IndiGo may hit air pocket in March qtr amid lean season, coronavirus threat

InterGlobe Aviation, which runs the country’s largest airline IndiGo, saw its pre-tax profit jump threefold to Rs 556 crore in the third quarter of FY20 on strong revenue growth. The company expects to complete modification of its Airbus A320Neo engines by May end, but expects a challenging fourth quarter because of lean season and coronavirus threat.
 
The company also announced redesignating Ronojoy Dutta its whole-time director and CEO. Dutta, who is currently the CEO, has been redesignated with immediate effect, and his term in the new role would be valid until January 23, 2024.
 
A subdued forecast for the March quarter came despite IndiGo beating Street estimates for the December quarter after a muted October. Revenue from operations grew 25.5 per cent to Rs 9,931 crore in the third quarter on a year-on-year (YoY) basis as the airline expanded its network and improved its seat occupancy by 2 percentage points to 87.6 per cent. Other income and ancillary revenue grew 27 and 28 per cent, respectively.  Lower costs (largely on fuel) also helped the company.
 
The net profit stood at Rs 496 crore as against Rs 185 crore during the same period last financial year.

Strong revenue growth in the quarter aided by greater load factors, however, may not continue as the March quarter is a seasonally weak one. The company indicated weak metro-to-metro fares because of stiff competition, as well as less travel, during the quarter which may lead to lower expectations on the revenue front in the quarter. Yields are also expected to be muted, given a higher base of last year, which saw the collapse of Jet Airways and a surge in fares.
 
The company highlighted that the international segment, which accounts for 24 per cent of its capacity, has been a bright spot in the quarter. It expects gains to come from this segment, both in terms of capacity and margins. However, in the near term, there are headwinds.

Given the outbreak of coronavirus, the worry is that it could spread to southeast Asia from travel hubs of Hong Kong and Singapore. While revenues from China are minuscule, southeast Asia is a big market for the company and higher cancellations may derail growth in the market. In a statement, IndiGo said: “We are aware of the coronavirus situation in certain areas of China, and are offering waivers cancellation/change fee (fare difference applicable) for all travels to and from China from January 24 to February 24. At present our flight schedules are unaffected.”
 
In a slowing market, international foray was a good overall growth driver for the company, which expanded its capacity from 14 per cent of overall routes in September 2018 to the current 24 per cent.
 
Cost is the other moving part which has hampered the market leader’s financials over the last few quarters. While fuel continues to be the single biggest expense, its cost was muted in the quarter, thus offering some relief. The cost structure, however, continues to be weighed down by maintenance of the older aircraft and training of pilots. While aircraft utilisation continues to improve, the company indicated that major gains on the cost front will come by May this year as it sorts out the engine issues of its Neo aircraft. It has highlighted that maintenance costs will stabilise from FY21 because of newer aircraft, as well as a higher proportion of international operations where tax rates are lower.
 
While the company guided for capacity growth of 20 per cent in FY21, this is lower than the 25 per cent guidance in the last couple of quarters. This is because of the reduced number of aircraft deliveries, as compared to the previous estimate. Despite the near-term headwinds on the international front, it indicated incremental capacity additions will be equally split between domestic and international routes.