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IndiGo Implements Cost-Cutting and Liquidity-Boosting Measures Amidst COVID-19 Crisis

Editor, TRANSFIN.
Jun 4, 2020 7:59 AM 5 min read
Editorial

In a previous article, we looked at why the decision to let domestic passenger flights resume operations was taken by the Government and what the new rules and regulations were. Here, we’ll dig a little deeper into the ailments of the aviation industry in the age of COVID-19.

 

 

IndiGo’s Quarter to Forget

IndiGo (Interglobe Aviation), the country’s largest airline by passengers carried and fleet size, reported its Q4/F20 results yesterday – and there was a lot left to be desired despite the fact that the bulk of the much-feared “lockdown impact” will probably show up only in Q1/F21.

Despite a 5.4% jump in revenue, EBITDAR (Earnings before Interest, Taxes, Depreciation & Amortisation, and Rent & Restructuring), a go-to metric in the airline industry to gauge core operational performance, saw a staggering 96% Y-o-Y decline to ₹87cr ($11.6m). This was due to sizable jumps in core expenses across the board. Consequently, the carrier posted ₹871cr ($116.3m) in net loss compared to ₹590cr ($78.6m) net profit in the corresponding quarter last year. The sharp decline in profitability was exacerbated by significantly higher depreciation and fx losses, compared to the same period last year. 

The lockdown, which began on March 25th, saw all domestic flights grounded and thus airlines’ flight revenues plummeted to nil during this period. However, only six days of impact is reflected in Q4/F20 results and the full impact (and a much scarier one!) should be seen in the next quarter. 

IndiGo Implements Cost-Cutting and Liquidity-Boosting Measures Amidst COVID-19 Crisis
How flight frequency in India dropped this year when compared with 2019.

 

The Aviation Industry’s Best Bet Against COVID-19?

To ascertain how airline companies will confront the coronavirus economic crises, let’s gauge what IndiGo’s plan is. It was explained by its CEO Rono Dutta and CFO Aditya Pande at the recent earnings call, the transcript for which can be read here.

CEO Rono Dutta said that the airline “must shift focus from profitability and growth to managing cash and liquidity”.

This could be a recurring theme in other airlines’ approach in the coming weeks. Before the coronavirus, airlines’ books were stressed already and they were trying to become profitable at all costs. But now, with limited capacity, muted demand and a rocky outlook, aiming for profitability seems like a luxury one can’t afford. Survival seems more important, at least for the foreseeable future.

All in all, IndiGo expects its emergency measures to generate additional liquidity of c. ₹3,000-4,000cr ($400-534m). Some cost-reduction and liquidity measures IndiGo will be undertaking/has already undertaken have been listed and contextualised below:

  1. Cuts in employee and expendable costs:

    Salary cuts in the range of 5-25% across the organisation, except for certain employees with lower pay grades. Merit-based salary increments have also been deferred. Leave Without Pay announced for May, June and July. Along similar lines, all discretionary expenses and certain projects are to be put on hold.

  2. Renegotiating contracts and opting for efficient aircraft:

    IndiGo will phase out 120 A320ceo planes (which are older models with higher maintenance costs and higher fuel burn) over the next two years. It will substitute them with the newer, more efficient A320neo aircraft. Moreover, suppliers are being contacted and prices are being renegotiated to secure more favourable credit terms.

    This will also be relevant considering the steep drop in fuel prices globally. In the absence of renegotiations, airline cos will have to pay their higher hedged amount for jet fuel, creating hedging losses.

  3. Reworking vendor contracts:

    The airline is looking to defer 50% of supplementary rentals for this year. IndiGo incurred ₹5,867cr ($783.5m) on supplementary rentals aircraft repair and maintenance for FY20, compared with ₹3,682cr ($491.7m) a year earlier.

    Sure, the lessors may be entitled to decline the airlines’ requests for concessions on lease obligations; but they may be obliged to provide some relief - even if only a moratorium on lease payments - to safeguard their contracts and business relationships in the aftermath of the crisis.

  4. To preserve cash, no dividends will be paid to shareholders by IndiGo this year.

In addition to the aforementioned strategic measures, management also appears to be exploring additional financing against unencumbered assets, furthering IndiGo’s liquidity profile . 

Point to Note: Not Every Airline is IndiGo

It is important to note here that IndiGo’s plan may not be a word-for-word blueprint for other airlines. 

Not every airline entered April as securely as IndiGo. Its relatively high cash balance helped it weather the lockdown better than others. (It ended the quarter with a healthy total cash balance of ₹20,400cr ($2.7bn) of which ₹8,900cr ($1.2bn) was free cash.)

Moreover, even though airplanes are populating India’s skies again, even thougn domestic passenger flights have resumed, things are not exactly back to normal. On average, airlines are still operating at below-33% capacity (IndiGo is at 20%). Consumer demand is dim. International flights are still prohibited. And there are numerous additional costs in terms of the COVID-related safety procedures. These new rules and costs can sink smaller and more ill-equipped airlines.

Then there’s the lack of Government relief, which has put a damper on the industry. The industry was promised a “a big package” in the Atma Nirbhar economic stimulus package. The announcements for the industry, however, were merely a rehash of already-existing measures. 

What Has the Global Aviation Response Been?

Obviously, India is not the only country that had to ground its flights. Most countries imposed restrictions of their own, either travel advisories or outright bans, even before the coronavirus was declared a pandemic.

Here’s a chart that shows the extent to which air travel ground to a halt around the world using data regarding scheduled flights YoY (Data source: OAG):

IndiGo Implements Cost-Cutting and Liquidity-Boosting Measures Amidst COVID-19 Crisis
Frequency of flights around the world has dropped precipitously in recent months.

But unlike in India, many other governments did provide significant financial relief for airline companies. In the US, a $25bn bailout was announced to prop up the crippled aviation sector (this included grants and loans for airlines to pay flight attendants, pilots and other employees). Beneficiary airlines include American Airlines, Delta, United and Southwest Airlines.

Other airlines that secured state aid include British Airways ($376m, UK), Air France-KLM ($11bn, France and the Netherlands) and Lufthansa Group ($10bn, Germany).

FIN.

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