Could Softening Demand Spoil The Indigo Party?

(MENAFN- Live Mint) IndiGo declared a loss of ₹986 crore in Q2-FY25, on the back of multiple factors like higher aircraft rentals and softening demand - which the IndiGo management termed as normalisation. The airline also called out that it is now the first and only Indian airline to cross a fleet size of 400 planes, though the numbers also include 25 wet-leased planes.

The airline reported a revenue of ₹16,969 crore and other income of ₹789 crore, which was clearly short to make ends meet. There was a steep increase in aircraft rentals, which stood four times of what it was in the corresponding quarter last year. The focus was also on airport rentals as one of the reasons for higher costs. However, this is an admission that the corresponding increase cannot be passed on to passengers.

The airline says that it is seeing a comeback of demand in October, but the overall competition could moderate yields, which definitely remains a concern. Is it because of economic reasons or because of higher supply in the market? It seems to be a mix of both, with the likes of Air India Express and Akasa Air having announced a sale, which includes flying dates during Diwali, also an indicator that IndiGo is not the only one affected by this but is more of an industry-wide issue.

The airline has seen a reduction in AOG (aircraft on ground) from the mid-70s to the high-60s and it expects to reach the 40s in April 2025. This will also have a positive impact on CASK (cost per available seat kilometre) and the gradual phasing out of wet-leased aircraft, for which it is currently paying a premium. Additionally, the A320ceo in the fleet remains cost-efficient compared to the A320neo.

As of mid-October, IndiGo has 313 A320neo family aircraft (201 A320neo and 112 A321neo). As many as 132 or 42 per cent of those are powered by Pratt & Whitney, while the rest are powered by CFM. The Pratt & Whitney-powered planes are gradually being made available with engine replacements and some being redelivered, shows data released by the regulator DGCA.

As IndiGo pivots further from its original model, how much will it cost the airline? The preparatory costs may have been without returns for now, but that will change starting the current quarter. Even for an airline of this size, it will take time to realise the benefits financially.

The airline is investing in digital initiatives to help take up more direct bookings, which are currently in the high teens, much lower than what carriers in other parts of the world have. The management focus has been on maintaining cost leadership, despite having to mitigate supply chain issues. Time will tell if investments in damp lease and older A320s were worth in terms of financial results or that helped guard the slots and take on the competition without adding profits or shareholder value.

IndiGo has had a moderate growth in the last quarter in terms of capacity, and so was the case with passenger numbers. The numbers also show that we are well past COVID now and the growth as well as yields are back to seasonal nature. The airline will launch flights to Penang and Langkawi soon and is on track to have 30 per cent of its total capacity on international segments.

All eyes are now on the current quarter. Will IndiGo crack a big profit on the back of the festival season or not? Q3-FY24 had recorded a profit of nearly ₹3,000 crore for IndiGo. However, the Tata group of airlines combined now offer more capacity by ASK (available seat kilometres) than IndiGo. A high profit on the back of lower fuel prices will mean that the demand is back and IndiGo is competing effectively against a rejuvenated Air India group. If it cannot, it will be an indication that the cyclical ups and downs have reached aviation, especially at a time when the stock market is seeing new lows, and spending is being curtailed.

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