IndiGo reports highest ever quarterly profit: How the airline is changing its fundamentals to stay ahead

New Delhi: India’s largest airline by passengers and the only one with a consistent track record of profits, IndiGo, has just reported an almost Rs 9 crore daily net profit in the first quarter ending June 30. It has obviously beaten analysts’ estimates about its profitability by posting the highest ever quarterly profit in this journey. For Q1, IndiGo reported revenue of Rs 5,753 crore, a growth of 26 percent year on year and 19 percent over the previous quarter. Net profit was Rs 811 crore , a growth of 37 percent year-on-year and 84 percent versus the previous quarter. Revenue per available seat kilometre (RASK) increased by 5.5 percent while cost per available seat kilometre (CASK) increased by 1.3 percent.  This airline now commands  nearly 40 percent overall market share but on non-metro routes, it control over half the market. Put simply, this means that 4 in 10 domestic fliers choose IndiGo but on non-metro routes, every second flier chooses this airline. According to data compiled by analysts, IndiGo has been increasing its share in the domestic market at the expense of Jet Airways and Air India. Motilal Oswal said in a note to clients this morning that in the 13 successive quarters starting from Q1FY15 when IndiGo had just about 32 percent share, it has inched up to 41 percent now. Over the same period, Jet Airways went from controlling  a fifth of the market (21 percent) to 17.58 percent now. And Air India went from 17.42 percent to 12.77 percent. SpiceJet, an LCC competitor to IndiGo, also came down from almost controlling a fifth of the domestic market in Q2FY15 to 12.96 percent now. Market share is a direct consequence of capacity and IndiGo has seen the fastest capacity addition among all domestic airlines. [caption id=“attachment_2920448” align=“alignleft” width=“380”]  Reuters[/caption] It is interesting to see that as IndiGo grows in both size and ambition, the airline is introducing significant changes to the way it does business. First, it announced plans to enter the regional market by acquiring a fleet of 50 ATR aircraft in what many saw as a complete reversal of its earlier strategy of keeping a single type of aircraft fleet (IndiGo flies the Airbus 320 aircraft on domestic and short haul international destinations). The new fleet will start coming in soon and is expected to help IndiGo start regional operations under the government’s UDAN scheme by the end of the current fiscal. Second major change in the way IndiGo operates is coming about shortly – after years of following a robust sale and leaseback model for aircraft acquisition, the airline may now go in for a mixed strategy when it starts actually purchasing aircraft instead of merely leasing them back from lessors. This will, going forward, impact dividends to shareholders as more of the company’s reserves will get used in paying for aircraft purchase. What this means for the airline’s overall profitability going forward is not clear as of now. Airbus 320neos are new-generation aircraft with fuel saving technology and IndiGo would like to hence own the aircraft for a longer period, a Business Standard report said. The current average age of IndiGo’s fleet is around six years. “Most of our aircraft are on a short-term operating lease. We may choose to operate the A320neo for a longer period. Hence, there is a shift in strategy,” said Rohit Philip, chief financial officer, in an analyst call. Under the sale and leaseback model, a lessor purchases the aircraft from the airline and leases it back. This removes the aircraft debt from the airline’s balance sheet and allows it to invest equity elsewhere. The BS report quoted sources to say that IndiGo makes around $4 million dollar per aircraft under such transactions. As of end-March, it had 131 aircraft, of which 17 were owned or on finance lease; 118 were on an operating lease. A third thing which needs to be kept in mind about changes in IndiGo’s workings is a slowing fleet induction plan – forced upon the airline by the aircraft manufacturer’s inability to supply the fuel efficient Neo engines. From about 25 percent annual capacity expansion rate till now, the airline will expand at just 20 percent between now and 2020 (including the smaller aircraft fleet). The induction of smaller fleet and participation in UDAN could mean creation of a separate company and therefore some diversification of operations where profit making may be tougher due to a fare cap-cum-subsidy structure of UDAN. Moving to an owned fleet strategy would, as we said before, mean lower dividend to shareholders. And a slowing fleet induction plan obviously is good news for competition since it gets a much needed breather. Yield – which denotes revenue per passenger – for the entire domestic aviation market could improve because of slower fleet induction by the market leader. Global aviation consultancy CAPA had noted last month that IndiGo has the largest in-service fleet in India and the largest order book of any airline in the world, at 458 aircraft. Its fleet could expand by up to 46 aircraft during this financial year – a net addition of almost one aircraft a week. Other airlines are responding by accelerating their own expansion in order to hold on to market share and to prevent IndiGo from securing a dominant position with over 50 percent of the market. “Despite IndiGo’s market-leading performance to date, this scorching pace will undoubtedly test the capabilities of its management team, increasing the risk of a negative impact on the airline’s profitability and operational performance,” CAPA had said. It also added that the possibility of IndiGo ordering A330neos to launch long haul low-cost services cannot be ruled out.