Soaring costs, grounded aircraft, forex fluctuations may hit IndiGo income

The airline industry faced several challenges during the second quarter of the current fiscal year, including rising crude oil prices. IndiGo, with a market share of 63 per cent, also faced a challenge from these factors.  

1. Higher Crude Oil Prices: One of the significant factors affecting Q2FY24 was the substantial increase in crude oil prices, which led to a 4.97 per cent quarter-on-quarter (QoQ) rise in Aviation Turbine Fuel (ATF) costs. This increase in operating expenses squeezed profit margins during a seasonally weak quarter, a note from ICICI Securities said.

For IndiGo, the increase in crude oil prices had a cascading effect on its operating expenses. The airline industry is susceptible to fluctuations in fuel prices, as fuel constitutes a significant portion of operating costs. To mitigate this challenge, airlines often implement fuel surcharges or adjust ticket prices, which can affect passenger demand.

ICICI Securities, in a note to investors, said Q2FY24 would be a near breakeven quarter for IndiGo, characterised by several key financial parameters. These include Available Seat Kilometres (ASK) totalling 34.5 billion, Revenue per Available Seat Kilometre (RASK) and Cost per Available Seat Kilometre (CASK) of 4.3 and 4.4, respectively, as observed in Q2FY23.

“Consequently, we project an approximate loss of around Rs 23 crore, excluding forex impacts, and an overall loss of Rs 470 crore when considering forex factors,” analysts Ansuman Deb and Sanil Desai said.

The primary drivers of this financial outlook include:

A substantial 25 per cent year-on-year (YoY) growth in ASK.

A 500 basis point (bps) quarter-on-quarter (QoQ) decrease in Passenger Load Factors (PLFs).

A notable 14 per cent QoQ reduction in fares.

Furthermore, the note said it is essential to account for the potential impact of heightened OEM compensation due to the increased grounding of aircraft during this period.

2. Aircraft on Ground Issue: IndiGo faced a challenge with Aircraft on Ground (AOG), which refers to grounded aircraft that are unavailable for operations due to maintenance or other issues. While this issue hurt operations, it is expected to be partially offset by Original Equipment Manufacturer (OEM) compensations. In the first five months of FY24, IndiGo added 23 aircraft to its fleet.

3. Lower Passenger Load Factors (PLFs): Despite maintaining a dominant 63.3 per cent share of the domestic passenger market as of August 2023, IndiGo experienced lower PLFs. PLF represents the percentage of seats filled on a flight, and IndiGo’s PLF remained muted for two consecutive months at 83.6 per cent. This indicates that while the market share was maintained, there were challenges in filling seats, which impacted revenue.

4. Rise in Jet Kero Cracks: The quarter also witnessed a QoQ rise in “Jet Kero Cracks”, which refers to the difference between the cost of crude oil and the selling price of aviation fuel. This increase in costs added to the operational challenges faced by IndiGo.

5. Forex Loss from Weaker INR: Another factor contributing to the challenges in Q2FY24 was a forex loss stemming from the depreciation of the Indian Rupee (INR). The INR weakened from 82.04 to 83.04 against the US Dollar during this period, resulting in currency-related losses.

Despite these challenges in Q2, there are several positive factors to consider:

1. Strong Competitive Position: IndiGo maintained a robust market share of 63 per cent, indicating its competitive position in the domestic aviation market.

2. Destination Expansion: IndiGo continued to expand its network by starting 14 new routes in Q2FY24, demonstrating a commitment to growth.

3. Favourable Supply-Demand Outlook: The overall supply-demand outlook for the Indian aviation industry remained favourable, providing future growth opportunities.

Q2 Financial Outlook: Historically, Q2 has been a seasonally weak quarter for the aviation industry, contributing relatively little to full-year profits. Q3 and Q1 are typically strong quarters, with Q3 being particularly favourable.

The Q4 tends to be better than Q2. Q2FY24 is expected to be a near-breakeven quarter with specific key financial parameters:

• Available Seat Kilometres (ASK) of 34.5 billion.
• Revenue per Available Seat Kilometre (RASK) and Cost per Available Seat Kilometre (CASK) are 4.3 and 4.4, respectively.
• An estimated loss of approximately INR 230 million, excluding forex losses, and INR 4.7 billion when including forex losses.

The primary factors driving these financial projections are:

• A 25 per cent year-on-year growth in ASK
• A 500 basis point (bps) QoQ decline in PLFs
• A 14 per cent QoQ decline in fares

Additionally, elevated OEM compensations due to grounded aircraft are expected to contribute to the financial picture.

Monthly Passenger Trends: Monthly passenger trends for IndiGo remained steady, with a 2 per cent month-on-month (MoM) increase in average daily domestic passengers in September 2023, attributed to the solid festive season. September’s average daily domestic passengers were 409,000 compared to 400,000 in August 2023.

Assessing OEM Compensations: Finally, the assessment of OEM compensations reported by IndiGo is an ongoing concern. These compensations are estimated by deducting reported passenger revenue and reported ancillary revenue from reported total operating income.

While the usual range for these compensations is Rs 50 crore to Rs 100 crore per quarter, there have been surges in certain quarters, such as the Rs 350 crore reported in Q3FY23. These fluctuations may be tied to costs incurred due to grounded aircraft, with some possible linkage to lost revenue.

“The OEM compensation may be more tied to costs incurred on grounded aircraft. However, some linkage to revenue lost could also be there,” the note from ICICI Securities said.