InterGlobe Aviation Limited (INDIGO) Earnings Call Transcript

Ladies and gentlemen, good evening, and welcome to IndiGo's conference call to discuss the first quarter of fiscal year 2027 financial results. My name is Sagar, and I will be your coordinator. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the call over to your moderator, Ms. Richa Chhabra, Head of Investor Relations at IndiGo. Over to you.

Good evening, everyone, and thank you for joining us for the First Quarter of Fiscal Year 2027 Earnings Call. We have with us our Managing Director; Mr. Rahul Bhatia; and our Chief Financial Officer, Mr. Gaurav Negi, to discuss the financial performance, and are available for the Q&A session. Please note that today's discussion may contain certain statements on our business or financials, which may be construed as forward-looking. Our actual results may be materially different from these forward-looking statements. The information provided on this call is as of today's date, and we undertake no obligation to update the information subsequently. We will upload the transcript of prepared remarks by the end. The transcript of the Q&A session will be uploaded subsequently. With this, let me hand over the call to Mr. Rahul Bhatia.

Good evening, everyone, and thank you for joining us on this call. Today, we announced our first quarter of the financial year 2027 results. This quarter, we reported a loss of around INR 2 billion. The aviation industry, and in particular, the Indian aviation industry, continues to operate in an environment that is promising, yet demanding. In the near term, what is very clear is that fuel costs remain elevated, and we continue to operate in a very volatile environment. This makes disciplined execution even more important, protecting the business in the near term, while staying responsive to fast-changing market conditions. The quarter was marked by a constructive pricing environment and our ability to pass through a part of the elevated fuel and operating cost pressure in a disciplined manner. While the quarter saw a sharp increase in costs, the revenue improvement needs to be assessed together with the movement in fuel and other costs. At the same time, it is equally important that we do not let short-term volatility cloud the long-term opportunity. Indian aviation remains one of the most compelling structural growth stories in the world. India is still a severely underpenetrated aviation market. Rising incomes, greater mobility, a young population, expanding aspirations and continued investment in aviation infrastructure all point in the same direction. As we reflect on this, it is important -- it is also a moment to reflect on IndiGo's journey. We began in 2006 with a simple belief: that air travel in India could be more accessible, reliable and consistent. Over the last 20 years, this belief has translated into meaningful impact, connecting more and more cities from heartlands, to metros, to international markets, serving millions of passengers and making air travel a practical choice for a wider sector of India. As we build IndiGo for the long term, we have signed an MOU with CFM International for over 1,000 LEAP-1A engines for our future aircraft deliveries. This MOU also supports the development of an engine MRO and long-term material services. It is a clear step towards gaining structural strength, investing ahead of growth and building the platform IndiGo needs as we scale into a larger and more global airline. That same long-term thinking often shapes how we view the network and fleet choices. The domestic and short-haul business will remain the heart of IndiGo, with our single-aisle program anchored by the Airbus A320 and [ A321 ] family aircraft being central to the future of the airline. Alongside this score, international expansion and product evolution will be important parts of IndiGo's next phase. This expansion is about building a footprint in a disciplined and fit for purpose manner. Thank you. Now let me hand over the call to Gaurav to discuss the financial performance in detail. Thank you.

Thank you, Rahul, and good evening, everyone. Let me start with sharing the operating context that we experienced during the quarter, which is important to understand the financial performance for Q1 FY '27. The quarter was shaped by 3 broad factors impacting the outcome. One, measured capacity deployment driven by geopolitical situation in the Middle East and optimization of our schedule as we transition into a seasonally weaker period starting 15th June onwards. Number two, pricing actions as a countermeasure to offset the pressure on economic performance and outcomes. The revenue environment improved meaningfully on a year-over-year basis, supported by pricing actions, healthy loads and base effect. Point number three, elevated cost environment led by fuel, currency and inflationary pressures. Now first, moving on to the financial performance for Q1 FY '27. We reported a total income of INR 256 billion, a growth of around 19% year-over-year, with a yield growth of 21.3% and a load factor reduction of 1.3%. Despite a volatile environment, passenger demand held up as we serve 31.3 million passengers, a growth of 1% year-over-year. In terms of profitability, EBITDAR came in at INR 38.3 billion at a margin of 15.6% compared to an EBITDAR of INR 57.4 billion and a margin of 28% for the same period last year. For the quarter, we reported a net loss of INR 2.4 billion compared to a profit of INR 21.8 billion in the same quarter last year. Excluding the impact of currency movement, we reported a net loss of INR 56 million compared to a net profit of INR 23 billion during the same period last year. The June quarter's capacity growth came in at 3% on a year-over-year basis, broadly in line with our guidance. Capacity deployment during the quarter remained impacted by geopolitical developments particularly air space related constraints and disruption in certain international corridors. As the quarter progressed, we adjusted capacity with customer demand in mind. We move capacity to markets where demand was holding up better and took measured action on routes affected by disruption. This helped us stay responsive to changing travel patterns while keeping the network aligned with customer needs. Moving to the demand and revenue. The quarter demonstrated the strength of an underlying demand base and the benefit of a more disciplined pricing environment. While demand conditions were not uniform across the market, the month of April, the demand and load factors reflected the combined impact of disruption, constrained customer sentiment in certain markets and network recalibration. May was a standout month for Indian Aviation. The next month, even for the domestic industry, reflecting healthy recovery. For IndiGo, it was a landmark month as we carried over 10 million domestic passengers, our highest ever, underscoring the strength of our network, our execution and the trust of the customer, which continue to be placed on us. June remained constructive from a revenue environment perspective, with yields holding up well even as part of the international network continued to be managed selectively. International capacity largely recovered during the month, supporting an uptick in revenue. Driven by the disciplined pricing actions and demand supply dynamics, the passenger unit revenue came in at INR 5.03, which is 19% higher on a year-over-year basis. This is slightly better than our guidance as June sustained the positive revenue momentum. The yield came in at INR 6.04, which is around 21% higher compared to the same period last year, and a load factor of 83%, which is 1.3 points lower as compared to the same period last year. On the cost side, fuel remains the largest source of pressure during the quarter. Global fuel markets continue to be influenced by developments in the Middle East, resulting in significant volatility. While average main prices were up by around 50% year-over-year, elevated crack spreads drove benchmark Singapore jet fuel prices higher by nearly 120%. We saw a timely intervention by the government, which was followed by our partners from the oil marketing companies, to limit and [ moderate ] the prices of domestic ATF during the months of April, May and first 8 days of June. This support enabled us to continue to operate largely as per our planned schedule and also pass on the benefits to the domestic passengers in the form of lower fuel charge. Despite these measures, our fuel CASK increased by around 80% year-over-year. We're also thankful to the airport authorities, airport operators and the partners for their continued support. Further on a year-on over-year basis, CASK ex fuel exports came in at INR 3.20, around 11% higher year-over-year due to inflated dollar denominated costs, due to the depreciation of the Indian rupee by more than 11%. The lower utilization in parts of the quarter, leading to a lower ASK base and annual contractual escalations. In this environment, we have stayed focused on cost efficiency and levels within our controls to reduce the impact on margins. We are prioritizing flying, our more fuel-efficient aircraft and not operating our older [ CO ] aircraft, wherever commercially appropriate. We've also tightened up the subscretionary expenses and deferred increments for senior-level employees. Now moving to the fleet. We inducted a total of 13 aircraft from our original order book, which were all inducted through our entity in the GIFT City. We redelivered 9 aircrafts from our original order book and 13 [indiscernible] leased aircraft during the quarter, resulting in a total closing fleet of 432 aircrafts at the quarter end. Let me now turn to the network and key developments during the quarter. During Q1 FY '27, we commenced flights through [ Jamnagar ], reinforcing our commitment to strengthening domestic connectivity while selectively building our international footprint. We also became the first airline to come on operations from Jewar Airports in Noida, further deepening our presence in the MCR airport system and positioning us well for long-term growth in one of India's most important catchment areas. On the product and ancillary initiative, there is an important customer dimension to the industry's evolution. As aviation became more mainstream in India, customers are looking for more choices, more flexibility and more seamless travel experiences. As the market evolves, customers have different needs across different journeys. Our task is to respond to these needs without losing the essence of IndiGo. In the same direction, we introduced light fare for customers, traveling without checked-in baggage with flexibility to purchase add-ons. This supports customer choices and revenue diversification while remaining consistent with our simple, efficient and operating model. We continue to strengthen our loyalty program ecosystem through partnerships that deliver greater value beyond journey itself. Our collaboration with [ Accor ], all loyalty platform, which recently went [ viral ], extend meaningful earning and redemption opportunities across travel and hospitality, enhancing customer engagement and reinforcing IndiGo's BluChip long-term proposition. Further, during the quarter, we also tested SITA's OptiClimb, and AI flight optimization solution aimed at improving fuel efficiency. These initiatives reflect our strategy in action, expanding the network in a disciplined manner, giving customers greater choices and building ancillary revenue streams and continue to strengthen the efficiency that sits at the core of IndiGo model. Turning now to the balance sheet side and liquidity. We ended the quarter with a total cash of INR 529 billion, of which free cash was INR 390 billion and restricted cash was INR 139 billion. The capitalized operating lease liabilities stood at INR 538 billion. The total debt, including capitalized operating lease liability, stood at INR 815 billion, with the right of use assets at INR 550 billion. In terms of the cash utilization during the quarter, we made deliberate capital allocation towards assets that strengthen the platform for the long term, including the purchases of 4 engines through the GIFT City entity and partial payment towards acquisition of land for our unified campus. As we enter the seasonally softer demand period and continue to manage fuel and airspace volatility, we are adopting a prudent and measured approach to capacity. We are rationalizing capacity by selective route level actions and few temporary international suspensions. As a result, we are expecting a flattish capacity growth in Q2 of FY '27 compared to the same period last year. In terms of unit passenger revenue or PRASK for Q2 FY '27, with the current balanced demand-supply equation and a higher fare holding up, we are expecting growth of more than 25% compared to the same period last year. Now in closing, the June quarter reflects the strength of the revenue environment and the depth of the demand base, but also the realities of highly elevated costs. We will continue to manage business with discipline, balancing growth with economic, capacity with demand and near-term volatility with long-term strategic priorities. Our focus remains on reliability, cost efficiency, balance sheet strength and long-term shareholder value. With this, let me hand it back to Richa.

Thank you, Rahul and Gaurav. To answer as many questions as possible, I would like to request that each participant limit themselves to one question and one brief follow-up question, if needed. And with that, we are ready for the Q&A.

[Operator Instructions] Your first question comes from the line of Krupashankar NJ with Avendus.

My first question is on the [indiscernible], while you have highlighted that the PRASK at least is expected to be high at 25%, what's been the impact you've seen so far with respect to other factors? And is that one of the key reasons why there is a rationalization exercise with respect to capacity, that the guidance is flattish on a relatively lower base on Y-o-Y?

So Krupa, the way Q1 panned out for us, we already had at least a 21% increase in the yield. The load factors did not go down significantly. It was just a 1.3% decline on the load factors. As we are looking into Q2, we are seeing that the price discipline is still holding up in the market. And as a result, the yields have been tapering upwards, and that's why the guidance for Q2 is 25% and north of 25%. We are expecting the loads to be flattish or slightly down similar to what it was in Q1, but that's largely driven by the fact that a large part of the capacity has also been reduced, which is typical of this quarter. Even last year, we had tapered down or optimized our capacity given that it's off-season quarter. So with the decline in the capacity deployment that we've done, we are seeing that the pricing discipline is still holding up. We are able to push up prices and the loads are also sticking. So that's how we are looking at Q2.

Got it. And second one is on the [indiscernible]. So just wanted to get a sense, given the cost escalations, is there a number you want to keep as a bottom number or a spread number, which you would be comfortable with going ahead until which there can be increasing hikes with respect to pricing? Is that something which is in the bottom of the calculation, which is always under consideration when you take this hike going ahead?

No. The endeavor is always going to be economically viable propositions so that we keep having a healthy spread. But as you're well aware, the kind of environment that we are in right now, the fuel and the currency have been the biggest drag. So given how things have shaped up in Q1, we managed it well. We were hoping that this is behind us because large part of the conflict was coming to a close. We've recently started to see some flare-up. But our endeavor is always going to be to make sure that there is a healthy spread. And towards that, we'll keep working. But the external factors are just too significant. The headwinds are too significant. But like we said, we keep testing high levels of yields in order to offset largely the increased levels of cost that we are experiencing. So there's no kind of a target, but we just want it to be a healthy kind of a spread.

The next question comes from the line of Pulkit Patni with Goldman Sachs.

I have a couple. Firstly, any change to your full year guidance given that your second quarter guidance is flattish one after first quarter also been relatively weak? So how should I look at your full year ASK guidance? That's question number one.

Pulkit, we are holding to the guidance that we gave at the analyst meet. So it's in single digits. So it was already tapered down. But post [ '27 ], we had already given us -- also given a guidance that we'll be back to early double digits. So given the external factors, we are still holding to the single-digit guidance that we will on capacity.

Sure. Sure. That's useful. Gaurav, my second question, it's not typically asked, but would you be able to talk about on a rupee basis, what has been the cost of fuel that you have paid in this particular quarter? And I'll tell you the reason why I'm asking this. Has our fuel consumed per ASK change meaningfully between the last few quarters and this quarter? That number would be helpful for us to just gauge that.

No. So when you say, the only change -- the 2 elements of change in the fuel. One is the rate and the consumption. So there's no change on a per ASK basis as far as the consumption is. Only driver of [ age ] has been the rate. And the rates, as you are very well aware, have been going up, and that's been the biggest part of the mitigation that we've been working in Q1. So...

And for the quarter, what's that rate, if you can talk about? Effective number?

So again, it's going to be -- if you look at the reference point, if you look at March because the way the pricing for fuel worked out, March was a reference point went in 1st of April, where the support came in, both from the government and the oil marketing companies, where they said that the increase in the fuel rates is going to be capped at 25% for the domestic space. So that was defined from 1st April. It worked out in April, it worked out in May. And until the 8th of June, this particular methodology worked out. While the international always was at the market rates, which was where the more backwards trending. Post the 9th of June, even for the domestic space, we've got the market rate, the more back rate that is kicked in. So it's kind of -- the way the quarter played out, 1st April 'til 8th of June, there was a defined kind of a formula which was supported by the oil marketing companies for all airlines. That is going to be referenced to a much pricing that you had, a 25% cap on that. Plus you've got taxes of that and excise duties. Post the 9th, the reference then shifted, and it was back to the market rates, which any -- which way played out for the international space that -- so all domestic had this. International is always at market rates. Additional -- this was just for the public sector kind of oil marketing companies. The private, in effect, had their own rates that were in place, which was, again, linked to the market prices that were applicable in March.

Sure. I'll take this offline because my implied calculation is showing that the effective rate is close to INR [ 1 50 ] per liter. I'm not sure if that's the right number. So maybe I'll check with you off-line to get a better understanding of this.

Sure.

Your next question comes from the line of Arvind Sharma with Citi.

Kind of continuing on the fuel cost part. If you look at the fuel CASK, that is up almost 60% quarter-on-quarter and 80% Y-o-Y. Now I understand that there was a cap in the cost increase. But there have been multiple releases that tested by the OMCs that fuel price would not be increased. I think May, it wasn't. Even after that, a 63% quarter-on-quarter fuel CASK increase, what would be the key drivers? Because even after 9th June, if it was a free market, but a major part of the quarter, the growth might not have been as much as the numbers kind of reflect. If you could throw some more light on how the fuel CASK increase was 63% quarter-on-quarter ties up with the actual fuel that you've paid for.

So Arvind, if you look at -- since you're doing a quarter-over-quarter comparison, if you look at January, February and March, so there were 3 kind of versions. So when the fuel was increasing significantly in March. So it was in the early 80s from a singe standpoint. It went to around [ 82-ish ] in February, and then there was an increase that happened in March. So March becomes the baseline when you're doing a quarter-over-quarter comparison because March became the reference point for April and May and the 8 days of June that you have. So you were already at an elevated level of a base on which then there was this formula that was being applied, which is 25% that was being applied for domestic, plus the VAT and the taxes, the excise duty and VAT that you had to apply. So that played out on the domestic front. International, any which ways was the same philosophy of pricing that applied prior to the award was getting applied. So the mix of that was the driver of the fuel going up to 63%. Additionally on that, this was only up to 9th of June. Beyond the 9th of June, it was anyway back to the same methodology of pricing, which was [ MOPAC-linked ]. So a combination of these 2 factors, plus the fact that we had international, which was anyway that market, which was 2x of the reference point that you had because the market -- the fuel prices had gone up by 120% between March and then April, May, June. International was at 120%. Domestic was being capped at 25% with additional impact of VAT as well as excise. And the private players that we had were anyway pegging their pricing at the market prices. A combination of these 3 effects is what will give you the 63% that you've kind of seen in the results quarter-over-quarter sequentially. So your starting base itself, March, was on a higher level compared to January and February. Add to that, the elements that I kind of called out is what is driving the 63% increase in the fuel quarter-over-quarter.

Got it. And second question would be on the fleet part. So is it fair to assume that damp lease will eventually go to 0? And is there any -- given that second quarter would be a flattish capacity growth quarter, is there a rethink on the fleet strategy for the year? Or does it continue as usual and adjusted for the damp lease aircraft being given away?

The [ 3 ] strategy is -- again, the only tapering that we've done is the older technology COs have, some have been parked given the environment. The fuel is -- the fuel levels are extremely high. It doesn't kind of necessitate that we need to be operating those. The damp leases, yes, we've returned most of the damp leases. So we'll again assess the situation as we come into Q2 -- Q3 where we'll have to probably look at what is the external environment, especially related to Middle East, has that improved? Has the fuel levels moderated down? And if the demand -- and the demand situation has started to improve and the cost has started to taper downwards, we'll assess that situation to see if we need a surge capacity in the form of damp leases. So outside of that, our own fleet continues to be -- continues to be on plan. Damp lease, we'll assess in Q3.

Right. And if I could just ask a comment on where are you in terms of Middle East capacity? Is it normalized? Or how much is the headroom for further normalization, the Middle East via [ N2 ]?

Yes. End of June, we were actually up on the same close to 90, 95 percentage levels of what capacity we were operating. We were close to 150 prior to the war, departures that we had on a daily basis. It went down to around 20 and 30 at the peak of the crisis. Over the course of June, then we started to ramp back up again. We were close to again 130-plus. But now we are assessing the situation that's developing over there. Today, probably it's going to be in the north of 90% capacity that we are operating. But we continue to assess the situation because the crisis is again kind of flared up. So that's where we are. But our intention is to keep operating Middle East 'till the point it's safe for us to operate at the maximum amount of capacity that we can go to.

Your next question comes from the line of Sabri with Emkay Global.

My question is also on the fuel side. So for the reported number in June was something like INR 110 to INR 115 per liter for ATF. Was that also a cap number? Or did you account -- it's much higher than that while taking the market pace after 9th?

No. So let -- probably I'll try to address it. Pre the war, the fuel was operating somewhere close to 85, 90 in terms of ATF is concerned. When the war kind of broke out, the fuel prices went up by 120%. So it was touching more. The [ SingJet ] also does not [indiscernible] SingJet and MOPAG started to touch close to 180 to 200 because of the 120% increase that happened. So that's why they were operating at. With that base of March that you start taking and you put a kind of a cap at least on the domestic side, it's 125% was the cap that was put. On top of that, there is VAT and excise duty that you need to add on to. International operated at 180-plus at that because there was no release available on the international. So when you blend these 2 together, you'll get an average rate. It could be somewhere 140 between the international and the domestic space. Now in this, this is the portion that comes to you from the public sector oil marketing company partners that you had. You also have private payers offering new fuel. The private players did not -- not all of them, some of them did, but not all of them, moderate their -- the pricing related to fuel. They continue to operate at the market pricing that was applicable to the international kind of pricing. When you blend these 2, you will get the 60%, which is closer to 140 kind of ATF price levels or as an average for the month -- for the quarter Q1. Now during this period, especially in June, at the back end of June, the ATF did start to moderate downwards at an aggregate level, but it's again linked to the averages that are there. So it did come down to 110. On a market level, it was probably tapering from 180, 120, it came down to 140 and then it further tapered downwards. So there was a period when the ATF did come down, but now it's again climbed back up. So today, if you were to look at ATF, my guess is it's going to be somewhere around $140 to $150 at international MOPAG levels. So the fuel has moved significantly. But when you add these things together, which kind of -- there are different drivers to it, a combination of support that came from the oil marketing companies, the additional VAT and excise that you have to add on to it, the fact that there were 2 periods in this April to June 8 and then June 8 to 30 June, plus the private supply that comes from private players. A combination of that will give you the 63% increase, which, from a base of 90 -- 85 to 90, that was very much. When you add on the 60%, it's somewhere close to 140, 150 what a -- I think Pulkit was also mentioning.

Right. So currently also, the rate is sort of similar $90 of [ Brent ] and the $50, $60 of [ SingJet ] margins?

That's right.

Right. And second question is on your -- on the capacity. So this whole capacity thing is very significantly connected to the existing ages. Is that right?

No. Capacity for Q2, you're talking about? Or you're talking about Q1?

In Q1 also in Q2 that you have like given flat guidance.

Q1 was largely Middle East driven because, obviously, we had a huge amount of cancellation. Q2 is, again, a prudent call that we typically take, where we taper down our capacity, especially for off-season markets. So we've already given a communication that 6 of the destinations on the East side, also, we had moderated down those capacities. We kind of suspended operations, which will restart back again in October. Places like [ Langkawi ], places like Ho Chi Minh City, Hong Kong, Shanghai. So there are 2 different kind of periods that we have. Q1 was Middle East driven, Q2 is a little towards the east because of the off-season market.

But that sequentially, Y-o-Y would still be having a Middle East impact in Q2, right?

I hope not. Like I said, we are already at 90% right now. I hope the crisis kind of tapers down. As far as capacity is concerned, we'll keep operating as long as safe to operate, the maximum amount of capacity that we can throw into the Middle East.

Your next question comes from the line of Aditya Mongia with Kotak Institutional Equities.

A couple of questions from my side. The first one is on pricing. As I understand, the company is in utilizing entire fleet while price points are being up to about 20% and then higher levels in 2Q. Is there some -- as is the case in 2Q...

Sorry to interrupt, Aditya sir, we had lost your audio.

In the middle -- Aditya, we couldn't hear you in the middle.

Shall I go ahead with the question now?

Yes, just repeat because you got cut out in the middle. So we couldn't hear a part of your question. Just repeat it.