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The headwinds on Indigo’s profit path

Shares of IndiGo have been resilient during the pandemic, trading 32% above the pre-covid highs seen on 24 January 2020. IndiGo’s healthier balance sheet is a plus. (Photo: Mint)Premium
Shares of IndiGo have been resilient during the pandemic, trading 32% above the pre-covid highs seen on 24 January 2020. IndiGo’s healthier balance sheet is a plus. (Photo: Mint)

  • While IndiGo clocked highest yield in Q1, there are risks to sustaining it in a seasonally weak Q2
  • The trajectory of PLF, which was lower in the June quarter than pre-covid levels, will be crucial

One of the things that stands out in InterGlobe Aviation Ltd’s June quarter (Q1FY23) results is the strength in its yields, a measure of pricing. InterGlobe runs IndiGo, India’s largest domestic airline. IndiGo’s yields rose to 5.24 in the June quarter from 4.40 in the preceding three months and 3.48 in the year-earlier quarter.

According to the company, capacity, revenue, unit revenue, and yields were the “highest ever" in the June quarter.

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Even so, the sharp jump in oil prices, along with a weak Indian rupee, kept profits at bay, with the airline reporting a net loss of over 1,000 crore. IndiGo maintains that excluding the foreign exchange impact, its net profit stood at 360 crore in the June quarter.

Some analysts pointed out that the quarterly numbers were better than anticipated. The moot question now is whether the strong yields will sustain. There are near-term risks. The ongoing quarter is seasonally the weakest for the airline industry, and this will weigh on yields sequentially.

“According to our airfare tracker, the 30-day domestic forward prices dipped sharply (down 7% month-on-month) in August. The 15-day domestic forward prices also dipped by 8% month on month due to additional capacity and a decline in ATF (aviation turbine fuel) prices," analysts at Motilal Oswal Financial Services said in a note on 3 August.

Eventually, a lot will depend on how the competition plays out. The entry of other airlines can increase the competitive intensity in the sector, the impact of which should be more visible from a long-term perspective. For now, IndiGo’s chief executive officer, Ronojoy Dutta, sees no irrational behaviour from competition on pricing. “In a certain manner, we don’t see too much impact from the competition. If anything, we see a healthy industry environment as far as prices are concerned," he said in the earnings call.

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Analysts from Credit Suisse Securities (India) Pvt. Ltd have a similar view. In a report dated 4 August, the analysts said: “Overall competitive environment seems rational. IndiGo does not compete with the Tata group of airlines as Vistara is full-service, even if it is currently sold at a similar price, and Air India is driven by international long-haul traffic and, thus, their target customers are different. Akasa and revitalized Jet are still small. Go Air and SpiceJet are head-on competitors but seem to be on the back foot (particularly SpiceJet)."

If the competitive scenario worsens, then there is a threat to IndiGo’s market share, which stood at 56.9% in June, according to the Directorate General of Civil Aviation.

Further, fuel costs still remain high, and its trajectory is of paramount significance. Fuel costs form a big chunk of an airline’s operating expenses and, therefore, high oil prices are undesirable. The induction of new engine option (neo) aircraft to the fleet will aid savings in fuel costs to some extent.

Additionally, since a high proportion of IndiGo’s costs are in dollars, the rupee depreciation has been a concern. Moreover, while demand has staged a strong recovery amid increased corporate travel, IndiGo’s passenger load factor (PLF) has taken a beating. PLF dropped to 79.6% in Q1FY23, far lower than the 88.9% level seen in the Q1FY20. However, with the airline increasing its capacity and focussing on maximizing revenue, it will be interesting to watch if its PLF rises.

Shares of IndiGo have been resilient during the pandemic, trading 32% above the pre-covid highs seen on 24 January 2020. IndiGo’s healthier balance sheet is a plus. However, investors seem to be capturing a brighter picture already, which could limit large upsides in the near future.

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