InterGlobe Aviation Ltd’s reported loss of over Rs1,000 crore for the seasonally weak September quarter was way larger than what investors expected. One reason for this massive loss was because the airline had to make a provision worth Rs320 crore towards maintenance on its older A320ceo aircrafts, resulting in a sharp spike in maintenance costs.
InterGlobe runs the IndiGo airline, India’s largest by market share. On the National Stock Exchange, shares of InterGlobe Aviation were down 9% at ₹1,516 in early deals on Friday.
While the surge in maintenance cost was an unpleasant surprise, it is not a one-quarter phenomena. Higher maintenance costs are here to stay. . “This cost should continue to be in similar range for the next couple of quarters. This maintenance cost should eventually go away around 2022 as the neos become a larger portion of our fleet and these older ceo planes are redelivered," said Aditya Pande, IndiGo’s new chief financial officer, in a results earnings conference call on Thursday.
That apart, employee costs jumped as well, hurting profitability. This comes at a time when IndiGo’s revenues increased by a robust 31% year-on-year, helped by better yields and capacity expansion.
Poor earnings show has led to a swift cut in earnings estimates by analysts.
“Although the deterioration in cost structure is not structural, it could remain elevated till Airbus is able to expedite deliveries to replace IndiGo’s older fleet. Given the weak performance we recalibrate earnings resulting in 41%/9% cut in our FY20/FY21e earnings per share," said SBICAP Securities in a report on 24 October.
Prabhudas Lilladher Pvt. Ltd has cut IndiGo’s FY20 & FY21 Ebitdar by 30.3% & 22%, respectively and downgraded its rating on the stock from BUY to HOLD. “This is owing to the increase in maintenance cost due to re-assessment of maintenance contracts of older A320ceo, cut in FY20 capacity addition guidance from 30% to 25%, weak domestic yield environment and overhang of ongoing promoter feud," wrote Paarth Gala of Prabhudas Lilladher in a report on 24 October.
Ebitdar is earnings before interest, tax, depreciation, amortization and lease rentals - a key measure of profitability for airlines.
To be sure, IndiGo was expected to post a loss for July-September period, which as mentioned earlier is a seasonally weak quarter. However, estimates for loss were quite low. For instance, SBICAP Securities Ltd was expecting the airline’s losses at Rs190 crore.
The flight ahead will not be smooth either. Domestic demand sentiment is weak and can hurt numbers. “Looking forward to the next quarter, the revenues during the festive season have been somewhat subdued," said the company during the earnings call.
Recall that IndiGo reported a stellar Rs1200 crore profit for the June quarter. If the initial weakness persists for the rest of the December quarter, a seasonally strong one, the best could perhaps be over for IndiGo in financial year 2020.