aircraft grounding: IndiGo CEO on Q2 results, aircraft grounding, fuel surcharge & more

Pieter Elbers, CEO, IndiGo, says “today, we are running in the second quarter on 28% capacity growth and in the third quarter we have announced to be roughly in the range of 25%. At IndiGo, we have taken a whole range of mitigating measures ranging from lease extensions to damp leases of wide bodies, damp leases of narrow bodies and keeping some of the older fleet in operation and that is pretty much also our vision and our strategy going forward. We are aware of the latest announcements of Pratt & Whitney indicating that due to the powder metal, engines have to be recalled. We in fact have reconfirmed last Friday at the publication of our results, our capacity guidance in the north of mid-teens for this year FY23.”Let us begin with the grounding of aircraft. While you have announced that more grounding can happen in Q4, how serious is the situation?
Actually, I would have expected you to start with our Q2 results and the fact that after five years, we are making a profitable second quarter of FY24. And why do I say that in relation to your question? What is important to recognise is that at IndiGo, we have been able to deal with the ongoing supply chain challenges since they emerged about a year ago. You may recall that about a year ago, the first indication of supply chain challenges were there and we had given a capacity guidance in the north of the mid-teens for FY23 and the second quarter is just a proof of that.

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Today, we are running in the second quarter on 28% capacity growth and in the third quarter we have announced to be roughly in the range of 25%. So, we have taken a whole range of mitigating measures ranging from lease extensions to damp leases of wide bodies, damp leases of narrow bodies and keeping some of the older fleet in operation and that is pretty much also our vision and our strategy going forward. So, against that backdrop, of course, we are aware of the latest announcements of Pratt & Whitney indicating that due to the powder metal, engines have to be recalled. But at IndiGo, we have taken a whole range of mitigating measures and with these mitigating measures, we in fact have reconfirmed last Friday at the publication of our results, our capacity guidance in the north of mid-teens for this year FY23.

Coming to your quarterly results then, what were the main contributors to that and out of them, how much will be continuing going forward? Crude price was one factor that actually hit your profitability a bit, that is also increasing. How do you see all these factors and what were the reasons for the Q2 results?
Well, I think there are three elements which are there. One, you have mentioned. There is, of course, the price of the fuel which is always fluctuating and as we know there is always a correlation between the price and the fuel and eventually about the tariffs and you saw fare levels which were lower than the quarter before. So, one is the price of the fuel. The other two, and I would say actually even more important factors are, firstly, a very healthy demand which is still there out in the Indian market and India today is probably one of the fastest, if not the fastest growing aviation market in the world, surely of this size and that both on the domestic side as well as on the international side continues to grow.

The third piece is the effective and efficient introduction and execution of the strategy which we have launched last year at IndiGo, of which part is internationalisation, part of further expanding our network, developing more domestic city network. These three factors, fuel cost, healthy demand, and execution of our strategy have been the main contributors and that now has completed not only a second quarter, which is profitable, but also a full cycle of four consecutive quarters of profits.

Let us talk about capacity now. In absence of many aircraft, 40 are currently grounded, more are going to be, how are you going to mitigate this situation? How are you going to even make good this loss, to what measures?
We have been demonstrating over the past year that we have, in fact, a very agile and effective way of introducing additional capacity. When the supply chain challenges started to emerge somewhere last year, we started with extension of leases. So, we have extended leases, planes which were supposed to go out, remained within IndiGo, that was one step. The second step we took was the introduction of two wide-body aircraft, notably operating on Delhi-Istanbul and Mumbai-Istanbul which were helping us to make sure that we have adequate lift to that side.

The third step we have been doing is basically we kept a steady influx of planes which were a lot already. Let me remind you, we have almost one plane coming each and every week and so with this influx of new capacity, we have almost a natural hedge if that is the correct word against some of these AOGs.

Last but not least, we have recently concluded induction of another 11 planes which are coming in one by one. Going forward, we continue on that track. Only in the month of December, we get three more ATR aircraft coming in, so that is helpful. We got new airbuses coming in and we are evaluating a further increase of leased aircraft going forward.But talking about the leasing environment in India after Go First has gone down, has not the leasing cost increased a lot because the lessors could not possess Go First aircraft? Isn’t it going to hurt you also?
I think there are a couple of factors here. There were, of course, some initial reactions to the grounding of Go First and the impact of that on the international leasing community. More recently, some new adjustments have taken place which is allowing the lessors to repossess their planes. More than that, I would say these disruptions, international lease prices are driven also by what is the interest levels and at IndiGo, we have demonstrated to be a very reliable party during Covid which was, of course, the worst time for the industry.

IndiGo has taken each and every plane which was in the order book. IndiGo has paid each and every lease instalment which was to be paid. So, the factors which are there on the global stage, the factors which are there on an Indian stage, IndiGo has demonstrated to be a very reliable and trustworthy partner for these leasing companies.

You said that you are in touch with Pratt & Whitney and have communicated with them and it will depend on the service bulletin now. When are you going to listen or maybe get some final clarity on how many aircraft are going to be grounded? Can you give us a number and what about the compensation from Pratt & Whitney?
As one of the largest, if not the largest, operator of Pratt & Whitney engines, of course, we are in constant dialogue with Pratt & Whitney, both on what precisely is going to happen at what point in time, as well as on the financial part of it. And next to what the precise information from the Pratt & Whitney side is, we are also discussing with them, how can they help us to take some of these mitigating measures? Until we have that clarity, any number would be more like speculation going forward because it all depends.

There is an equation of what is the number of planes and what is the number of engines being involved on the one hand and how much mitigation we can do on the other hand. We focus clearly on not only what is the impact, but also how we can do the mitigation and to what extent Pratt can help in addressing that mitigation. When it comes to the compensation, that has now come to clearly also what is the overall impact. That has been a topic of intense discussions that we are having, of course, with Pratt & Whitney.

Any clarity on compensation when it will come to you? That is also depending on the grounding and the clear picture on grounding of aircraft, the numbers?
Yes, you pretty much mentioned it. Of course, there is a correlation between what is going to be the compensation on the one hand side and what is going to be the precise number of groundings. As that number of groundings and as that number of supply chain challenges is still fluctuating, the same would go for the number of compensation. What is clear is that Indigo is operating in the world’s most dynamic, vibrant, and fastest growing market. We need that capacity and we are putting all our energy into obtaining that capacity with the help of Pratt and outside the help of Pratt also with some other arrangements we are doing.

Let us talk about expansion. Last time you spoke, you were quite bullish about expansion on the global front. You have launched 20 new flights globally in the past six months. What is the outlook going forward, especially in the coming season of December in the Christmas year end period?
Pretty soon after I joined IndiGo in August, September last year, I joined the inaugural flight of IndiGo to Ras Al Khaimah. At that point in time, that was our 100th destination and it was actually a moment of big pride and celebration for the company. Today, we operate in 115 destinations and soon will reach 120. We have, in fact, delivered what we promised in terms of international and domestic expansion. The most recent international expansions to Baku, Tbilisi and Tashkent actually are doing very well. We have indicated that soon we hope to be able to announce new flights to Bali and Medina and that would further expand our international portfolio.

On the domestic side, today we operate 83. We have announced 84 and 85. So we keep on expanding that. Importantly, though, next to the number of destinations, I would say it is the number of routes. Take a station like Ahmedabad. We were having two international routes from Ahmedabad only. Today, we have four. So we are expanding not only from India into new international destinations but also solidifying some of the destinations. We now fly out of six cities in India to Singapore, it used to be three.

Only last week, it was Hyderabad, Colombo, Hyderabad, Singapore. We keep on expanding those new routes. And what you see going forward and that was your question really, is where is the emphasis? We continue to build both on new destinations but I would say even more so building on new routes.

And you introduced the fuel surcharge a few weeks ago. How is it impacting the yield? Some estimates say Rs 100 crore per week is going to be added to your kitty. Is that correct? And how is the surcharge working for you as far as yields are concerned?
Yes, it’s interesting. I saw some of these calculations. And the math is obviously always more complex than that because the surcharge is announced, then there is competitive dynamics, then there is something in the pricing. What is important is there should be a correlation between fuel prices and eventually what is the prices in the markets. During the last couple of months, we have seen a very significant and steady rise in the fuel prices, much more than before. And with that, we are addressing, which is common practice, I should say, in internationals, but even in Indian markets, we have introduced the fuel surcharge.

You would see that overall fare levels will also be affected. So I would not be able to call out a precise number now and say, okay, it is precisely resulting into this number or that number. What is important is that we are making sure that we have a consistent operation and we will be able to, in fact, address these rising prices of fuel.

Talking about the fares, well, the coming season is going to be definitely of your liking. A lot of traffic is going to come in December, year-end, Christmas season. What is the outlook on airfares going forward?
The coming season is to our liking. That is a nice way of putting it. I think what is important here is that there are natural cycles and evolutions in fare prices. And the same way as we saw in the second quarter, a decline in yields as compared to the first quarter. We will see in the next quarter, in the quarter to come, some positive developments in yields, which, again, is the natural fluctuation. As an airline, we are here for the long-term position and not so much for quarter over quarter. So you will see prices coming back to levels which were there in previous peak seasons. I would not be able to give a precise number now on what precisely will be or how it will compare season over season. But overall, we see a healthy demand in the markets.

Let us talk about your food and beverage business. You earned Rs 762 crore. It was revenue over last financial year and which was more than many, many food companies in India. You have introduced a new meal service, though I personally don’t like it much. Is it going to increase your margins in the food and beverage business further?
Well, I am sorry to hear that you do not like it much. Actually, we are getting a lot of positive feedback from our customers on that. So, but maybe offline, you tell me what part you do not like and then we can go into more detail. As I said, we are getting really a lot of positive feedback, especially on the speed and the efficiency of it, which in the old structure just took a lot more time.

The number you are referring to was, I guess, taken from our annual report and then someone did its own math. I think what is important is that the vast majority of the food we have on board is part of corporate fares and a certain fare structure. So it is not so much of an ancillary as it is actually a part of those fares. We will continue to build on that but at the same time, making sure that we can continue to deliver the service on our flights.

One of the reasons why we have changed this whole concept is that on some flights with a lot of customers who are entitled to the catering, the crew could not almost catch up in doing that, leave alone having time to give other services to customers. So by changing it a), it helped a lot to get a better service pattern on board; b), to make sure that the crew has time for all the customers because in the past, we had no time anymore to serve them.

Importantly, it is also addressing a lot of sustainability issues in terms of wastage we had on board and so on. So we will continue to build on that, not so much with the focus on ancillary but very much as a focus to deliver a customer proposition, which is very much tied to what is the basis of IndiGo, affordable fares and hassle-free service and of course, an on-time performance.

And from Rs 762 crore, do you see touching Rs 1,000 crore this year?
Again, that number is a composition of fares which included that and the actual being sold on board. I would not be in a position to give any prediction of what is going to be the precise number. What is important for me is that we continue to deliver service to our customers in line with our customer promise.

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