IndiGo facing cost pressures from ageing fleet, weakening rupee

Updated: November 27, 2019 2:32:57 AM

In the previous financial year, IndiGo saw a flat growth in yields as the capacity growth rate of the airline was higher than the growth in demand

indigo, indigo airlinesIndiGo’s yields, which remained flat in FY19, saw a 9.5% growth in the September quarter to Rs 3.5 per kilometer.

By Anwesha Ganguly

Indigo, which recently announced induction of 300 Airbus A320neos, could see some slowdown in capacity addition in the near term as a result of the directive from the Directorate General of Civil Aviation (DGCA).

The DGCA mandated that IndiGo must replace its A320neos with older engines with new planes which are delivered.

India’s largest airline by market share, could also continue to face cost pressures due to maintenance of older aircraft and the weakening rupee, according to industry analysts.

The DGCA on Monday directed that for every new aircraft added to IndiGo’s fleet, one of those with unmodified engines should be grounded and the new aircraft be operated on the older one’s schedule. “For the next three to six months, you would want IndiGo to add capacity of 20-25% over the existing base, that may not happen. That will have its impact in terms of how much capacity will be brought in during the January-March quarter,” said an analyst from SBICAP Securities, adding that over the medium to long term horizon, their capacity addition programme should normalise by 2021.

Cost of maintenance and repairs of IndiGo, which rose sharply by 87% year-on-year to around Rs 2,180 crore in FY19, was still lowest among domestic airlines. However, during the September quarter, IndiGo’s profitability was impacted by a 88% y-o-y increase in repair and maintenance cost to Rs 1,529.78 crore. The slowdown in induction of new aircraft, due to issues with Pratt & Whitney engines in A320neos, forced the airline to extend leasing of some older planes leading to aging of the fleet. The surge in maintenance cost was on account of provisions worth `318.96 crore on account of older A320neos in IndiGo’s fleet, a lot of which were inducted between financial years 2016 and 2019 from the secondary market to meet capacity, analysts said. “Lease extensions and the rise in second shop visits of older aircraft are likely to drive an increase in these costs,” Motilal Oswal said in a report.

Another factor that may put cost pressures on the airline would be the weakening rupee, analysts said. In FY19, the airline’s forex loss grew over eight times to Rs 467.47 crore on account of the depreciation of the rupee in FY19. Meanwhile, foreign exchange loss in the September quarter grew 34.6% to Rs 451.64 crore, on account of re-evaluated lease liability in foreign currency, the airline had said.

IndiGo’s yields, which remained flat in FY19, saw a 9.5% growth in the September quarter to Rs 3.5 per kilometer. However, going forward the yield is expected to be flat in the coming two quarters. “In the first half of FY20, IndiGo have averaged about 10% yield growth y-o-y. In the second half, yields will remain flattish given some weakness in the demand environment right now. This is despite continued benign capacity growth in the market,” the SBICAP analyst said.

In the previous financial year, IndiGo saw a flat growth in yields as the capacity growth rate of the airline was higher than the growth in demand. The airlinecurrently has 245 aircraft in its fleet compared with 94 aircraft in FY15. While the total flights of the airline grew 29% in FY19 to over 4,48,000, its load factor, which indicates capacity utilisation, declined 130 basis points to 86.2% in FY19, according to analyst reports.

Cost per average seat kilometre (CASK) — a parameter to gauge the efficiency of an airline’s operations — grew marginally by 2.8% in the September quarter, muted on account of a 2.6% rise in fuel costs to Rs 3,115.4 crore. In the previous financial year, fuel expenses of the airline had risen 53% to Rs 11,942.8 crore. The airline’s total debt as on September 30 stood at Rs 19,841.8 crore.

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