quarantine restrictions, and there are pre-testing (conditions)in some countries. That’s holding international back. I would hope that by end of 2021, we should be back — all international and domestic — to pre-Covid levels, and higher. 2022 will become a year of growth again,” says Dutta.

Since May, domestic carriers are operating under capacity restrictions, which have been slowly eased from 33 per cent (pre-Covid) to 45 per cent in June, 60 per cent in September, 70 per cent in November, and 80 per cent in December.

In January, IndiGo was doing around 1,100 departures a day. Its domestic and international capacity deployment was 70 per cent and 28 per cent, respectively, of pre-Covid levels. At its peak, IndiGo was doing 1,750 departures a day, which it aims to achieve again by 2021-end.

Industry experts believe once air traffic comes back fully, IndiGo will benefit the most. In an October report, investment banking firm BOB Capital Markets said IndiGo will outperform the entire sector during FY20 to FY23 with 11 per cent growth in passenger traffic share, against 7 per cent for the sector. Its market share is also likely to be 58 per cent in FY21 and 56 per cent in FY22 and FY23, significantly higher than 48 per cent in FY20.

“We believe IndiGo is in a sweet spot for growth over the next two years given a benign dollar-rupee exchange rate, the vulnerability of its peers (in terms of negative net worth and massive cash burn), and a strong balance sheet. Nevertheless, the sharp jump in crude prices is expected to severely erode profitability in the near-to mid-term,” said another BOB Capital Markets report published in January.

But as the recovery happens, experts predict a bloodbath. That’s because once fare caps are lifted, airlines will in all likelihood bring down ticket prices to fill up planes. “As soon as capacity restrictions are lifted, everybody would want to pack their domestic flights because international flights are not coming back soon. To do that, they would offer deep discounts. I believe two Tata airlines (AirAsia India and Vistara), and IndiGo can offer such discounts because they are either funded well or have strong liquidity,” says Vinamra Longani, head of operations at Sarin & Co, a law firm specialising in aviation.

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