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JUNE 2021

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Hoping for the best while preparing for the worst

How India’s largest airline plans to emerge stronger from the pandemic. Anjuli Bhargava reports.

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June 1st 2021

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Ronojoy Dutta, the CEO of India’s largest airline, IndiGo, did not mince words when he described the pandemic as the worst crisis his airline has faced. Read More » It has been a major threat to the LCC, he told Orient Aviation, but instead of “moaning” over everything that is amiss, he and his team have used the crisis for introspection and reassessment, with the goal of emerging stronger from the corporate trauma.

Like airlines worldwide, IndiGo’s losses have ballooned from the fallout of air traffic from the pandemic. The airline, India’s largest domestic carrier, recently reported its fifth straight quarterly loss from muted travel demand and a huge new wave of COVID-19 cases across the country.

In the fiscal year to March 31, IndiGo reported a net loss of Rs 58.1 billion (US$797.6 million) compared with a net loss of Rs 2.3 billion a year ago. Revenue declined 58% to Rs 156.8 billion, continuing the trend of deepening quarterly losses of the last 18 months.

IndiGo had its best month since the pandemic began in February when domestic bookings hit 80% of pre-pandemic levels. But the recovery stopped in its tracks after a nationwide surge in COVID-19 cases from March.

At the full-year results announcement, Dutta said “a meaningful recovery of international traffic will probably be pushed back to the fourth quarter of 2022”.

Deciding not to worry about what will be, the airline has been concentrating on “getting in better shape” so it will emerge stronger than its rivals when the pandemic ends.

“We have produced disappointing financial results this year, but we have positioned ourselves to be the best-in-class airline when the inevitable recovery finally arrives,” Dutta said.

To achieve its goal, the LCC has been steadily replacing its A320ceo with A320neo. Twenty three classics have been returned in the year to March 2021 compared with March 2020 and 20 neos have been added in the same period.

The airline had 285 aircraft at the end of March, 2021. It did not achieve its target of returning 40 ceo in the 12-month time frame because its MRO facilities in the Philippines, Indonesia and Turkey were closed from COVID-19 till August last year. The shutdown impacted the speed at which planes could be passed out of the IndiGo fleet.

Dutta said the airline’s plane count will remain “flat” until March 2023. “All its ceo will be replaced with neo, making our fleet newer and more fuel efficient,” he said.

Already the replacements have resulted in lowering the airline’s overall fuel consumption by 15%, he said. In the last 12 months, fuel consumption per flying hour also has fallen, by 10%. All costs that could be pared have been examined with a fine tooth comb across all divisions of the group. Staff costs are down as a result of graded pay cuts.

By raising Rs 3000 crore through a Qualified Institutional Placement (QIP), the airline has ensured its cash levels don’t fall below a threshold level, anchoring its financial viability.

The pandemic has helped the LCC identify many niche pockets of international traffic from its operation of charters during the pandemic that it hopes to optimize after the virus abates.

Dutta said the very fact passengers prefer and will prefer nonstop flights instead of connecting through hubs marks a significant change in air travel patterns and is a distinct advantage for airlines like his.

“We see ourselves very competitively placed vis-a-vis rivals around the globe to garner the direct flyers within seven hours of flying distance,” he said.

If international traffic offers great scope when the world returns to normal, tier two and tier three domestic traffic within India also has surprised the airline. “I am not sure if this is COVID related or that manufacturing is moving out or trading is increasing. I can’t say what is happening, but earlier it was the metro to metro connections that were strong but now it is tier two,” Dutta said.

The airline is introducing several routes to its network and adding frequencies to other destinations. It is looking at smaller cities such as Lucknow, Coimbatore, Kanpur, Dehradun, Jaipur and Vijaywada as destinations for increases in direct connections and frequencies. For instance Dehradun, which IndiGo connected directly to Bengaluru, and Hyderabad (stopped during the pandemic) are likely to see many more direct connections as well as Panjim in Goa.

Although the airline’s yields have remained largely flat, with fares unchanged since 2020, Dutta said its Cost per Available Seat Kilometre (CASK) is the lowest of all of India’s carriers.

Only one factor worries him, he said. “Load factors. This is cyclical and this will change.” But once the pandemic is behind us and recovery begins, IndiGo is very well poised to take off in the true sense of the word, Dutta said.

IndiGo’s six point strategy for success
IndiGo’s CEO, Ronojoy Dutta, outlines the six trends that dictate the LCC’s expansion strategy:
• “Non-stop flying will finally have its time in the sun. It has been almost impossible to make money on nonstop flights. Passengers have so many options. As a result, U.S. carriers found it very hard to fly direct to India. There were at least 20 stops on offer.
“I have tried it with United [Airlines] to Delhi and from Air Canada to Delhi. A passenger has so many choices. So many places to stop or change flights.
“The pandemic has changed this. People want to fly nonstop, not wanting to risk infection. Now American Airlines is flying Seattle to Bangalore for instance. This is a big change as I see it and one that is reflected in the residual values of airplanes. Values of narrow-bodies are holding up while wide-bodies have collapsed.
“Similarly from India, if you wanted to go to Cairo or Kazakhstan or Manila or Jakarta, you would fly through the Middle East or through Singapore, all this is going to change.
“This is good for IndiGo as we are armed with aircraft that can do seven hours. We see the competitive dynamics shifting in our favour in this respect.
“Domestically, two tier cities are really showing strength. In the past, it was metro to metro connections that were strong. In fact, we are introducing several routes and adding frequencies from these second city points.”
• “Global hubs such Dubai and Singapore are likely to be in deep trouble and certainly will experience very challenging times. Imagine trying to fill an A380 in this situation?
“Carriers who were surviving on primarily connecting traffic are in trouble. We are already seeing a lot of pain with these airlines.
“Etihad was struggling even pre-pandemic. Many carriers are almost entirely dependent on connecting traffic. A drop in this can mean serious trouble.
“London has a fair amount of local traffic so it is holding up better. A lot of the hubs around us were relying on Indian traffic - Doha, Dubai, Singapore and so on. Indian traffic will still be there, but the question is who is going to carry it? Who will have the advantage in carrying it? We too have discovered pockets of international traffic through charters we did not know existed.”
• “Carriers feeling the most pain are those heavily dependent on connecting traffic. So Lufthansa may be worse affected than a British Airways because the latter has more domestic traffic. The Middle East carriers will be and already are feeling the brunt of changing travel patterns.
“MROs and those involved with servicing wide-body aircraft will be affected. Boeing has been beset with a series of misfortunes. Airbus has its own production and supply issues. It is better positioned than Boeing I think.
“Among the engine manufacturers, CFM is better off than Pratt [Pratt & Whitney]. It’s a mixed bag. Not an easy time for the industry as a whole.”
• “Our minimum threshold for cash has been set come hell or high water. For many airlines globally, that minimum is four months of revenue in cash. That’s the global standard. For IndiGo, it is much, much higher although we do not reveal how much. But let me reiterate this threshold is sacrosanct for us.
“In the present crisis, we looked at various scenarios: optimistic, realistic and pessimistic. Even under the worst case scenario, we need to maintain our threshold level. The money we are raising from the Qualified Institutional Placement (QIP) is not a working capital need. The board felt, given the environment, it was prudent to raise money through the QIP as an insurance policy.
“What if there’s a third wave and no domestic flying for say four months? Or scheduled international flights do not open up for two years? These are extreme scenarios, but we don’t want to be caught flat footed.
“I think shareholders look favourably on QIP as way to raise cash through equity. We have increased our debt levels by taking credit lines from various banks. But the QIP is not for paying for debt. It is only disaster insurance. We want to be comfortably above our own threshold cash limit.”
• “In relation to our suppliers, we enter into long term agreements and contracts with all of them, be they our key lessors, our engine and aircraft suppliers, MROs or any other services. We have a partnership approach to the whole thing. In general, we are loath to disturb our pipeline and arrangements that have worked very well for us.
“From time to time, we seek each other’s assistance and cooperation in times of trouble, but we don’t want to reopen or negotiate contracts unless it is imperative. We have a long-term approach and are not looking at saving say three months of lease rentals.”
• “Indian aviation is the highest taxed in the world. This needs to change. We all need a stronger sector. For improving the situation of individual airlines, I don’t have an answer.
“Airlines go bankrupt all over the world. Continental went into bankruptcy three times. Air Canada went into bankruptcy. But many of these countries have strong bankruptcy laws and codes that allow one to restructure. Companies need to adopt better day-to-day running practices.”

 

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