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IndiGo loses, its rivals lose more; growing capacity begins to pay off

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ETIG: The December 2018 quarter financial performance of India’s largest airline by market share (43 per cent) reflects the successful implementation of a carefully crafted strategy of gaining market share (gained 3 per cent in the past two quarters) with a slight consideration to gaining pricing power in the industry. This is summed up in two key financial variables.

One: the revenue per available seat km (RASK), and two: high capacity addition. In the December quarter, considered the peak travel season, Indigo's RASK fell by 3 per cent to Rs 3.7, compared with the same quarter last year.

This fall is largely due to the airline's conscious decision to install high capacity in the industry. This strategy did not provide much room to its competitors to raise fares as they were forced to match the attractive fares offered by IndiGo.

IndiGo could afford this strategy, given its balance sheet strength and cash, but this wasn’t a good business proposition for its rivals.

Even in the March 2019 quarter, IndiGo would install 34 per cent additional capacity in the industry.

In the airline's post result conference call, its management said that it in 2019, its capacity would grow by 25 per cent, while the industry’s by 19 per cent. This is a long-term strategy, whereby after gaining market share, the airline might increase fares, which means optimum utilisation of its market share, which is likely to grow to 45 per cent in the next three years from 43 per cent, reckon analysts.

The effectiveness of this strategy can be seen in the airline’s earnings per share (EPS) in the next 1-2 years.

According to estimates of Bloomberg’s pool of analysts, the airline's EPS is expected to grow to Rs 68.9 in FY20 from Rs 29.35 in FY19. At present, this strategy has impacted the airline's December quarter performance as its revenue of Rs 7,916 crore came in a tad below analysts’ estimate of Rs 7,965 crore.

Due to high fuel prices (up 31 per cent in the December quarter on a y-o-y comparison) and currency depreciation (depreciated close to 10 per cent in the December quarter on the same basis), the airline’s profits fell massively by 75 per cent to Rs 190 crore in the quarter under review, compared with the same quarter last year. In the coming quarters, the airline said in its post result conference call that it plans to increase its presence in international markets as the management suggested that large part of its incremental capacity would be directed to international routes.

Analysts pointed out that the airline's strategy of providing relatively attractive fares may not bear the desired results as it would face stiff competition on international routes from wellentrenched foreign airlines. On the domestic operations, Indi-Go is placed to gain considerably from benign fuel prices (fallen 13 per cent in January till date, against last January), which would add to its earnings in a meaningful way. Being a dominant player with a strong balance sheet, its gain would be higher than its peers.

On the valuation front, considering FY20’s earnings, the airline is trading at an EV/EBIDTA of 8.73, which is quite attractive when compared with its past three-year average of 12.3.




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