India’s largest airline, IndiGo, on Wednesday posted its first-ever loss since its public listing. However, it vowed to aggressively participate in a price war that now threatens to saddle India’s airlines, faced with a high fuel price and a weaker rupee, with heavy losses.
The airline blamed rivals for the prolonged low-fare environment, saying that it has no option but to match the fares in order to hold onto its market share. “At IndiGo, it is never our practice to take the lead in discounting fares but, as due to the current industry environment, other airlines, desperate to raise cash, are dropping fares, IndiGo had no choice but to match them,” said IndiGo co-founder and interim CEO Rahul Bhatia, when asked by analysts about the pricing pressure.
On Wednesday, IndiGo announced a sale offering a million seats between November and April on discount, leading to murmurs among rival carriers.
The airline reported a net loss of Rs 6.52 billion in the three months ended September. Revenue rose 17 per cent to Rs 61.85 billion from a year earlier, as IndiGo flew more passengers. That came at the expense of yields as intense competition restricted its ability to raise fares to sufficiently cover higher costs. Its yield, which measures average earnings per passenger per kilometre, declined by 10 per cent to Rs 3.213 as compared to Rs 3.52 during the same period last year. On the other hand, the airline’s expense for the same rose by 24 per cent to Rs 3.74 as compared to Rs 3.01 in the corresponding period last year.
While analysts are saying that there is a mismatch between demand and supply in the market and airlines need to rationalise addition of planes, IndiGo management instead increased their capacity addition plan and blamed rival airlines for discounting.
For the next quarter, IndiGo has forecast that their capacity will increase by 35 per cent — the highest ever in the airline’s history. Its rapid capacity addition (it added 20 planes in Q2) has been blamed for subdued fares in the market.
The management, in its justification, said that the company’s lowest cost structure allows flying more seats despite high cost of operation. “Other companies may differ but for us, we find it profitable to fly more planes,” said IndiGo CFO Rohit Philip, when asked if the airline would lease out planes to rationalise capacity.
Analysts remained concerned about the justification and questioned the management on why the airline isn’t taking steps to rationalise pricing despite having a 43 per cent share of the market. However, IndiGo said that despite its attempt to raise fares in the past, rivals did not match, which forced it to drop fares. “We were the first airline to introduce fuel surcharge but none of our competitors introduced it, which forced us to roll it back. The latest sale is for travel post Diwali when traffic slows down,” said the airline’s chief commercial officer Willy Boulter. He also added that the competitive pressure remains intense and fares in the 15-day window remain under pressure.
Analysts expressed caution that IndiGo’s numbers suggest airlines’ inability to control market dynamics and that near-term pressure will increase. “Don’t see near-term correction at this stage. Likely higher oil prices post November 4 could trigger another industry downside. Indigo’s strength of a very strong balance sheet and execution capability continue to give them a structural advantage but competitive intensity, which is likely to sharpen further, has visibly impacted,” said Kapil Kaul, CEO (South Asia) of aviation consultancy firm CAPA.