Thursday, July 30, 2020

IndiGo blames COVID-19 and government for poor Q1 performance

The country's biggest airline IndiGo reported net losses of Rs 2,844 crore in the first quarter of FY21. The low-cost carrier also reported 92 per cent drop in revenues which are on expected lines since it didn't operate commercial flights for 55 days in the 91-day period. IndiGo recently became the first carrier to lay off 10 per cent of its staff owing to tough market conditions.

At the earnings call, IndiGo's CEO Ronojoy Dutta said that the fare caps are hurting the airline. How? For instance, when the government allowed the airlines to fly domestically in May, it had set the seven fare bands (depending on flight duration) under which airlines were supposed to take future bookings. In addition, 40 per cent seats were to be sold below the mid-point in each band. Initially, it didn't bother airlines as much since this rule was supposed to last till August 24.

However, these rules were extended till November 24 last week which has made carriers like IndiGo furious. These rules essentially affect airlines in two ways. First, they put a cap on the amount of capacity that airlines can put out. Though there has been some relaxation on that front - from earlier 33 per cent to 45 per cent - the bigger question for airlines like IndiGo is that whether it will be relaxed further or not.
In the recent call, IndiGo has given its investors capacity guidance of 60-70 per cent for October-to-December period. It's likely that IndiGo might be flying at lower capacities if government doesn't allow more easing. That's where the problem for IndiGo really exacerbates. Why?

With about 30 per cent capacity in air, IndiGo's cost-economics have gone for a toss. The airline has daily cash burn of Rs 30 crore on the fixed costs side. The variable costs are in addition to this. With low capacity, the airline is not able to cover its higher costs. If it stays so for a long period - let's say till November 24 - the airline might have to take a plenty of harsh decisions.

The other big issues for IndiGo with government regulations are the price bands, and a series of lockdowns announced by various state governments in the past one week. For instance, flight operations at Kolkata airport will remain suspended for seven days in August. Parts of Lucknow were under lockdown recently after UP registered eight-fold jump in COVID-19 cases in a month. Then, Bihar has imposed 16-day lockdown starting August 1.
30/07/20 Manu Kaushik/Business Today
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