Passengers may have to bear the brunt of higher aircraft groundings at IndiGo as increased operational costs for the country’s dominant airline may lead to a jump in airfares.
The budget carrier operated by Interglobe Aviation Ltd., which had a domestic market share of 63.4% in September, will have to replace these planes with less fuel-efficient and costlier-to-lease aircraft, while it continues to pay lease rentals on nearly 80 grounded aircraft.
But the airline expects higher profitability, in a market with limited seating capacity, to offset the increased costs.
“Overall, it should be a net neutral in terms of the increased cost being offset by the demand that we see and the shortage of capacity which is going to reflect even in the yields and the RASK,” Gaurav Negi, chief financial officer at the company, told investors on the call to discuss its performance in the second quarter.
RASK is revenue per available seat kilometres, which is a measure of sales generated through one seat. Yield is for measuring the airline’s profitability per seat.
With nearly 45 aircraft already grounded due to problems in the Pratt & Whitney engines, the turbulence is expected to turn severe as additional aircraft in the range of mid-thirties will be grounded from January.
“The total cost of the airline may rise 30%-50% as it will pay dry lease rentals for PW affected aircraft on ground, in addition to the higher wet lease/ACMI hour rate it will have to pay for planes being inducted as the interim stop-gap arrangement for the peak travel season,” said Mark Martin, founder and chief executive officer at aviation consulting firm Martin Consulting.
“It’s not too difficult to guess who’ll end up paying for the additional costs faced by the country’s dominant airline; airlines aren't a charitable business,” he told BQ Prime.
IndiGo’s fleet stood at 334 aircraft at the end of September. A total of 136 aircraft are fitted with these Pratt & Whitney engines, which means the number of groundings may rise in the coming months.
Once the engine goes for inspection, it will take between 8-10 months to get back the aircraft on air.
Mitigating Measures
The airline has maintained that the issue will not affect its capacity in the ongoing fiscal as it laid out a few steps to counter the problem.
It has retained 14 Airbus 320ceo and is leasing 12 additional ones. These older version of Airbus’ A320neo family burn 15% more fuel on an average, which again means higher costs for the airline. Fuel charges account for nearly 40% of an airline's operational costs.
Also, the plan to wet lease 11 additional aircraft will also put additional strain on its finances. It costs higher to wet lease an aircraft as the lessor pays for maintenance and insurance, as compared with a dry lease where the lessee or the airline pays.
These leasing rates are expected to hold at the current levels and even inch up in the coming months as a majority of 600-700 Pratt & Whitney engines are expected to undergo inspection in 2023 and early 2024. As more aircraft are grounded world over, it will worsen the availability of planes, pushing the leasing rates higher.
“If the Fed keeps the rates steady, we can assume the leasing rates will inch higher with the rising number of aircraft on ground,” said Ram Shankar, managing partner at AeroDef Labs.
Back Against The Wall
In a price sensitive aviation market such as India, IndiGo will be expected to adopt a careful approach in pricing. However, it doesn't have much space to absorb the higher costs.
After the Covid-19 pandemic, the airline had to weather losses in several quarters.
In the first quarter of the ongoing fiscal, the company posted record revenue and net profit. But the tide seems to have turned yet again for worse.
The company reported profit for the fourth consecutive quarter in the three-month period ended September, but net profit slipped to Rs 189 crore. The airline also had to introduce a fuel charge to offset the rise in fuel expenditure.
With an expected surge in costs, it will be difficult to maintain the streak of quarterly profit, which may limit IndiGo's ability to navigate pricing.
In the ongoing winter schedule, IndiGo is expected to make-up for Go First’s absence. The low-cost carrier’s bankruptcy earlier this year vacated space for IndiGo to capture more market share.
IndiGo is now facing the same challenges that led to Go First’s downward spiral, but it may be the travellers this time who’ll need to step up.
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