IndiGo Bullish on Long-Term International Growth
- IndiGo’s chief Rono Dutta, once a top United executive, spoke with the Economic Times about managing India’s largest domestic airline during a global pandemic. There are a few positives, like cheap fuel, the momentary disappearance of airport congestion, and opportunities to cut costs in other areas. Since allowed to restart flights earlier this month, IndiGo’s demand has been steadily rising, as have load factors and yields. “We have been very encouraged by what we have seen in the first few weeks of travel resumption,” Dutta said.
IndiGo was initially able to operate just one-fifth of its normal capacity at the start of the month, when Delhi removed a restriction on flying. Capacity has steadily increased through the month, and Dutta hopes to reach 50% of normal capacity next month, and 80% by April 2021 (the start of its next fiscal year). He also hopes to restart international flights before long.
Speaking of which, international flying was a big bright spot for IndiGo before the crisis, earning higher profit margins than domestic flying last year. China in particular produced strong returns (it served Guangzhou and Chengdu, not to mention Hong Kong), and the LCC would have expanded to China had the existing India-China air service treaty allowed (Side note: India and China are currently engaged in deadly mountain border skirmishes).
IndiGo is separately bullish longterm on winning back international traffic that for years passed through Gulf hubs. These hubs, i.e. Dubai, Abu Dhabi, and Doha, were overbuilt, Dutta believes, and thus fragile. He gives the example of a passenger that once flew from Kozhikode to Chicago via Dubai. That passenger will in the future be more inclined to fly the route via Mumbai instead. One of IndiGo’s goals pre-crisis was indeed developing Mumbai as a more robust international hub, especially after Jet Airways collapsed. It even at one point considered buying Air India to get its airport slots, Dreamliners, and overseas route rights.
Dutta also mentions the stress Gulf carriers are feeling with widebody values getting “massacred.” This, he said, will favor narrowbody carriers in the international arena. Last year, sure enough, IndiGo included A321 XLRs in another giant NEO order it placed with Airbus. For now, the focus is just returning to profitability, which Dutta says won’t happen anytime in the next 14 months. But it can at least cover its variable costs, namely fuel costs, crew costs, and airport costs. On that basis alone, excluding fixed costs, IndiGo’s flights are currently earning good margins and generating cash. Fixed costs though, including monthly lease and debt payments plus overhead, are about 40% of total costs. “So flying 30%-40%-50% of the capacity, there is no way we can cover that and make a profit.”
Travel restrictions even for movement within India remain severe, making a near-term return to profitability unlikely. But the crisis could cause more carriers to disappear, with Go Air said to be facing severe financial difficulties. Would IndiGo consider buying a rival airline? No, Dutta says firmly.
- The South China Morning Post points out that in Europe, British Airways, easyJet, Virgin Atlantic, Ryanair, SAS, and Lufthansa are seeking to cut a combined total of 53,650 employees. In Asia, on the other hand, carriers have been more inclined to opt for pay cuts and unpaid leave, often supported financially by governments. It names Japan Airlines, All Nippon, Korean Air, and Taiwan’s Big Two carriers, China Airlines and EVA Air — all have thus far avoided giant layoffs.