IndiGo Performs Well in Q3 FY2016 but Is Outshone by Q1 FY2016

Key points

• IndiGo did better in Q1 FY2016 (quarter to 30 June 2015) than in Q3 FY2016 (quarter to 31 December 2015).
• Operating profit in Q3 was about the same as in Q1.
• Fuel was 34 percent of operating costs in Q3, against 46 percent in Q3 of the year before. Fuel cost per ASK fell 33 percent.
• Non fuel cost per ASK rose 11 percent, which raises IndiGo's dependence on low fuel prices. Total unit operating cost fell 9 percent.
• Operating revenue per ASK (RASK) fell 7 percent from Q3 FY2015 and 4 percent from Q1.
• Forecast for Q4: fuel cost below INR 1.00 per ASK, RASK lower than in Q2, and operating profit of INR 100 to 200 crore.

Traffic

Most analysts rate Q3 (October to December) as better than Q1 (April to June), since airlines add capacity from summer to winter, which raises revenue and spreads fixed costs. Both are peak seasons, so the comparison is fair. In Q3 IndiGo carried 8.3 million passengers, 1.5 percent more than 8.2 million in Q1, and only 5 percent were international. It flew 59,216 flights, up 4.8 percent. The fleet averaged 97.1 aircraft, up 2.6 percent, and utilisation grew 2 percent to nearly 12:30 hours a day. Seats rose 4.8 percent but passengers only 1.5 percent, so the seat factor fell 3 points to 78 percent from 81 percent. The author thought inventory management was better in Q1.

Operating profit in Q3 was INR 857 crore, up only 0.2 percent from INR 855 crore in Q1. It excludes other income, finance costs, exceptional items and tax.

Costs

• Fuel was 46 percent of operating costs in Q3 FY2015, then 40 percent in Q1, 36 percent in Q2 and 34 percent in Q3. Fuel prices were down 31 percent, but fuel cost per ASK fell 33 percent to INR 1.08, perhaps because of buying fuel in cities with lower ATF tax.
• Aircraft and engine lease costs, including maintenance reserves, rose to INR 0.71 per ASK from INR 0.65. The author linked this to 11 older A320s taken in 2015 from Tiger Airways' stored fleet, part of 17 older A320s now flown, on short leases of about three years. Cash and non cash incentives per ASK dropped 18 percent, so lease costs rose 14 percent per ASK from Q3 FY2015.
• Employee costs reached INR 0.43 per ASK, up 24 percent. IndiGo had about 1,600 pilots and 3,000 cabin crew, around 800 and 750 crew sets. An airline needs 4 to 5 sets per aircraft, and with 101 aircraft IndiGo had 8, or 3 to 4 spare, to cover about 30 aircraft expected in 2016. Employee stock options cost INR 23 crore in the quarter.
• Depreciation per ASK rose 35 percent because of component accounting under the Companies Act 2013. It has been steady across the three quarters of the year.
• Landing and en route charges rose 5 percent per ASK and other expenses about 1 percent.

Around 60 percent of an airline's costs are in US dollars, so the weaker rupee added to the rise. A flight cost INR 581,027 on average, the lowest of the four quarters. With the highest non fuel costs of the four, IndiGo would be exposed to a fuel price rise in a lean season.

Revenue

Ticket sales were 88 percent of income from operations, and ancillary revenue 12 percent, up from 10.5 percent. About half of ancillary income comes from passenger services like seat selection, baggage, changes and convenience fees. The other half comes from cargo, in-flight sales, insurance commissions, advertising and tours. IndiGo carried 596 kg of cargo per domestic flight and 865 kg per international flight, 15 percent and 31 percent less than a year earlier, so cargo fell to about 33 percent of ancillary revenue.

Operating revenue was INR 3.97 per ASK, against 4.29 in Q3 FY2015 and 4.12 in Q1, because of lower seat factors, lower industry fares and more competition. The average fare, excluding taxes, was INR 4,517, down 14 percent from INR 5,262. Domestic services gave 91.5 percent of revenue. Domestic RASK was INR 4.07, down 9 percent. International RASK rose 14 percent to INR 3.35, and since international flights are 2.3 times longer, the distance adjusted figure is higher than domestic. In the lean Q2, RASK was INR 3.36, 22 percent lower despite the same seat factors as Q3 FY2015.

Profit

Operating profit in Q3 was up 22 percent from INR 702 crore a year earlier. Per ASK it was INR 0.80, up 2 percent on Q3 FY2015 but down 5 percent from INR 0.84 in Q1, which was the best quarter on a unit basis in the year, helped by a domestic load factor of 92 percent in May. The lean quarter Q2 earned only INR 0.10 per ASK, or INR 109 crore.

Forecast for Q4 FY2016

IndiGo would add three older A320s to a fleet of 101, reaching 104, rather than 111 as planned, because the A320neo was delayed by a technical issue with the Pratt and Whitney geared turbofan. If the problem were fixed and neos arrived by the end of February, the quarter might end with 3 to 4 neos and a fleet of 107 to 108. The author saw a risk of overcapacity, as growth was driven by stimulated demand more than real demand.

If fuel prices stayed at February levels, they would be 16 percent lower than in Q3, or 19 percent if they fell another 10 percent in March, taking fuel to INR 0.88 to 0.91 per ASK. Operating cost per ASK could fall to INR 3.05, 5 percent lower than a year earlier. RASK might be about INR 3.12, leaving INR 0.07 per ASK. Capacity could grow 5 to 6 percent, or less if aircraft go for heavy maintenance in the lean season. With about a 35 percent market share, IndiGo might cut fares to pressure competitors, which would put operating profit around or below INR 100 crore. If it held fares, profit might be nearer INR 200 crore.

The author noted that the analysis used public information, did not endorse or fault IndiGo, and that he held no shares in the airline.