![Pieter Elbers explains what is driving up IndiGo profitability and double-digit capacity guidance for FY24](https://img.etimg.com/thumb/msid-110383834,width-210,height-158,imgsize-41034,resizemode-75/pieter-elbers-explains-what-is-driving-up-indigo-profitability-and-double-digit-capacity-guidance-for-fy24.jpg)
What are the main factors that have driven up revenues and profitability in Q4?
Pieter Elbers: We are looking at the results. There are a couple of elements. As always, it is a combination of different factors. Let me start with the growth of the Indian market and the Indian market, as we shared earlier, is still largely underpenetrated when it comes to air travel. Even more so, when it comes to international air travel. So, there is a very buoyant market out there hand in hand with the growth of the Indian economy, that is one part of the story.
Two years ago, we launched a strategy which has a lot of different ingredients. One was to further build our network, to re-emphasise the basics of our product, to make sure that we continue to build our international routes and basically what you have been seeing over the last couple of quarters is that all these elements are coming together nicely. So, on one hand, there is the growth of the market and the buoyant Indian consumers traveling domestic and international. On the other hand, our strategy is starting to take shape and resonating very well for all the different initiatives.
While you are talking about strategy and how it is really working out for you, you are saying that you are in sync with the kind of economic growth that we are seeing in the country as well. But these fourth quarter yields, they seem to be seasonally weak. How have these yields been so far in the first quarter of FY25?
Pieter Elbers: We usually look over a year over year comparison because that would to some extent rule out some of the seasonal effects. Although you can also say that last year in the first quarter, there were some specific events when it comes to capacity and some developments in other airlines. Even a year on year comparison is challenging. But we would predict a similar revenue environment for this first quarter as compared to last year's first quarter.
The environment remains similar, but for the first 45 days of the first quarter, tell us about growth in air traffic. Are forward bookings at least indicating that air traffic is likely to get better or perhaps would remain at current levels? What is the scenario like right now?
Pieter Elbers: I would rather stay rather than break it up in 45 days and to the outlook we gave for the first quarter and there is again a very similar revenue environment where, of course, we are today to some extent not delivering the capacity we wished we could deliver. We are in line with our capacity guidance as we have given earlier, thanks to all the mitigating measures.
But clearly, the situation with the planes on the ground, some of the supply chain issues is something we wished was not there because that would have enabled us to further grow in the market and clearly, we had to take a step in Q4 to mitigate some or to reduce some of the initially planned growth, yet still within our capacity guidance and in this first quarter we start to stabilise that situation and really we see that all the measures we have taken, extension of leases, taking in back some aircraft, some damp leases are really helping us to deliver up to our capacity guidance.
The real reason I am asking you this is because in the current scenario, the elections are playing out and typically in the past, where elections have been taking place, there has been a slowdown for the aviation sector. Are you seeing any slowdown because of elections?
Pieter Elbers: Yes, that is probably the million dollar or one million rupee question. It has two dynamics. Certain market segments are slowing down at this point in time because of the elections. Some other market segments where people travel for precisely those reasons we see going up. So, I would say in general, it is difficult to precisely pinpoint what is the effect of the elections. But if you were to outweigh the two dynamics, I think it would be fair to say that it has some impact.
It would be very difficult, though, to precisely quantify what that impact is and what it will do in terms of passengers and yields. The bigger dimension is really some of the effects when it comes to some of the supply chain affecting the number of planes being available to operate.
Yes, indeed. But you did mention that some cost items would see an inflationary pressure of high single digits to low double digits. So, I am wondering why you have this sudden worry about the rises in maintenance costs, at least as far as inflationary concerns are concerned, how do the maintenance costs pan out? What has changed from what we have seen in the past in the third quarter to what we are seeing now in the fourth quarter?
Pieter Elbers: Well, I do not think it is a sudden concern or a sudden notification. What we have seen all across the board post-COVID is that there is inflationary pressure, especially on some of the supply chain challenges. We also see that some of the airports are increasing their cost levels. So, we see some of that inflationary pressure and it is good in all transparency to point it out as we did in the call earlier this evening. And, of course, we continue our focus as IndiGo has been doing all the time to remain a cost leader in the Indian market.
Tell us about capacity growth as well because there is a guidance of 10% to 12% capacity growth. So, if there is that coming through, where are you deploying this capacity growth? Is it going to be on new routes and are those routes going to be more domestic or more international?
Pieter Elbers: For now, in the next foreseeable future, we have only one international destination, which we have announced to be further developed, which is Jaffna. We have added quite a significant amount of international new destinations last year. A total of seven new destinations were added. But importantly, we continue to build on that and we have recently also announced new flights, additional flights from Delhi to Phuket. We are increasing our flights to Central Asia.
So, our emphasis at this point in time is to keep the international growth. But we are putting additional capacity to existing destinations, either by new routes or by firming up existing routes. And some of these new destinations, like the one in Central Asia, have been a big success, so we continue to build on those.
Mid-70s, is that the grounding number, as you indicated earlier? How quickly do you expect this number to come down now? How long do you expect it to remain at these levels even?
Pieter Elbers: I have been here almost two years now and in all the things we have been doing, it has been a constant and recurring question and rightfully so. We work all the time on two dimensions. One is to get as good as possible insight from the OEM on what is the outlook on that and clearly the changes which were there from the start of the year we had not foreseen. But on the other hand, to really address whatever insecurity and whatever variations there are from the OEM, to address that with mitigating measures.
You have a tailor-made business product. Obviously, it is going to be the option to fly business class. But have you set any timelines through which this is likely to play out? Also, will this first start on domestic routes or is it going to be on international routes, this product?
Pieter Elbers: We see the Indian market evolving constantly and with the development of India as a country, with the growth of India, with the ability to spend from Indian consumers, with the growing business environment, with the fact that India is in 2027 predicted to be the third largest economy in the world, we felt that this was really an adequate timing to start also catering for those customers who are in need of that product and therefore we start with that product on what we have labelled as the busiest and business routes of the nation.
In the first half of August, we will further unveil what the product precisely will look like, what routes it will precisely operate. But it will be very much geared to those needs. I would like to draw a parallel here to our recent order for the 350s. This step is significant enough to address the needs for the customers and prudent enough still to keep the basis of IndiGo's business model, which has enabled millions and millions of Indians as first-time flyers.
So, keeping that business model in mind, tell us about the new routes. How many new routes are you planning to start – be it domestic or international?
Pieter Elbers: Well, this product, I assume that this question is not in general, but focused. Again, this business product is going to be a domestic product as we announced. We will share the precise number of routes in the first part of August.
Yes, indeed. But in FY24, your international capacity grew much more than your domestic capacity. This is also because of a low base and because of the incremental capacity that is coming. Are you purposely deploying more capacity on the international side?
Pieter Elbers: We come from a relatively low basis, but I think that time is behind us. We moved in the range of 22% to 25% of our ASKs last year. Last quarter, I believe, it was as much as 26% to 27% and we have set a near-term objective of having that number grow more in the range of towards 30% and we have not given any guidance after that.
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