Improving yield a positive for IndiGo amid higher pricing pressure

Load factors to remain under stress amid aggressive capacity addition

IndiGo’s financials have been under pressure over the last few quarters on account of pricing pressures, higher fuel costs and a weak rupee.
 
While the latter two have impacted the financials in the December quarter, trends in passenger fares over the last couple of months have been positive. The festival season saw uptick in pricing — especially in the 0-15 days booking period — sustain in November and December, which has since continued to the current month.
 
It was the higher passenger fares per kilometer, or yields, which helped IndiGo post revenue growth of 28 per cent over the year-ago quarter. Overall growth would have been higher but for a weak October, and the fact that the company has been adding capacity much faster at 33 per cent. As a consequence, load factors fell 320 basis points to 85.3 per cent.
 
There was no relief, however, on the costs front. While fuel costs per litre were up 31 per cent, the rupee weakened 9 per cent over the year-ago period. Dollar-denominated payments, be it on account of engine rentals or maintenance, have led to incremental cost increases.
 
Fuel and engine rentals account for 60 per cent of the company’s costs. If not for the cost increases from these two heads as well as weakness of the rupee, unit costs would have been flat over the year-ago quarter.
 
Given the cost headwinds, operating profit margins before rental costs fell over 1,100 bps to 21.2 per cent. However, lower fuel prices and some recovery in the rupee should help the aviation market leader make the most of the strong revenue growth and lower costs.
 
With the company expected to add capacity aggressively (March quarter YoY growth of 34 per cent), expect load factors to be under pressure. However, the key positive continues to be the pricing discipline, which seems to be holding up as of now.
 
The other worry is regarding the slowing down of overall demand, given that in the last couple of months, passenger growth has been around 12 per cent.