Written jointly with Somesh Gupta
Intro: A series of measures taken by the low-cost carrier will see it survive these virulent times
COVID-19 struck a deleterious effect on airlines worldwide. While some have survived through sheer hard-nosed strategy, others have gone under. IndiGo, India’s largest airline and most profitable, survived the turbulence through smart strategy and foresight, especially how it handled aviation turbine fuel (ATF).
IndiGo commanded 48% of the market share as of February 2020. It was started in 2006 and maintained its customer value by low fares and on-time performance. However, in the January-March 2020 quarter, IndiGo reported a loss of Rs 870.8 crore as compared to a profit of Rs 595.8 crore during the same quarter last year.
Some of the measures that helped it get a profit are:
- The sale and leaseback model where the airline purchases a plane and sells it to a rental company. It then rents it from the rental company, making a clean profit on the purchase.
- Another plus point is that IndiGo don’t arbitrarily fill up the entire tank of the plane like its competitors. It carries extra fuel only in exceptional cases while following the regulatory norms on ATF limits. In addition, it has a specialised software which tells pilots the optimum altitude and speed to fly at for increasing overall fuel efficiency.
- It also refuels at states where the taxes on ATF are low such as Kerala and Hyderabad. In states with higher ATF taxes, the airplane carries extra fuel to avoid refueling. This calculated approach is in stark contrast to its competitors that carry full fuel to destinations.
In its annual report 2019-20, IndiGo’s expenses totaled Rs 29,970.76 crore. Fuel accounts for almost 40% of the total expenses so IndiGo relies on various strategies to make sure that it is efficient in its fuel usage. It also directs pilots to optimize flight planning for minimum fuel-burn routes and altitudes.
However, the grounding of all domestic and international flights due to COVID-19 severely impacted the aviation industry and led to salary reductions and job losses. Airlines were allowed to operate domestically from May 25, 2020 after taking certain safety measures. Many operated cargo and special rescue flights during the lockdown. The Centre for Asia Pacific Aviation said IndiGo was better placed as compared to its competitors in terms of cash reserves ($ 1.13bn free cash and $1.33bn restricted cash) in the short run.
During this time, ATF prices also fell. In May 2020, ATF prices witnessed a steep decrease by 23% due to less demand. There were no disruptions in IndiGo’s ATF supply chain and it is currently flying at 20% its capacity. It implemented massive cost-cutting measures and plans to raise an additional Rs 3,000 cr to Rs 4,000 crore in funding.
During this period, IndiGo’s major costs are employee and maintenance costs. Firstly, it halted expansion plans and the purchase of new aircrafts. It is returning the older 120 A320ceo aircraft which have higher fuel burn and increased maintenance costs. It also cut 25% on employee expenses by announcing salary cuts in the range of 5% to 25%. It deferred all merit-based salary increments and leave without pay for three months. It renegotiated aircraft lease rents with its lessors and got 50% relief on supplementary rentals. The company is also negotiating cost arrangements for IT contracts and ground handling agreements. CEO Ronojoy Dutta stated the airline’s focus will not be on “profitability and growth but to manage cash and liquidity”.
This period also saw an increased demand for transporting essential supplies and a rise in international cargo rates from $1,000 per tonne to $3,000 per tonne. IndiGo sought to benefit from this by converting 10 passenger planes into freighters. It operated 230 commercial cargo flights from April 9 to May 28. As insider said the company was always ahead of the curve and had seen a tremendous opportunity in increasing its cargo capacity. He mentioned that IndiGo was one of the first airlines to seek permission from the Directorate General of Civil Aviation to allow planes to carry cargo in the passenger cabin and on seats apart from the aircraft’s belly. It was transporting everything from pharmaceuticals and medical equipment to fruit and vegetable supplies to Asian countries such as Hong Kong, Maldives, Singapore, etc.
While the overall outlook is extremely bleak for at least a year, airlines such as SpiceJet, AirAsia and Go Air will face extreme financial difficulty and could file for bankruptcy. This will make the market share larger for IndiGo in the long run. IndiGo is in a better position because its cash reserves will allow it to stay operational for the next six months whereas other airlines may survive for 1-2 months. IndiGo has the capacity to survive the COVID-19 crisis if it restructures its business model.
IndiGo also joined the government’s Vande Bharat mission, to rescue Indian’s which are struck overseas. The mission is primarily operated by Air India and its subsidiary Air India Express, hence making IndiGo the first private airline to join hands with the government in its rescue mission. The airline has operated several international and domestic charter airlines to repatriate close to 1,000 stranded Indians in countries like UAE, Oman and Maldives. Hence, in the immediate 3-6 months, IndiGo will operate several more charter international repatriation flights at a time where international passenger flights aren’t operational.
So the road ahead for IndiGo will be challenging with reduced passenger traffic, curtailed operations and the fear of COVID-19. The immediate challenge it faces will be to maintain cash reserves and focus on liquidity challenges. Exploring greener pastures such as international cargo operations and operating repatriation missions will bring temporary relief from the crisis.
But knowing IndiGo and its tight operations, it will be in a better position to regain its earlier height.