Wednesday, October 30, 2019

IndiGo's order for 300 A320neo family aircraft will secure future supply of aircraft for carrier into next decade, assure sustainable cash flow

Just last week, as we entered the Diwali weekend, IndiGo announced their results, announcing a loss of Rs 1062 crores for the quarter ended 30 September 2019. What stood out in the results was the ballooning costs of maintenance of aircraft, which spiked about 88 percent from the corresponding quarter last year. This cost was attributed to the older aircraft in the fleet, those called the ceo by Airbus. Each aircraft requires a detailed inspection at pre-defined milestones, and in the case of these older aircraft, the engines are heading back to the workshops for maintenance. This cost will be significant until the airline retires these older aircraft and has a fleet largely composed of the newer and more efficient neo engines, i.e., till 2022.
An airline business has a lot of moving parts, but to break it down simply: You buy aircraft, pay for fuel and all other monthly costs such as employees, airports, systems and so on, and the money left after is profit. However, in the case of IndiGo, which always makes big orders, there is one other factor at play, which is the income they generate from sale and leaseback.

An airline is supposed to pay a small token deposit when they order an aircraft. The bulk of the payment is made on delivery. By placing massive orders, IndiGo manages to get large discounts on the list price of the aircraft. For instance, the 2018 list price of an Airbus A320neo was $110.6 million, but IndiGo might even get it at 50 percent less. At the time of delivery of the aircraft, IndiGo sells the aircraft to a leasing company, making a profit of a few million dollars on the aircraft right at the time it is inducted in the fleet. It then pays a monthly amount to the aircraft lessor it just sold the plane to, for the use of the aircraft. IndiGo has built a massive cash chest of Rs 18,736 crores, with ticket sales supported by sale and leaseback of aircraft.

On Tuesday [29 October], Airbus and IndiGo announced the airline’s order of 300 A320neo family aircraft. The A320neo family includes the A320neo, the 180-186 seater aircraft which is the workhorse of IndiGo, as well as the A321neo, the 222 seater aircraft which can fly further than the A320neo as well, enabling the Delhi-Istanbul flights of IndiGo at the moment.
30/10/19 Ajay Awtaney/First Post

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