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The secret behind IndiGo's success

September 15, 2015 16:07 IST

Given its network and fleet, IndiGo has garnered the highest share of passenger growth.

 

With fuel costs expected to fall further and IndiGo’s cost structure leaner than rivals, the airline is expected to post an improved operational performance for FY16. 

The airline, India’s largest aviation company by market share, ended FY15 with revenues of Rs 13,925 crore (Rs 139.25 billion) and a net profit of Rs 1,300 crore (Rs 13 billion).

While Jet Airways and SpiceJet, which posted losses in FY15, have turned the corner in the quarter ended June, their combined net profit for FY16 is expected to be less than half of IndiGo’s FY15 net profit.

While IndiGo has grown faster than peers due to higher passenger load factor (PLF), market share gains, and domestic network expansion, falling fuel costs will continue to be the biggest trigger.

PLF tells how much an airline's passenger-carrying capacity is used. Over the past year, aviation turbine fuel costs have fallen 34 per cent. 

Every one per cent fall in fuel costs translates into a half a per cent gain in operating profit.

This means, most airlines would see their operating profit in recent quarters boosted by 17 per cent compared to the year-ago period.

IndiGo has seen its fuel costs fall from 50 per cent of sales in FY14 to 45 per cent at the end of the December 2014 quarter.

The other positive thing for IndiGo would be the continuing trend of higher sector passenger volumes, which in recent quarters have been growing at 20 per cent year-on-year.

Given its network and fleet, it has garnered the highest share of passenger growth. IndiGo’s market share has increased from 14.5 per cent in FY10 to 36 per cent in July 2015.

PLF has been consistently strong, at 85 per cent in the first seven months of 2015. For IndiGo, other non-fuel costs have also been under control.

IndiGo’s domestic revenues grew at an average of 40 per cent during FY10-15, while earnings before interest, taxes, depreciation, amortisation and rental (Ebitdar) has grown at 25 per cent.

In FY15, Jet Airway’s revenues grew 10 per cent year-on-year and its quarterly revenue run-rate was stagnant at Rs 5,000 crore for the past 15 quarters.

IndiGo’s higher sales growth and lower unit cost (25 per cent lower than the sector average) has meant that Ebitdar margins are at 20 per cent. Jet’s June quarter Ebitdar margin was 6.3 per cent. Analysts say margins for the sector will improve due to falling fuel costs.

This is why most analysts say there couldn’t have been a better time for IndiGo for an Initial Public Offering.

Ram Prasad Sahu
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