Interglobe Aviation Ltd Management Discussions.

Company overview

IndiGo is Indias fastest-growing carrier and the largest domestic passenger airline with a market share of 40.1% during FY17 according to the DGCA.

IndiGo has carved a niche for itself in the domestic low-cost carrier category by focusing on ‘on-time performance, a courteous and hassle-free experience and affordable fares.

The Indian aviation industry is highly under-penetrated with the current capacity of just ~450 commercial aircraft serving a population of over 1.3 billion people. Strong economic growth, expansion of the middle class and growth in tourism are some of the key catalysts to the growth of the Indian aviation market. We believe in this huge opportunity in India. As a result, we placed an order for

100 A320 aircraft in 2005, 180 A320neo aircraft in 2011 and 250 A320neo aircraft in 2015. While all the A320 aircraft under the 2005 order have been delivered, we have taken deliveries of 19 A320neos as of March 31, 2017. These new generation Airbus A320neo aircraft are 15% more fuel-efficient than the existing A320 aircraft without sharklets. We believe that these fuel-efficient aircraft, along with our disciplined execution of low-cost carrier model, have created structural cost advantages for our airline that are difficult to replicate by our competitors

Since inception, the Company has successfully achieved strong and sustained traffic growth. Over the last 5 years, our domestic capacity, measured in terms of ASKs, and domestic traffic volumes, measured in terms of RPKs, have increased at a CAGR of 24.2% and 25.0% respectively. In contrast, for the domestic aviation industry excluding

IndiGo, the domestic capacity and traffic volumes have grown at a CAGR of 1.8% and 4.6% respectively. We started our international operations in September 2011 and have grown our network to 6 international destinations, representing 9.8% of our total capacity for FY17. We have remained consistently profitable across various business cycles and have delivered our 9th consecutive year of profitability.

Indian Economy

Indian economy is one of the fastest growing economies of the world. As per the Ministry of Statistics and Programme Implementation, the provisional estimate of growth of Indias real GDP was 7.1% for FY17. For the period January – March  2017, the same stood at 6.1%, which was lower than Chinas 6.9%, primarily on account of demonetisation that had a pronounced broad-based impact on our economy in the fourth quarter. While the growth in trade, hotels, transport and communication, mining and public administration continued to outperform the overall GDP growth rate, growth in manufacturing, construction and major services were impacted due to currency squeeze during the fourth quarter. During FY17, the Government embarked on decisive initiatives in digitisation, GST and FDI to ensure that all major services and industry sectors returned to status quo by the end of Q4. Overall, adequate monsoons, moderated inflation, banking reforms and strong consumption appetite helped grow the economy. Consequently, the Asian Development Bank expects the

Indian economy to grow at an accelerated 7.4% in FY18 and 7.6% in FY19, retaining its position as the worlds fastest-growing major economy.

Industry overview

India is the worlds third-largest and fastest growing air travel market. Indias domestic air passenger traffic reached 100 million in 2016, behind only that of USA (719 million), China (436 million) and ahead of Japan (97 million). According to Airbus, the number of passengers flying in the Indian domestic market is expected to multiply by almost six times in the next 20 years compared to 1.5 times for domestic USA and almost four times for domestic China. The key growth factors behind growth in the Indian aviation market are as follows.

Demographic distribution: India is the second-most populous country, its population growing more then 14% over the past decade to 1.3 billion. Even with such a high population, only about 100 million passengers fly on domestic routes in a year, less than a quarter of the size of air travel in China, which has a similar population. As India is projected to emerge as the worlds most populous country by 2022, with more than 50% of its population younger than 25 years old, air travel is likely to increase manifold. Burgeoning middle-class: Indias per capita income at current prices crossed

Rs.100,000 in FY17, increasing 9.7% Y-o-Y from ~Rs.94,000 in the previous year. Rising affluence is the biggest driver of consumer spending in India. The affluent segment is all set to grow from 8% to 16% of the national population by 2025; the share of strugglers is expected to decline from 31% to 18% during the period; growth in the countrys middle-class could increase air travel. (Source: BCG)

Economic growth: India is expected to be one of the fastest-growing major economies in the world over the next four years, with Real GDP expected to grow at a CAGR of 7.1% from CY14 to CY19, according to the EIU. Growth in the aviation sector is closely linked with the overall growth of the economy. Domestic RPK growth on an average was 1.7 times the real GDP growth rate of India from FY10-17. Over the last 3 years, RPK growth on an average was 2.6 times the real GDP growth rate.

Regional connectivity: The Indian Government rolled out its regional air-connectivity scheme (UDAN Ude Desh Ka Aam Naagrik) under the National Civil Aviation Policy 2016 to ensure connectivity with smaller cities.

Subsequently, 43 new airports are likely to be created, raising the number of Indian airports to 118.

Tourism boom: Indias tourism industry is fast-growing and contributes to ~6% of Indias GDP. According to the World Travel and Tourism Council, India would form part of the ten fastest-growing destinations across the world for leisure travel.

(Source: The Travel & Tourism Competitiveness  Report 2017, Morgan Stanley research)

IndiGo has been driving growth in the airline industry, combining a reliable on-time product and a hassle-free experience with affordable fares. IndiGos domestic

ASKs have increased from 16.7 billion in FY12 to 49.2 billion in FY17, growing at a CAGR of 24.2%, while all the other Indian carriers collectively grew at a CAGR of 1.8% over the same period, according to DGCA data. In terms of traffic, IndiGos domestic RPKs have increased from 13.7 billion in FY12 to 41.9 billion in FY17, growing at a CAGR of 25.0%, while all the other Indian carriers collectively grew at a CAGR of 4.6%. IndiGo has doubled its domestic market share in last 5 years from 20.3% in FY12 to 40.1% in FY17.

Operational Highlights

The following table sets forth key operational data for the periods indicated

Particulars FY Ended March 31
2017 2016 Change
ASK (in million) 54,583 42,826 27.5%
RPK (in million) 46,288 35,968 28.7%
Number of Scheduled Passengers Carried (in thousands) 43,532 33,104 31.5%
Passenger Load Factor (%) 84.8% 84.0% +0.8 points
Block Hours 558,567 436,739 27.9%
Number of Scheduled Destinations Served as of period end 44 40 10.0%
Total Number of Flights 300,526 236,385 27.1%
Number of aircrafts at period end 131 107 22.4%
RASK (Rs.) 3.44 3.78 -9.2%
Yield (Rs.) 3.50 3.91 -10.5%
CASK (Rs.) 3.04 3.12 -2.5%
CASK ex-fuel (Rs.) 1.88 2.01 -6.3%

Financial performance


Passenger ticket revenue: Passenger ticket revenue increased by 15.2% from Rs.140,624.22 million in FY16 to Rs.161,970.72 million in FY17. Revenue from ancillary products and services: Revenue from ancillary products and services primarily include cargo, special service requests, ticket modification and cancellation, in-sales and tours. Revenue from ancillary products and services increased by 13.2% from Rs.20,019.98 million in FY16 to Rs.22,667.58 million in FY17.

Other Income: Other income primarily comprises financial income on our cash, net mark to market gain on net liabilities denominated in foreign currency and other non-operating income. Other income increased by 53.2% from Rs.5,151.21 million in FY16 to Rs.7,890.70 million in FY17. Revenue per available seat kilometre (RASK): RASK reduced by 9.2% from Rs.3.78 in FY16 to Rs.3.44 in FY17 primarily driven by a decline in yield by 10.5% which was partially offset by a 0.8 point increase in load factor.


Total expenses increased by 24.5% from Rs.138,315.23 million in FY16 to Rs.172,252.30 million in FY17.

Aircraft fuel expenses: Aircraft fuel expenses increased by 32.7% from Rs.47,793.24 million in FY16 to Rs.63,415.13 million in FY17 because of an increase in capacity and fuel prices.

Aircraft ownership cost: Aircraft ownership cost comprises aircraft and engine rentals, depreciation and net interest expense. Aircraft ownership cost increased by 15.4% from Rs.28,566.47 million in FY16 to Rs.32,965.08 million in FY17.

Employee benefits expense: Employee benefits expense increased by 14.6% from Rs.17,879.84 million in FY16 to Rs.20,481.90 million in FY17. On a per ASK basis, employee benefits expense reduced by 10.1% owing to higher employee productivity.

Other expenses: Other expenses increased by 25.2% from Rs.38,342.18 million in FY16 to Rs.47,985.83 million in FY17.

Cost per available seat kilometre (CASK):

CASK reduced by 2.5% from Rs.3.12 in FY16 to Rs.3.04 in FY17 primarily driven by our continued focus on cost performance.

Profit after Tax reduced by 16.5% over the last fiscal year to Rs.16,591.88 million.

Balance sheet

Total debt for the Company reduced by 20.0% to Rs.25,961.74 million as of March 31, 2017. Our total cash increased by 54.2% to Rs.93,432.13 million as of March 31, 2017, comprising free cash of Rs.44,326.48 million and restricted cash of Rs.49,105.65 million.

Opportunities, Threat, Risks and Concerns

The Indian aviation market witnessed rapid growth beginning in 2003, following liberalising actions by the

Indian Government. Between FY12 and FY17, domestic carrier capacity, as measured in available seat kilometres (ASK), grew at a CAGR of 8.3%, while domestic passenger traffic, as measured by revenue passenger kilometres (RPK), grew at a higher CAGR of 10.8%. Among several initiatives, the governments focus on developing greenfield airports is the key catalyst for the next level of accelerated growth. Expansion of the middle-class population, rail travel substitution, and strong economic growth, fuelled by improved regional connectivity, are also growth drivers. While we believe that our structural advantages give us the ability to withstand different business cycles, our profitability is dependent on certain external factors:

Depreciation of the Indian Rupee against the US Dollar: Substantially all of our revenues are denominated in Rupees, but we are exposed to foreign exchange rate risk as a large portion of our expenses are denominated in US Dollars, including our aircraft orders with Airbus, all of our aircraft and engine leases and financing payments, our aircraft fuel and a significant portion of our aircraft maintenance expenses.

Price and availability of aircraft fuel: Aircraft fuel expenses represent the single largest item of our total expenses and, hence, our operating results are significantly impacted by changes in the availability and cost of aircraft fuel. Competition in the airline industry: The airline industry is highly competitive. We face intense competition from other low- cost carriers as well as full-cost carriers that operate on our routes. We may also face competition from airlines that could be established in the future.

Lack of airport infrastructure and facilities and increased airport costs in India: We are dependent on the quality of airport infrastructure in India and any other market where we operate for future expansion. The availability and cost of terminal space, slots and aircraft parking are critical to our operations.

Changes in government regulations: The civil aviation industry in India is regulated by the MoCA, the DGCA and the Airports Authority of India (AAI). The regulations are extensive, complex and cover all major aspects of operations, including basic licenses, aircraft acquisitions and routing. Any changes in regulations, or the imposition of additional restrictions and conditions that affect our business and operations could impact our revenues, profitability and ability to grow our business.

Internal control systems and their adequacy

Our internal control procedures are adequate to ensure compliance with various policies, practices and statutes in keeping with the organisations pace of growth and increasing complexity of operations.

We have in place systems and processes commensurate with our size and nature of business and we maintain a system of internal controls designed to provide reasonable assurance regarding the following:

• Effectiveness and efficiency of operations

• Adequacy of safeguards for assets

• Prevention and detection of frauds and errors

• Accuracy and completeness of the accounting records

• Timely preparation of reliable financial information An independent internal audit is carried out to ensure the adequacy of the internal control system and adherence to policies and practices.

The scope of internal audit activity is guided by the internal annual audit plan, which is approved by the Audit Committee of the Board. The Audit Committee reviews reports submitted by the independent internal auditor and monitors follow up and corrective action taken.

Human resources

The Company participated in the prestigious AON Best Employer Survey and was chosen as AON Best Employer

India 2017. This was made possible thanks to the dedicated efforts of the employees. The Company fosters a sense of empathy and patience among its people to serve customers better and attain the best hospitality standards. The Company commissioned a 75,000 square feet state-of-the-art learning academy named ‘ifly for training employees. It collaborated with third-party agencies to train pilots.

As of March 31, 2017, the Company had 14,604 employees on its roster, comprising 2,094 pilots and 3,880 cabin crew. Keeping growth in mind, the Company added a net 2,242 employees during FY17.