There was an extraordinary impact of Omicron in the last quarter. So can I say that whatever numbers we are discussing, those numbers are not that relevant because there has also been a big uptick in crude prices along with Omicron. Business in a sense has normalised. So, let us start with the big picture.
The picture is that Delta, Omicron are cyclical things. They come, they go. They are like a big thunderstorm. But you should not get distracted by them. The question is what is happening to the underlying demand. The underlying demand is not only strong but getting stronger as well.
In April, our revenues are about 12% higher than pre-Covid days. So. yes the March quarter was bad but Omicron is gone. Once the Omicron is gone, what happens? Revenue jumps 12%. I believe, it is just the beginning. Look at a few indices if you will. Delhi has emerged as the fifth largest airport in the world. That is so exciting for the country and it is happening with only local traffic. Imagine when we start connecting traffic through Delhi!
Not only Delhi but also Mumbai, Bangalore all have been seeing more traffic. Fundamentals of this business are strong and they are getting stronger every day and that is because so far only about 7% of Indians travel by air. Now Indians are going to start embracing air travel and one can see that in demographics, you can see the economy growing and what we are seeing right now. People ask is this sustainable? And I am reminded of the time when people started switching from desktop to laptops and they said oh! this is a strong demand; is it sustainable?
Looking back, that was not a wave, it was a ripple and what we are seeing in air travel now in India is just a ripple. The wave is yet to come. The fundamentals of the business are very strong not just for IndiGo. I am not talking about IndiGo, I am talking about industry, Indian aviation, it is really fantastic. What is really a challenge of course is oil prices. But oil prices again are no different from Covid. It is not a structural problem. It is a cyclical problem. At some point, oil prices will go back down and the cost pressure is there now, but it will not be there forever.
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So who’s currently enjoying the pricing power? If I book a ticket, do you think the ticket pricing is very dynamic or are ticket prices right now completely subject to international oil prices?
Airlines never have pricing power. No airline in the world has pricing power, believe me. It is a commodity business, there is no power. We are starting from a very low point, remember. Indian ticket prices are the lowest in the world. The percentage of Indians flying are the lowest in the world. Now you put those two factors together and say which direction are we going to go? We can only go up, that 7% has to go to 20%, the ticket prices have to normalise to reasonable levels.
Of course, the revenue is going to go up. So within that, what is IndiGo’s strategy? Our strategy frankly is to say that at every step of the customer service process, the customer should ask themselves why would I made the mistake of not booking IndiGo? In the pre-booking stage, we will offer you more frequencies, better connectivity. During the airport process, during the onboard process, we will give you more efficient processes, we will give you reliability, we will give you courteous service. Just as importantly, we are focussing heavily on post travel.
How many bags does the individual have, how quickly do we get the bags back, how quickly do we give people their refunds and whatever the number is, we are saying let us make it half as much. Refunds are taking a long time. Why is it taking so long? Well they get stuck in the travel agents. Now we have made it the objective of the sales force to say if there is a travel agency that is not making refunds on time, it is your responsibility, go chase it down. So that is going to make IndiGo the preferred carrier. More and more people will come to us. Yes, we will compete heavily on price, we have to but we want a disproportionate share of the revenues through superior customer service.
Given that competition will increase with the re-launch of Jet, new launch of Akasa; Air India has been sold to Tatas and there is definitely going to be a change in the comparative landscape. Are we in for a price war in the skies?
Hopefully, the industry has learnt from its past mistakes. Let us go back to the period when there was strong revenue growth and I am thinking of 2013-2014. At that time, the Indian economy was strong, GDP was great, airline revenues were going up but the players all went up to volume at the detriment of price.
So, in a strong revenue environment, airlines were losing money, going broke because everyone was chasing volume. This time around, it truly is different as shown by last three-four months as the industry is behaving quite maturely, and saying volumes are important but hey with these sort of fuel prices, we better keep the yields up. That is the environment we are in and we have learnt from our past mistakes and I am encouraged by the fact that both Akasa and Jet have seasoned veteran, who have been through the industry cycle. I do not expect them to come and score self goals by reducing yields and chasing volumes.
I expect the industry to be more mature. One cannot get too distracted by competition. We have five other guys that each have their own little niche, that each have their own little business model, their own little strategy, we cannot go tying ourselves in knots trying to give you a price war. We have to focus on ourselves.
Fundamentals of the business are very strong, our market position is very strong, our processes are very robust. All of that put together makes me very optimistic.
If you lose market share because of competition, will your profitability get impacted? Right now, you have got the lion’s share of the Indian aviation market. . If there is going to be more competition, obviously your market share will go down. Will that impact profitability?
Market share is by default. We should not think that high market share translates into high profitability. To give you an example, look at Alaska Airlines in the US. It, is really competitive. American Delta is a highly profitable airline. Look at JetBlue, a highly profitable airline. So it is not size and market share and all that determines profitability.
We are not chasing market share. Our market share tends to be high by default because we provide the best customer service. Our strategy on customer services is at every step of the way, customer should ask themselves why they did not stick with IndiGo? Our high market share is fine but that does not mean we will be the most profitable. Our profitability will depend on how we manage our unit revenue, how we manage our unit cost and that is what we are focussed on.
Since I have access to only your last quarter numbers there was an unusual drop because of the Omicron impact. Is it safe to assume that in this quarter now the things have normalised and both yields and passenger load factor will increase substantially?
Let us focus on revenue. In April, revenue was 12% higher than pre-Covid. That is why I am willing to declare that we are totally fine. Now revenue has components of yields other than volume in it. As I said, it will be a mistake to chase fund. Our load factors in pre-Covid used to be at 88%. Now we are at 80%. I do not understand, are we concerned about that and now it is a balancing act between yields and load factor and our goal is to maximise the amount of revenue in every flight.
One can maximise the revenue through sometimes load factor and sometimes maximise through yields doing that little balance in game and we are happy where we are. Yes, we are losing some load factors but unit revenue is very strong.
Would you be looking at replacing your older aircraft with new because that is where the fuel efficiency would kick in?
Fuel efficiency is one of our strongest new parameters. Fuel cost ASKM for Indigo is really an outlier and it is low compared to everyone else because we have such fuel efficient engines. Now we still have a few classics left. So next year, we take delivery of about 40 Neos and we return about 25 or so classics. So net-net, the growth is low not because we are not taking delivery, but only because we are returning so many classics.
By 2024, we are out of that cycle so new deliveries will be net new growth and will be more fuel efficient engines. So, fuel efficiency is a great story particularly at $110 a barrel but we have the best fuel efficiency in the nation.
What is your average break even? Average break even is the threshold beyond which you are actually losing money on crude or are making money below that level. What is that sweet spot or the threshold level?
Right now, we are on the cusp. If this was a seesaw, we are right on the cusp of that seesaw. On one side, revenue is going up, on the other side, crude is going up and we are just managing. So any break in crude will be hugely beneficial.
FY21 was about surviving the Covid storm. It was about keeping the balance sheet intact, conserving the cash. FY23 will be the year of breakeven but can I say that FY24 is where Indigo will literally start flying again?
The key of course is where will fuel be because before it was a revenue story in a bad way. During Covid, revenues were low but we are out of that. Revenue is strong and I do not see that as a problem anymore. I see that as a tailwind, revenue is going to help us. The question is where is crude? If crude goes to $125, how are we earning and it depends on that but I am not a statistician or a forecaster, but there is just a gut feel that crude cannot stay at these levels for too long or the whole world will go into recession. Hopefully, at some point, crude will come down. So, with that caveat, if crude comes down of course we will do.
During Covid times, cargo made a comeback and you were able to maximise your cargo operations. What are the plans because we understand that Indigo is getting four big cargo planes now. Are you going to have a fleet dedicated to cargo?
Cargo is a very good story for Indian aviation and I will again point to the macro factor. First of all, India’s export volume and import volume is fine which tells us something. Secondly, there is a huge disruption in shipping that helps the aviation story and Indian cargo was carried by foreign airlines. About 95% of Indian cargo is still carried by foreign carriers. Now that is going to change.
Equally our neighbouring countries like Bangladesh, Vietnam do a lot of exports and need a lot of air capacity. India is a natural transhipment point. If one looks at all the macro factors, one can see it is going to do great. We have had very good experience during Covid and we have placed orders for four freighters. Two of them are coming this year. So, yes we are very bullish on cargo and we are going to keep doing that.
Mr Rahul Bhatia is starting his own cargo business and he is a one of the promoters of Indigo Will that be complimentary? Has that been a thought out strategy and will there be an advantage to Indigo if one of the promoters starts his own cargo business?
That is almost irrelevant for us. They are focussing on the ground part. UPS is the partner. UPS will bring their airplanes in and then they need the ground distribution system, small package delivery, the last mile delivery. We are doing nothing in their space.
But UPS is an important customer for us directly, FedEx is an important customer for us, DHL is an important customer for us. So, that is not going to change. The way to look at it is Indigo is in the consolidated air shipment business and
to a large part is in the small package ground delivery business.
One yardstick which is often used to judge the growth of a company is that we understand the hiring plans, salary hikes. What is the plan there? 2020 was all about cost cuts because of Covid compulsions. Is hiring back on track?
We are hiring at a pretty robust pace. We are hiring about 400-500 attendants, we are doing a lot of upgrading our pilot services, first of the cabin captains. At the same time and this is a good news-bad news story, we are seeing a lot of poaching and attrition going on and that is the bad news.
The good news is Indigo has a huge store of aviation talent and it is a huge story not just domestically but even internationally. We used to think of hiring in India for low-skilled employees. The high skilled staff involved in revenue management, network planning, maintenance planning all that resides somewhere in Europe or the western part of the world. Now we have created such a strong motherload of talent that global players are coming here to hire. For example, United is going to start a 900-person office in Gurgaon in aviation and they are doing the highest of the highest skill – revenue management, maintenance planning, network planning and they are getting those people from Indigo.
It just shows what a talent pool we have built up and it is great and people will have better job opportunities and higher income. We are just going to keep the strong pipeline going. We are going to go into colleges, recruit people, train them and yes some of them will move on to better job opportunities and that is fine.
Can we read in between lines? You are going back to the US. Is this a move to greener pastures?
No, wait. There is no linkage. IndiGo is in a wonderful position. The best times are ahead, they are not behind us. Look at it from the macro point of view. The Indian economy is strong, the middle class income is growing, people have started embracing flights. Delhi is the fifth largest airport in the world. This is great and IndiGo has such a great position. So why am I moving on? The board feels that they need a CEO whose tenure should last around 8-10 years. The laws of biology make me an unlikely candidate. That is fine and so I am moving on.
Let us look at the categorisation. How much of the existing traffic is coming from leisure and how much is coming from the corporate?
The big surge that we are seeing is really non-traditional traffic. That is the biggest surge we are seeing and why is it happening? We talk of a diaspora of Indians living in the US and there is so much traffic. Well there is such a diaspora within the country. People are moving from one end of the country to the other in large numbers and when they move, they do not take the family. They move, they come back three times a year or whatever and there is a huge demand for air traffic.
Then comes the cities that never had air transportation. One of our most profitable towns I am happy to report is Shillong. Shillong never had any air traffic, did not have an airport but now Shillong is connected to Dibrugarh, Kolkata and look at the traffic coming out of there! So it is those sort of new markets, new demographics that are fuelling the growth.
Corporate travel was there before, it will be there in the future, it is back to where it was but it is not the metro to metro corporate traffic that is driving us. During Covid, it went down sharply. It is recovering but has not recovered to pre-Covid levels, So, the real surge is in non-traditional forms of traffic.
But can I say that the real delta in your balance sheet in this case would come when the metro travellers come back because those are really the high paying trunk route bulk travellers?
There is no one thing. It is not dependent on corporate traffic. Even without corporate traffic, we are doing great. Our revenue is up 12%. Is it because of corporate traffic? No. Corporate traffic is still below Covid times. So this 12% higher revenue is non-corporate traffic. Within the corporate traffic, there is a high-end corporate that goes through American Express and so forth which are the consultants and bankers and stuff like that.
But then there is a low-end corporate traffic which is made up of the SMEs and in the low-end corporates, we are seeing a lot of growth and then there is international traffic. There is so much opportunity all around us and remember India serves all these markets nonstop. People are travelling from India to Barcelona and Milan and Bali and they are getting there through Singapore, Doha and you say enough of that. So like I said, the best is yet to come.