IndiGo Airlines: Singed by high costs, low fares

Rising costs, primarily of fuel, and the inability to pass these on to customers due to cut-throat competition and capacity additions in the sector, saw IndiGo Airlines’ profit in the June 2018 quarter crash 97 per cent y-o-y to ₹28 crore. This is the second successive quarter of dismal performance for the airline. It would have posted losses but for ‘other income’. The cost trouble worsened in the June quarter due to the fall in the rupee.

The airline’s CASK (cost per available seat kilometre) rose 20 per cent y-o-y, while its RASK (revenue per available seat kilometre) fell 3 per cent. The airline market leader was not able to increase fares despite double-digit growth in passenger traffic.

This lack of pricing power is reflective of the intense competition in the sector. This is a fallout of sharp increases in seat supply in the sector, led by IndiGo. The airline’s capacity (available seat kilometres) growth was 18 per cent in the June 2018 quarter, and it expects a capacity increase of 25 per cent in 2018-19. Other airlines are also adding to their fleet. These capacity additions could continue keeping fares under check.

The IndiGo stock recouped its losses over the week. But it is down 34 per cent from its April highs. Even so, due to the earnings rout, it trades at about 26 times trailing 12-month earnings, higher than the three-year average of 20 times.

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