Why aviation regulator DGCA's diktat on A320neo jets will not impact IndiGo's near-term profitability

New Delhi: India’s aviation safety regulator, the Directorate General of Civil Aviation (DGCA), is often criticized for being tardy in decision making. However, in the case of the latest engine trouble with the Airbus A320neo aircraft, the regulator must be commended for taking swift decision to ground 14 jets belonging to two different airlines. Yes, this will lead to many flights either getting cancelled or clubbed, and cause significant inconvenience to passengers even as capacity expansion plans of IndiGo and GoAir are already impacted due to engine issues with this aircraft. Analysts at brokerage Edelweiss said in a note this morning that the grounding of 11 IndiGo aircraft by the DGCA will mean it cedes market share to rival SpiceJet as near term capacity addition plans will also suffer.

The trouble is with the Airbus A320neo aircraft fitted with a particular series of Pratt & Whitney (P&W) engines. Those with even one P&W engine featuring a seal, found to cause vibrations, are no longer allowed to fly. A Bloomberg report said ‘unilateral’ action by the DGCA in grounding the aircraft is at odds with the European Aviation Safety Agency (EASA), the primary regulator for Airbus planes, which repeated its guidance that the jets are safe if they have a single affected turbine. The Indian move comes after three in-service shutdowns of aircraft with one PW1100 engine featuring the seal, two of which occurred in the past week.

As a result of the aircraft on ground (AOG), IndiGo has cancelled 47 flights this morning from destinations such as Delhi, Mumbai, Chennai, Kolkata, Hyderabad, Bangalore, Patna, Srinagar, Bhubaneswar, Amritsar, Srinagar and Guwahati.

This is less than the number of flights initial estimates has suggested would be cancelled, at anywhere between 70-80 flights. But still, these cancellations will lead to some disruption for domestic air travelers, especially since the peak summer rush is just around the corner. At least four in 10 domestic flyers choose IndiGo so the disruption for this airline and its passengers will be more than for GoAir. Vistara, which also flies A320neos, has not been affected because its aircraft are not fitted with the affected P&W engines.

IndiGo grounded 8 A320neos. Representational image. Reuters.

The DGCA has, in a statement, squarely blamed P&W for the groundings, saying “P&W in its latest communication has also not given any firm commitment as to when the issue on the engine post serial number 450 will be resolved and informed that all the affected engines will be replaced by early June 2018. There is no concrete proposal in place to address the issue.”  The regulator said three instances of in-flight shutdown of engines were seen recently: GoAir flight from Leh on 24 February, IndiGo flight from Mumbai on 5 March and then the IndiGo flight from Ahmedabad on 12 March. These prompted the DGCA to order the groundings.

But P&W said: “We are working closely with our customers to minimize disruption. The corrective action has been approved and we have already begun to deliver production engines with the upgraded configuration. We are working to mitigate the AOG situation by the end of the second quarter.”

While the groundings will affect IndiGo and GoAir passengers, the event will not impact IndiGo’s financials. In a note to clients, analysts at Edelweiss said this morning that the grounding of aircraft will have no near term impact on the airline’s financials. “The order impacts overall 9 A320 NEOs for IndiGo out of the total 32 delivered NEO planes. IndiGo is operating the remaining 23 A320 NEO planes. Even for the grounded planes, IndiGo is getting compensated from P&W. Therefore there is no impact on near-term profitability.”

But the groundings will delay IndiGo’s aggressive capacity addition plans. The airline had earlier placed a mega 430 aircraft order with Airbus, of which 150 planes were A320new fitted with P&W engines. “P&W and Airbus have recently put fresh deliveries of all the NEO planes on hold till the resolution takes place. Delay in the resolution from P&W impacts IndiGo’s near-term capacity addition plans (Q4FY18 capacity growth guidance of 24 percent, FY19: 20 percent YoY) and therefore loss of market share to SpiceJet,” these analysts said.

In a note to clients, ICICI Direct said that as of December 2017, IndiGo had 118 A320ceos and 32 A320neos in operation. This means that roughly 7 percent of the airline’s operating fleet has been affected by the current groundings.

That the DGCA has been proactive in this matter is evident from the fact that safety regulators outside India have not asked airlines that fly aircraft with the same P&W faulty engine series to ground aircraft.

As this piece says, almost one in three A320 neo aircraft fitted with Pratt & Whitney engines have been affected by glitches, worldwide. Only a particular engine series has been affected by the glitch – some aircraft of IndiGo have both engines which fall under this series, some others have been fitted with only a single engine within the affected series. Ditto for Go Air.

Though disruptive, the aircraft groundings due to engine trouble are not really the first instance of a new aircraft/engine series giving trouble to airlines. Whenever a new aircraft type is launched in the market, there are teething troubles and often, there are groundings of the aircraft before glitches are fixed by the manufacturers. One cannot forget the trouble Boeing faced with its Dreamliners, when battery issues ground the B787 fleet worldwide for a while in 2013.

The aircraft were plagued by mishaps, raising concerns over the use of lithium-ion batteries. By then, the Boeing Company had sold about 850 of aircraft, with 50 deliveries done and the Dreamliners were operational in Japan, South America, Poland, Qatar and Ethiopia, besides India. The battery glitch was eventually fixed and the aircraft are flying now.