Interglobe Aviation Ltd Management Discussions.
India is currently the 7th largest civil aviation market in the world and is expected to become the third largest civil aviation market within the next 10 years.
According to the Ministry of Statistics and Programme Implementation (MoSPI) of the Government of India, the Indian economy has been growing at a robust pace with a compound annual growth rate (CAGR) of 7.4% over the last 5 years (FY13 to FY18) and is the third largest economy globally in terms of purchasing parity. Based on the provisional estimate for FY19, the Real Gross Domestic Product (GDP) is expected to grow at 7%. Considering the longer term, the Indian economy is expected to continue to grow at a faster pace. According to India Brand Equity Foundation (IBEF), the Indian economy is expected to reach USD 6 trillion by FY27 and achieve upper-middle income status on the back of digitisation, globalisation and favourable demographics.
The International Monetary Fund (IMF) projects that the global economy will grow at 3.3% in 2019 and 3.6% in 2020, It took a more optimistic view on India and expects the countrys GDP to grow by 7.5% for FY20. As per the Organisation for economic Co-operation and Development (OCD), business investment and exports are expected to be strong, as past structural reforms have started to pay off.
As one of the fastest growing airline markets, India is the 7th largest civil aviation market in the world, according to the International Air Transport Association (IATA). Since 2014, India has overtaken major domestic markets like Australia, Japan, Brazil, and Russia in terms of RPKs flown, and accounts for around 1.5% of total industrywide RPKs.
|GDP/Per Capita (in USD)(1)||USD 2.7 Trillion/ USD 1,987||USD 17.3 Trillion/ USD 53,356||USD 10.2 Trillion/ USD 7,329|
|Passengers Ferried (2)||164 million||889 million||612 million|
|International Passengers||25 million||111 million||64 million|
|Domestic Passengers||139 million||778 million||548 million|
Source: (l)World Bank, (2)Data for domestic carriers in 2018 by Civil Aviation Authorities of India and China, and US Department of Transportation
The domestic passenger traffic registered CAGR of 13.4% during the period FY10 to FY19 while the international passenger traffic grew at a CAGR of 9.3% during the same period.
The increase in the number of Low Cost Carriers (LCCs) combined with macroeconomic factors such as Indias relatively low per capita income and price-sensitive consumers have led LCCs to dominate Indias air travel market. As per IATA, in the domestic market alone, the LCC share of total seats has increased to 70% from less than 20% in 2004. On the other hand, the share of LCC seats offered on Indias international routes is much smaller, at just under 25%.
IATA expects air passenger numbers to, from and within India to increase by 3.3 times over the next 20 years, to more than 500 million passenger journeys per year. This strong growth outlook for air passenger demand will see India overtake Germany, Japan, Spain, and the UK within the next 10 years, to become the worlds third largest air passenger market.
The significant growth potential of the industry in India also has its share of challenges for the airlines, its industry partners and policy-makers. Certain key metro airports in India are already experiencing slot constraints, and there is a need for growth in airport infrastructure to ensure a healthy airline transport sector. As per the report released by Federation of Indian Chambers of Commerce & Industry (FICCI), by FY40, the passenger traffic (to, from and within India) is expected to grow by 6 times to reach 1.1 billion from the current 187 million in FY18. If the airport capacity has to
By 2033, airport traffic in India is expected to grow by 5.3 times.
keep up with the demand, then by FY40, India is expected to require investments of approximately USD 40 - 50 billion.
As per IBEF, strong private participation will boost growth in the sector and investments worth USD 25 billion are expected to enter the airport sector by 2027.
Key Growth Drivers
Growth of Middle Class Population:
With a rising working class and a large middle class population, the growth in the demand for air travel is expected to persist. As per IATA, India is forecasted to gain an additional 359 million passengers by 2037, compared to 2017. This will be largely contributed by the middle class, whose share in total population is expected to rise by an additional 13 points to 20% over the next 20 years.
Strong Economic Growth:
The Indian economy is expected to maintain its growth momentum. Its GDP is forecasted to grow at 7.5% for FY20 and is expected to maintain strong growth going forward. As per IATA, after adjusting for inflation, per capita incomes are expected to increase to almost USD 5,000 per year in 2036, more than double the current level. Furthermore, improvements in living standards (due to higher incomes) are expected to contribute around 5.1 points out of a 6.1% forecasted average annual growth in Indian air passenger demand over the next 20 years.
Expansion in Aviation Infrastructure:
According to data released by the Department of Industrial Policy and Promotion (DIPP), FDI inflows in Indias air transport sector (including air freight) reached USD 1,820 million between April 2000 and December 2018. According to IBEF, Indias aviation industry is expected to witness USD 5 billion investment in the next four years. The Indian government is expected to invest about USD 1.8 billion for the development of airport infrastructure and aviation navigation services by 2026, and develop greenfield airports under the Public Private Partnership (PPP) model.
IndiGo (hereafter referred to as the Company), is Indias largest passenger airline operating as a low cost carrier. Serving
52 domestic destinations and 16 international destinations, we provide travelers with a simple, unbundled product, fulfilling our singular brand promise of providing "low fares, on-time flights and a courteous and hassle- free service" to our customers. In addition to passenger transportation, our activities primarily include cargo and mail services on scheduled flights.
We commenced operations in August 2006 with a single aircraft, and have grown our fleet to 217 aircraft as of March 31, 2019. Our Company has made a firm aircraft order of 100 A320 aircraft in June 2005, 180 A320neo aircraft in June 2011, and 250 A320neo aircraft in August 2015, including a right to convert the A320neo aircraft into A321neo aircraft. According to Airbus, each of these were the largest single Airbus orders by number at the time of placing the order. We believe that the magnitude of our 2005, 2011 and 2015 aircraft orders has helped us negotiate favourable terms with Airbus, in addition to our other aircraft-related suppliers and service providers. This provides us with a structural cost advantage by reducing the overall costs associated with the acquisition, maintenance and operation of our aircraft.
At the end of March 2019, we had 71 fuel efficient A320neos, giving us 15% lower fuel burn compared to the current generation of A320ceos without sharklets. We have also started taking A321neos that have a higher seating capacity and lower unit costs compared to the A320neos and also have a longer range.
We have also placed an order with Avions de Transport Regional G.I.C., or ATR, in August 2017, for the purchase of up to 50 ATR72-600 turboprop aircraft. These aircraft have given us the opportunity to, once again, redefine air travel in cities that were devoid of reliable air service so far, or were subject to exorbitant air fares. As of March 31,2019, we had 15 ATR aircraft in our fleet.
For the second time in a row, IndiGo was ranked amongst the top 20 mega airlines globally in terms of On-Time Performance (OTP), based on data compiled by OAG. We were also the only airline from India to have made it to the list. Our Company was also awarded the Best Low Cost Airline - Asia at the Tripadvisor, Travelers Choice Award 2019. We were also awarded the Passenger Choice Award for being the Best Low Cost Carrier in Asia and South Pacific at the Apex Asia Awards 2019. This was based on customer feedback from more than a million flights, across nearly 500 airlines around the globe, over a period of 12 months. These awards are a testimony to our best in class service quality.
The following table sets forth key operational data for the periods indicated
FY Ended March 31
|ASK (in million)||81,028||63,510||27.6%|
|RPK (in million)||69,811||55,524||25.7%|
|Passenger Load Factor (%)||86.2%||87.4%||-1.3 pts|
|Number of Scheduled Passengers Carried (in thousands)||64,743||52,142||24.2%|
|Number of Scheduled Destinations Served as of period end||68||50||36.0%|
|Total Number of Flights||448,904||347,640||29.1%|
|Number of Aircraft at period end||217||159*||36.5%|
|*excluding 4 A320 on damp lease|
The following table sets forth key financial data for the periods indicated
FY Ended March 31
|EBITDAR Margin||18.3%||29.0%||-10.7 pts|
|Net Profit Margin||0.5%||9.7%||-9.2 pts|
|CASK Ex-Fuel (Rs.)||2.11||1.93||9.7%|
Our Financial Performance
Passenger ticket revenue:
Passenger ticket revenue increased by 26.1% from Rs. 199,432.69 million in FY18 to Rs. 251,576.91 million in FY19.
Revenue from ancillary products and services:
Revenue from ancillary products and services primarily include cargo, special service requests, ticket modification and cancellation, in-flight sales and tours. Revenue from ancillary products and services increased by 17.6% from Rs. 25,778.36 million in FY18 to Rs. 30,309.56 million in FY19.
Other Income primarily comprises of financial income on our cash and other non-operating income.
Other Income increased by 39.9% from Rs. 9,468.56 million in FY18 to Rs. 13,249.36 million in FY19.
Revenue per Available Seat Kilometre (RASK):
RASK decreased by 2.0% from Rs. 3.64 in FY18 to Rs. 3.57 in FY19, driven by a decrease of 1.3 points in load factor and slower growth in revenue from cargo business.
Total expenses increased by 43.8% from Rs. 208,410.66 million in FY18 to Rs. 299,707.55 million in FY19.
Aircraft fuel expenses:
Aircraft fuel expenses increased by 53.9% from Rs. 77,601.36 million in FY18 to Rs. 119,427.93 million in FY19, due to an increase in capacity and fuel prices.
Aircraft ownership cost:
Aircraft ownership cost comprises of aircraft and engine rentals, depreciation and amortisation, and net interest expense. Aircraft ownership cost increased by 51.4% from Rs. 35,501.43 million in FY18 to Rs. 53,735.36 million in FY19.
Employee benefits expense:
Employee benefits expense increased by 27.8% from Rs. 24,550.22 million in FY18 to Rs. 31,377.91 million in FY19.
Foreign exchange (gain)/ loss:
Foreign exchange losses increased from Rs. 516.17 million in FY18 to Rs. 4,674.87 million in FY19, driven by depreciation of India rupee.
Other expenses increased by 32.2% from Rs. 60,622.59 million in FY18 to Rs. 80,155.52 million in FY19.
Cost per Available Seat Kilometre (CASK): CASK increased by 13.9% from Rs. 3.15 in FY18 to Rs. 3.59 in FY19, primarily driven by an increase in fuel prices and depreciation of Indian rupee.
Profit after Tax decreased from Rs. 22,423.74 million in FY18 to Rs. 1,561.35 million in FY19. This resulted in a decrease in our Return on Equity from 31.7% in FY18 to 2.2% in FY19.
Our total cash increased by 11.7% to Rs. 153,081.02 million as of March 31,2019, comprising of free cash of Rs. 60,795.85 million and restricted cash of Rs. 92,285.17 million. Total debt for the Company was Rs. 24,291.71 million as of March 31,2019.
With the commencement of operations in 2006, IndiGo has been on a track of rapid growth and has added capacity at the CAGR of 22% over the last 5 years. We have built a strong foundation of domestic air travel network serving 52 domestic destinations and operating over 100 daily departures from each of the six metro airports. With this, we are now looking to capitalise on this foundation by increasing our connectivity in Tier II and Tier III cities of India and increasing the frequency of our already existing connections.
We are equally focused on expanding the international operations. We commenced operations from 8 new international destinations, adding 28 new international routes during the year. As a part of our international expansion strategy, we have entered into our first codeshare and cooperation agreement with Turkish Airlines. This will allow IndiGo customers to reach several destinations beyond Istanbul.
At IndiGo, we believe that low cost is fundamental to the success of an airline. We remain relentlessly focused on maintaining our cost advantage and have taken various steps to further optimise efficiencies and improve productivity across the organisation. As we add more A320neos and A321neos to our fleet, we expect our overall unit costs to go down further.
Opportunity, Threats, Risks, and Concerns
The Indian aviation industry is expected to continue to grow at a robust pace over the next two decades. Increasing middle class population, favourable demography, along with the expected continuation of economic development and growth in household incomes support the positive long-term outlook. The growth will be further fuelled by strong growth in tourism, increased aircraft penetration from current levels, and the expansion of aviation infrastructure.
The air travel infrastructure of India has significantly grown over the last decade and we, at IndiGo, take pride in being the front runners for building this critical infrastructure in India. We believe that there is a still a significant opportunity of growth that is available for the air travel market in India and we are ready to capitalise on this front. According to Airbus, the propensity to fly in India is expected to increase by four times to 0.4 trips per capita in the next 20 years.
At IndiGo, we believe that our structural cost advantage gives us the ability to withstand various challenges. However, our profitability is dependent upon certain external factors. Below are some of the risks that may potentially have an adverse impact on our business, financial results and our future outlook.
a. Inadequate market supply of pilots and inability to recruit and retain key talent
Our business requires us to attract and retain highly skilled, dedicated and efficient management personnel including pilots and experts from other airlines globally. Any shortfall in availability of pilots or our inability to hire, train or retain qualified employees can have adverse effect on our operations and our ability to grow.
b. Airport Infrastructure constraints and increased airport costs in India
As we expand our fleet, our future growth is dependent on adequate airport infrastructure in India to support our operations. Non-availability of terminal space, slots and aircraft parking and increasing cost of airport landing and departures may adversely affect our operations. While some of the key metro airports are slot constrained, the Governments initiatives towards the construction of a newer runway or terminals may ease some of these constraints. Up gauging with A321neos is expected to further help in slot maximisation.
c. Operational issues with our new A320neo aircraft and engines
We have experienced operational issues with our A320neo engines, which has adversely impacted our operations. These operational challenges have required the engine supplier to deliver upgraded engines and provide spare engines in the interim to reduce operational disruptions.
d. Exceptional variation in fuel prices
Aircraft fuel expenses is the single largest expense of our total cost. Price of fuel cannot be accurately predicted because of several economic and political factors and events that govern them. Our operating results could be negatively impacted by any adverse movement in aircraft fuel prices.
e. Adverse movement in foreign exchange as most of the expenses are exposed to foreign exchange rate risk
Several cost items including aircraft and engine lease rentals, aircraft and engine maintenance and aircraft insurance are denominated in foreign currency and any adverse movement in foreign exchange may negatively impact our profitability. Further, we may not be able to pass the increase in cost to our customers through higher fares, resulting in decreased profits.
f. 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.
g. Changes in Government regulations The civil aviation industry in India
is regulated by the Ministry of Civil Aviation (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, can affect our business and operations.
h. Breaches in IT/Cybersecurity
The Company is heavily dependent of the use of computers and complex network technology to run its business. These complex systems and technologies are subject to random interruptions and delays caused by catastrophic events, acts of war or terrorism, power loss, computer and telecommunications failures, security breaches and similar events or disruptions. Any such system interruptions or security breach in these systems can disrupt our normal business operations and can also lead to loss of business or confidential information and even damage the Companys reputation.
i. Reputation Risk:
We are exposed to loss of reputation in the event that any of our aircraft is subject to an emergency, accident, terrorist incident or any other disaster. Further, any adverse experience or harm arising to our customers or vendors, while dealing with the Company, can also potentially lead to loss in our reputation.
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.
At IndiGo, we have laid a foundation that has an emphasis on people. This has helped us create an environment where employees thrive to deliver an exceptional customer experience. We have extended our work culture from beyond what we offer to our customers to a larger audience including our employees. Our Company has invested into the training and learning & development of our employees on a regular basis through a state-of-the-art learning academy, ifly. As of March 2019, we had 23,531 employees on the Companys rolls comprising of 3,187 pilots and 6,248 cabin crew. Through our talent retention and acquisition efforts, we have been able to hire sufficient pilots and cabin crew to keep pace with our expansion plans.