India’s largest airline, IndiGo, is booming. The airline recently reported its highest-ever annual revenue, at $6.8 billion, and best-ever quarterly profit in the second quarter when it carried 86 million passengers, a 72 percent jump from last year.
Led by Pieter Elbers, who took the top spot in September after eight years at the helm of European giant KLM, IndiGo has big plans. Expanding its international operations is top of the list. The airline serves just 26 destinations outside of India, compared to 78 in the country, and 90 percent of its passengers are flying domestically.
“Outside the scope of our present range aircrafts, we’re not very well known,” Elbers said in a recent interview. The airline is experimenting with new routes and wants to start flights into Nairobi, Jakarta and Central Asia with its existing fleet of Airbus A320ceo and A320neo family aircraft.
And then of course, there is IndiGo’s order for Airbus’ long-range narrowbody, the A321XLR. Indigo expects its first aircraft around 2024-2025, even as Elbers said the airline has not taken a final decision on where to fly with the A321XLRs.
“One of the charms of the Indian market, is that it is a very late booking market and people are open to new routes and new developments. Contrary to some parts of the world, there’s no need to announce new routes a year prior,” said Elbers.
Defining the strategy for internationalization, Elbers said IndiGo is focused on building its own network and also working through codeshare partnerships. The airline currently has codeshare agreements with seven foreign carriers — Air France, American Airlines, KLM, Qantas, Qatar Airways, Turkish Airlines, and Virgin Atlantic.
Despite its current fleet size of 307 aircraft, the airline has a substantial order book of around 500 planes. However, it faces many of the same supply chain challenges that are thwarting the growth plans of many airlines around the world. As a result, IndiGo has extended some of its leases and looked for more creative solutions.
For example, IndiGo connects 33 destinations in Europe offered by a code share with Turkish, in which travelers fly on an Indigo branded Boeing 777 between India and Istanbul and then onwards to Europe on Turkish metal. The tie up is the first time IndiGo has codeshared on another carrier from that carrier’s hub.
As part of the arrangement, Elbers said IndiGo is also seeking approval to codeshare on some of Turkish’s flights to the U.S.
IndiGo has no plans to join one of the global alliances — Oneworld, SkyTeam, or Star — Elbers said. The airline does remain open to the possibility of adding more codeshare partners in the future, he added.
Elbers is mindful of the airline consolidation underway in the Indian market. Four Tata Group-owned airlines — AirAsia India, Air India, Air India Express, and Vistara — will be consolidating to form one full-service and one low-cost carrier.
“I’m very confident about the strength and the proposition in operating in these markets,” Elbers said. “India as an aviation market does not only have a relatively low penetration, but also is in somewhat a nascent stage.”
As Elbers pointed out that, what’s happening today in India in terms of consolidation, has happened earlier in Europe and the U.S.
IndiGo has been instrumental in stimulating the Indian market and creating new opportunities, said Elbers. “Through its efforts, the airline has successfully generated demand in smaller cities that previously had limited air connectivity, effectively expanding and shaping the markets.”
In addition to the major metropolitan cities, there remains untapped potential in tier two and tier three Indian cities, for example Ahmedabad, Chandigarh, Jaipur, and Pune. Previously, residents of these smaller cities had limited access to air travel opportunities.
“As I travel to smaller cities and navigate through the aircraft, I encounter a diverse Indian audience aboard that IndiGo plane,” Elbers said. “I witness first-time fliers, senior citizens embarking on a holiday with their children for the first time, young individuals engrossed in their work on laptops, and families traveling together.”
American and Southwest Update Second Quarter Guidance
These are good times for American. The Texas-based airline upped its second quarter financial guidance last week, in light of both revenue coming in stronger than expected, and fuel prices coming in lower. When it last gave a forecast earlier this spring, American told Wall Street it would deliver a second quarter operating margin (excluding special items) of 11-13 percent. It now says 12.5-14.5 percent. CEO Robert Isom, appearing before investors at a Bernstein conference last week, downplayed the impact of a judge’s decision to dissolve American’s northeastern joint venture with JetBlue. He said the alliance was helpful but not influential enough to meaningfully impact overall margins. The company will, however, appeal the ruling.
American executives, separately, trumpeted the carrier’s strong operational performance of late, inclusive of the busy Memorial Day weekend. Reliability aside, other top priorities for the airline include cutting debt, getting a new pilot deal ratified, developing its new distribution strategy, and increasing the supply of regional pilot captains. One thing it doesn’t need to do is spend lots of money renewing its fleet — that’s largely done. Demand, no surprise, remains strong. “I’ll tell you,” Isom said, “that American Airlines right now, if we had more aircraft … we’d be flying them.”
Southwest likewise gave updated financial guidance at the same Bernstein conference. Like its Fort Worth-based neighbor American, Dallas-based Southwest sees strong demand, clearly evident during this past Memorial Day weekend. “Second quarter 2023 leisure travel demand and yields continue to be strong, including a recent improvement in close-in leisure demand and yields, while managed business revenue trends continue to perform as previously expected.” The airline didn’t provide any margin guidance like American, saying only that profits for both the second quarter and the full year will be “solid.” And with much of its fuel costs tied to pre-purchased hedges, Southwest’s June quarter fuel expenses are now expected to register at the higher end of its previous forecast. Still, fuel costs will be down substantially year-over-year. Even on the revenue side, the airline’s original guidance was not much changed, with unit revenues (RASM) now expected to be down 8-10 percent compared to 2022 — it previously said down 8-11 percent. If you’re wondering why RASM would fall in such a strong demand environment, that’s mostly because of capacity expansion — available seat miles (ASMs) will be up about 14 percent year-over-year. Capacity growth should in theory depress non-fuel unit costs too but in this case, CASM excluding fuel will be up 5-8 percent, reflecting inflationary cost pressures. The other big unit cost issue is that Southwest still has about 40 planes it can’t fly “because we’re constrained by pilots,” said CEO Bob Jordan. “That will be fixed by the end of the year.”
“There’s a lot of inefficiency in the system,” Jordan said. “So we have a big opportunity as you get into the fall and then into ’24, particularly, to really push hard on optimization and rationalization of the network [and] optimization of our efficiency around our people.” Operations, he said, are now running smoothly, a big deal considering the meltdown Southwest suffered this winter. The airline is convinced that there were no long-lasting effects of the meltdown, in terms of lost loyalty. Jordan also spoke about Boeing 737 Max deliveries: “We were going to get 114 last year. We got 68. We were going to get 100 this year. It looks like we’re going to get 70.”
Qantas Sees Big Revenue Premiums on Ultra Longhaul Routes
The Qantas Group has its sights on profitable new international growth opportunities with the hundred-plus new planes it has on order. Those aircraft, part of separate deals to renew its narrowbody fleet and for the Project Sunrise ultra-longhaul nonstops flights to both London and New York, are a backbone of the group’s strategy through fiscal 2030, or the year ending in June 2030. During that period, executives have ambitious goals to boost margins — thanks in part to expectations of international demand outstripping airline capacity for the rest of the decade — while expanding and cutting costs, all at the same time.
To paraphrase crooner Johnny Nash, it could be a bright, bright sunshiny decade ahead for Qantas.
The group, which includes Qantas and budget airline Jetstar, laid out its vision through the end of the decade to investors Tuesday. It targets international annual operating margins of 10-12 percent for Qantas, or about double pre-pandemic levels, and at around 12 percent for Jetstar, on par with its pre-Covid returns. Domestically, Qantas anticipates margins 5 points better than pre-pandemic of roughly 18 percent, and Jetstar margins comparable to its best years of around 15 percent. And don’t forget things like loyalty, where high-margin operating profits are forecast to jump to A$800 million to A$1 billion ($521-651 million) by the end of the decade from a pre-pandemic peak of less than half that.
Qantas’ new fleet forms the foundation for those returns. The group has orders and commitments for more than 150 Airbus A220, A321neo, and A350, and Boeing 787 aircraft with deliveries stretching into the next decade. While many of the planes, particularly the narrowbodies, will replace older models in the Qantas and Jetstar fleets, their larger size and improved capabilities enable a long list of potential new network opportunities for both airline businesses.
The biggest of those is Project Sunrise. Qantas aims to launch the nonstops to London and New York from Sydney from around 2025. The routes will be flown with the 12 A350-1000s on order, and are expected to generate as much as A$400 million in incremental revenue for the airline by fiscal 2030.
“People are willing to pay a premium to fly direct, and it’s even more so since Covid,” Qantas Head of International and Domestic Andrew David said at the investor event. That premium for the nonstop flights would drive the additional revenues.
But Project Sunrise is not only about new nonstops to London and New York. When those flights launch, Qantas will find itself with freed-up 787-9s that currently fly one-stop routings to both cities. Those planes could then be put to use to — you may have guessed it — Paris, or Chicago or Seattle. The latter two cities are Oneworld alliance strongholds with Chicago a hub for joint venture partner American Airlines, and Seattle one for Alaska Airlines.
The A220s and A321neos, notably the long-range A321XLR variant, will open up new opportunities closer afield to Australia for both Qantas and Jetstar. The group’s investor presentation said Qantas will be able to “profitably participate on routes that were previously unfeasible” without giving specifics. However, a range chart showed the A321XLR potentially able to fly routes like Brisbane-Manila or Perth-Bangkok nonstop. Neither Qantas nor Jetstar flies either route today, according to Cirium Diio schedules.
On the Jetstar side, the expansion opportunities are much more explicit. The discounter could potentially add flights to “Philippines, Vietnam, Thailand, Korea, India, Sri Lanka, and Pacific Islands.” Some of those, for example the Philippines, Thailand, Vietnam, and the Pacific Islands, would be within range of the A321XLR. Others, for example, India and Sri Lanka, would be possible with Jetstar’s 787s that the group said would be “redeployed” to markets outside of the XLRs range once the new Airbuses arrive.
Further boosting the Qantas Group on the international front was Virgin Australia’s decision to exit longhaul flying during its Covid restructuring. The airline removed its widebody Airbus A330 and Boeing 777 aircraft and ended service to destinations like Los Angeles as a result. Virgin still flies international routes that it can serve with its Boeing 737s, for example to Bali and New Zealand. It will also begin flying to Tokyo Haneda with a 737 in June, a move that is seen by most as protecting its coveted slot at the airport.
The new fleets will also help the Qantas Group cut operating costs. Qantas estimates a 21 percent reduction in unit costs, measured by cost per available seat kilometer (CASK), with the A220s that replace Boeing 717s, and a 9 percent reduction with the A321neos that replace Boeing 737-800s.
Total group unit costs, excluding fuel, were up 13 percent during the six months ending in December compared to 2019. That increase was more than offset by a 44 percent increase in group unit revenues over the same period.
Operating expense savings estimates do not include the capital costs of the new fleet. The group expects capital expenditures to rise from A$2.6-2.7 billion this fiscal year to A$3-3.2 billion in fiscal 2024. Outgoing CEO Alan Joyce told investors the group secured “very attractive pricing” for all of the aircraft, and that incoming CEO Vanessa Hudson was pivotal to securing those terms.
Key to the group’s margin targets, however, is the expected supply and demand imbalance. While not new, the fact that it could continue through the end of the decade is. This stands to boost international yields where the imbalance is most pronounced, something Qantas expects to be the case on routes to and from Australia.
International seats to and from Australia, excluding New Zealand, are scheduled to be down roughly 17 percent this year compared to 2019, Diio data show. Schedules more than six months out, including during the peak season in the southern hemisphere, are still subject to change.
In Other News
- Bankruptcy can be a powerful tonic for an airline. That’s been the case most recently for carriers like Latam, Thai Airways, and Philippine Airlines. It’s not yet, however, delivering big improvements at SAS. The Stockholm-based carrier reported a negative 11 percent operating margin for the months of February, March, and April (it uses an unusual fiscal calendar). The airline is cutting costs and restructuring obligations for sure, as it navigates through the U.S. Chapter 11 process. Revenue trends, meanwhile, are strong. Yet barriers to recovery remain, including weak Nordic currencies (relative to the U.S. dollar) and tough competition from Norwegian Air, which undertook its own restructuring at a more favorable time, when creditors including aircraft lessors had less negotiating leverage. The cost of capital has increased as well, with interest rates much higher. In addition, SAS experienced a litany of operational woes in April, many beyond its control — bad weather, air traffic control strikes, etc. Remote working, furthermore, appears to be eating into corporate travel quite significantly throughout Scandinavia. “We obviously are not satisfied with the negative result,” Chief Financial Officer Erno Hilden said. “But we are on track and maintaining our financial projection from April this year.” SAS still hopes to exit bankruptcy by the end of 2023. One task left is attracting more equity capital. In the meantime, it’s preparing for the peak summer with a host of additional routes, including some new Airbus A321LRs flying to Newark from the non-hub secondary cities Aalborg and Gothenburg. It’s launching a new Copenhagen-New York JFK route as well.
- When your home hub is an island with just 5 million residents, it helps to have friends. With this in mind, Singapore Airlines struck a joint venture arrangement with Indonesia’s Garuda. This expands upon an initial agreement on deeper cooperation that the two carriers signed in late 2021. They have codeshared since 2010. The idea now is to boost capacity between Singapore and the Indonesian cities of Jakarta, Surabaya, and Denpasar (the latter is on the island of Bali, one of Asia’s top tourist destinations). Most importantly, joint venture status, if approved by regulators, will allow for potential scheduling, pricing, and corporate sales coordination. The 2021 memorandum also discussed the possibility of aligning frequent flyer plans, marketing jointly, promoting tourism, and cooperating in both cargo and maintenance. Singapore Airlines is deepening ties to other ASEAN-based rivals as well, including Malaysia Airlines, Thai Airways, and Vietnam Airlines. It also has close relationships with All Nippon, Air New Zealand, Virgin Australia, Lufthansa, SAS, United, and now Air India. Perhaps it’s looked to the U.S. and learned the lesson that cooperation and consolidation can do wonders for profitability.
- Route tidbits: United is out of the Boston-London market, again. The carrier’s latest offering ends October 28; its last Boston-Heathrow route operated from 1999 to 2002, per Diio. Norse Atlantic moves its South Florida operations to Miami on September 14, replacing Fort Lauderdale as the gateway for its nonstop from London Gatwick. Taiwanese Starlux will connect Taipei and Manila’s Clark airport daily from August 15, joining AirAsia, Cebu Pacific, and Eva Air in the market. South African Airlink will add flights between Johannesburg and both Lilongwe and Blantyre in Malawi on September 4. The former route is unserved, while Ethiopian Airlines and South African Airways operate the latter, per Diio.
- United Chief Financial Officer Gerry Laderman will retire next year after more than 35 years in the industry. Laderman is respected for his financial prowess and fleet strategy at the carrier, and Continental Airlines previously. United will name Laderman’s successor later this year at which point he will transition to the Executive Vice President of Finance role; he intends to retire by September 2024.
- Delta has been hit with a lawsuit in California claiming it mislead consumers with its tagline “the world’s first carbon-neutral airline.” The class action suit filed last week argues that the claim, which Delta said it has achieved through carbon offsets, is “manifestly and provably false.” The concept of carbon offsets has come under scrutiny in recent years with numerous reports where, for example, forests that were “preserved” by the sale of offsets were never threatened to begin with. United CEO Scott Kirby, for one, has sworn off offsets in his drive to make United carbon neutral. But on the lawsuit, this is the latest legal action against an airline for so-called greenwashing; Lufthansa lost a challenge in the UK in March where a regulatory body found that one of its ads misled consumers on the airline’s carbon reduction activities.