Four big messages from IndiGo’s results

On Monday, when the stock markets opened, IndiGo’s share nosedived. This was on the back of ₹987 crore loss that the airline reported in Q2-FY25 and subsequent commentary about the market, even as the ungrounding of the fleet has started leading to fewer aircraft on ground than before.

Also Read: IndiGo share price cracks over 13% on poor Q2 show; brokerages express mixed views about the stock

To read between the lines is to understand the true meaning of what IndiGo’s management said on the call, which included words like “normalisation of demand” and “softening demand” which very well translate to revenge tourism not being the case any more and the high fares party being spoilt, for now.

Capacity is growing faster than passengers

An analysis on the basis of departures, passengers and capacity by ASK (Available Seat Kilometres) for the Indian domestic market shows that the capacity by ASK is growing at a faster rate than passenger growth.

From June to September, the capacity by ASK growth over the same months in previous years stood at 18.1 per cent, 14.1 per cent, 14.4 per cent and 9.1 per cent respectively. In the same months, the number of passengers grew by 5.8 per cent, 7.3 per cent, 5.7 per cent, and 6.4 per cent respectively. This is at a time when load factors are not at their peak, indicating that any additional capacity which does not attract sufficient passengers leads to lowering of load factors. Ironically, this happened when SpiceJet’s capacity was going down with each passing month and there was room to absorb that in the market.

Also Read: IndiGo Q2 Results: Aviation major reports net loss of ₹986.7 crore amid rising fuel costs| Key Highlights

Longer flights

Data also suggests that capacity by ASK is growing faster than the departure count. Capacity by ASK is calculated by multiplying the distance (in km) by the seat on offer. For example, a flight from Delhi to Jaipur or Delhi to Kochi will be counted as one departure but its capacity (by ASK) will be 41,740 for Delhi to Jaipur and 3,67,200 for Delhi to Kochi for the same 180-seat aircraft.

A longer flight will have a higher trip cost, and to recover, there have to be as many fare-paying passengers who pay the premium to fly non-stop on these destiantions. A monopoly converting to duopoly or an increase in frequency on such routes puts considerable pressure on the overall yield scenario since demand does not double overnight. This winter, there are more such flights which are in operation than they were in the past few months.

Is pricing the issue?

On the other side of the pandemic, “revenge travel” became a big buzzword. With limited capacity, airlines had the ability to price higher; this was also justified with increased input costs like fuel and supply chain constraints. India recorded a new high in domestic traffic in 2023, surpassing the 2019 numbers. The normalisation since then has been due to multiple factors like job losses or the risk of it in the IT sector, overall inflation impacting ability to spend, revenge tourism coming to an end with COVID a fairly distant memory and life back to office for most.

While a regular trend has been to sell cheap early and then increase the prices, most airlines in India have tried bucking it, giving the passengers a sense of being cheated on a few occasions wherein passengers have booked early thinking these were cheapest only to see the fares go down closer to departures, as the airlines had to drop fares staring at empty seats. A similar situation arose during last Diwali and then in certain sectors during this summer. This has led to passengers holding on to their travel, leading to a cycle which needs to be broken.

Focus on cost leadership

IndiGo has definitely understood that the party days are over. The need for navigating smartly is going to be the way forward and that is where IndiGo has focused on when it says its differentiator is “cost leadership”. The Tata group is all set to chase IndiGo across routes in India (and abroad) with Air India Express being the front. Air India Express has a cheaper cost side as compared to mainline Air India, though it has the disadvantage of multiple fleet types and subtypes currently.

Also Read: Airlines are flying into this winter with flat capacity

The airlines may tide over this quarter, but the same situation will return to haunt them in the January to March quarter - another weaker one, when the capacity will be more than now. Lower input costs is what will differentiate the winners from the losers and, in some cases, from higher and lower losses.

Tail Note

What is in it for the passenger? The passenger may finally breathe some sigh of relief on the fares front, though selectively. Competition would mean that there will be a sudden spurt in seats on certain sectors, leading to market stimulation with fares. IndiGo has been holding on to their fares, despite lower loads. If the softening demand continues, it will have to switch its strategy to attract more passengers and increase revenue by discounting. In fact, IndiGo’s load factors have been significantly lower than full-service carriers like Air India and Vistara for months together.