IndiGo's profitability takes back seat amid high fuel costs, weak rupee

The pressure on yields will remain as capacity addition leaves little room for a cut in prices despite rising costs

In the June quarter, India’s largest airline InterGlobe Aviation or IndiGo barely kept its head above water posting a nominal net profit. It should not come as a surprise then that in what is described as the industry’s weakest quarter (Q2), the airline totted up its first ever loss since listing of Rs 6.5 billion. Like in the previous quarter, the culprits were the same - high fuel costs, depreciating rupee and cut throat competition. While the first two are outside of the industry’s control, the last scenario defies logic given the high debt and cost base of players in the sector. Having learnt its lessons in the past, InterGlobe, does not wish to preempt the competition and put its market share at risk by unilaterally raising prices. Its response has been to add capacity aggressively and keep increasing market share. In the fiscal this it has added over 30 aircraft taking its total to 189 which will help it to tap the 15 per cent plus passenger growth the sector has witnessed for 16 quarters in a row. 

While IndiGo’s strategy is clear, prioritising market share over profitability may not go down well with the street. While its revenues were up 17 per cent it is nowhere near enough to take care of the surge in fuel costs, which were up over 84 per cent and rentals, which were up 36 per cent over the year ago period. This is reflected in the margins, which came in 3.6 per cent as compared to the year ago period when they were touching nearly 30 per cent. 

Though the company indicated that fares should firm up given the festive season, the slew of offers in recent weeks and the strong capacity addition plans will mean the focus will be on improving load factors and thus softer fares. While unit revenues should see an improvement as new routes start getting traction, at the current fuel costs and adverse currency movement, the pressure on the company and the sector would mean little hope of turning the corner in the near future. The only solace for the market leader is a cash chest of Rs 131 billion as compared to debt of Rs 26 billion.