Airline’s profitability takes back seat

In the June quarter, IndiGo barely kept its head above water posting a nominal net profit. It should not come as a surprise in what was described as the industry's weakest quarter (Q2), the airline totted up its first loss since listing. Like in the previous quarter, the culprits were the same — high fuel costs, depreciating rupee, and cut-throat competition. While the first two are outside of the industry's control, the last scenario defies logic given the high debt and cost base of players in the sector.

Having learnt its lessons in the past, InterGlobe does not wish to preempt the competition and put its market share at risk by unilaterally raising prices. Its response has been to add capacity aggressively and keep increasing market share. In the fiscal year it has added over 30 aircraft, taking its total to 189. This will help it to tap the 15 per cent plus passenger growth the sector has witnessed for 16 quarters in a row. While IndiGo's strategy is clear, prioritising market share over profitability may not go down well with the Street. While its revenues were up 17 per cent it is nowhere near enough to take care of the surge in fuel costs and rentals, which were up 36 per cent over the year-ago period. This is reflected in the margins, which came in 3.6 per cent against the year-ago period when they were touching 30 per cent.

Though the company indicated that fares should firm up given the festive season, the slew of offers in recent weeks and the strong capacity addition plans will mean the focus will be on improving load factors and thus softer fares.

The only solace for the market leader is a cash chest of ~131 billion as compared to debt of ~26 billion.