Interglobe Aviation Ltd
NSE:INDIGO
Earnings Call Analysis
Q2-2024 Analysis
Interglobe Aviation Ltd
After five years of facing challenges, the company reports a comeback with a net profit of INR 1.9 billion for the quarter ended September '23, marking four consecutive quarters of profitability. This is a significant turnaround compared to a net loss of INR 15.8 billion for the quarter ended September 22. This performance is notable given that the second quarter is typically weak.
The company boasts an impressive operational profit of INR 8.1 billion, driven by a strong load factor of 83% and an increase of passenger numbers to 26.3 million, signifying customer trust and support. This is supported by the efficient expansion, with 18 new aircraft added, bringing the total fleet to 334 aircraft.
The company's EBITDAR of INR 24.5 billion with a margin of around 16% is primarily due to revenue growth, despite a slight decrease in unit revenues and reduction in fuel costs. Additionally, the company is managing costs effectively, with a reduction in fuel CASK by 27% and CASK ex-fuel, ex-ForEx by 4 points, excluding certain reversals. Financial year 2024 capacity growth guidance remains north of mid-teens, with an estimated 25% capacity addition in the third quarter.
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Good evening, ladies and gentlemen, and welcome to IndiGo's conference call to discuss the second quarter and fiscal year 2024 financial results. My name is [ Nirav ], and I will be your coordinator.
At this time, the participants are in a listen-only mode. [Operator Instructions]. As a reminder, today's conference call is being recorded. [Operator Instructions]. I would like to turn the call over to your moderator, Ms. Richa Chhabra from Investor Relations team of IndiGo. Thank you, and over to you, ma'am.
Good evening, everyone, and thank you for joining us for the Second Quarter Fiscal Year 2024 Earnings Call. We have with us our Chief Executive Officer, Petrus Elbers; and our Chief Financial Officer, Gaurav Negi, to discuss the financial performance and are available for the Q&A session.
Please note that today's discussion may contain certain statements on our business or financials, which may be construed as forward-looking. Our actual results may be materially different from these forward-looking statements. The information provided on this call is as of today's date, and we undertake no obligation to update the information subsequently. We will upload the transcript of prepared remarks by day end and the transcript of Q&A session will be uploaded subsequently.
With this, let me hand over the call to Peter Elbers.
Thank you, Richa. Good evening, ladies and gentlemen, and thank you for joining this call. Today, we announced our financial results for the second quarter of the financial year '24. We reported a net profit of INR 1.9 billion for the quarter ended September '23. With these results, we have completed a full cycle and remain consistently profitable for the last 4 quarters.
In fact, this is the first time post financial year 2018 and after 5 years, that we have again achieved profitability in the seasonally weak second quarter. Excluding the impact of foreign exchange loss, we reported an operational profit of INR 8.1 billion.
Further, as indicated in the last earnings call, while we faced some downward pressure on the yields in this quarter, the loads came in strong at around 83%. During this September quarter, 26.3 million customers chose to fly with us, an impressive 33% increase as compared to the same period last year.
Overall, our passengers in the first half of this financial year were around 52 million, which is 41% higher than pre-COVID levels. Through concerted efforts and execution of our strategy, we're well on the way to welcome 100 million passengers in this year. And it's our customers' trust, feedback and support, which has been the driving force in our journey and inspires us to reach new heights.
We continue to maintain an industry-leading operational performance with an on-time performance of 86.5% and a very low cancellation rate. It is the countless hours of hard work, the commitment to excellence and the relentless pursuit of our goals that have placed us amongst the global leaders. And I want to express my sincerest gratitude for all 6E employees' hard work, determination and the passion they bring to their roles, living up to the principle the Power of We every day.
And even with the ongoing supply chain disruptions, we have been augmenting our network, both domestically and internationally. We have recently started operations to 4 new domestic destinations, Khajuraho, Jaisalmer, Salem and Diu. And we will be starting soon operations also to Jharsuguda. And additionally, we will be commencing operations to Gondia, and Ayodhya is also on the list, the temple city of India, somewhere in the next quarters.
These connections will significantly booster interstate connectivity and advance regional accessibility. These additions will take the number of our domestic destinations up to 86 and will help in reiterating our philosophy India by IndiGo.
We're also focused on advancing our international strategy, leveraging our unique geographical position as an Indian airline. A sizable proportion of the world population is within 5 to 6 hours of flying range from multiple cities in India. Our growth aspirations, coupled with this advantaged geographical positions, provides us with an opportunity to enhance international connectivity and redefine the passenger experience.
And we're executing our international strategy under these 3 elements. The first element is to further strengthen our own network, and we took a massive step in this direction by adding an impressive 6 new destinations recently, Almaty, Tashkent, Nairobi, Jakarta, Tbilisi, and Baku, across Central Asia, Southeast Asia and Africa. We also resumed our operations to Hong Kong recently.
And we will be further densifying our international network and soon add 2 more destinations, Bali and Medina in the coming quarters. With this expansion to our network, we'll be flying directly to 34 international destination.
Second element of our international strategy is developing more routes, more routes and frequencies, catering to the rising demand for international traffic. In the past one year, we've added almost 24 international routes to our network, which is around 32% increase as compared to October last year. With this expansion, our share of available seat kilometers has increased to 26%, and we aspire to reach 30% of international ASKs in the coming years.
The third element is enriching our reach through codeshare agreements and partnerships. September, we have signed a codeshare agreement with British Airways to further boost connectivity between India and the U.K. Further subject to necessary approvals, we will be also expanding our codeshare agreement with Qantas from the current unilateral one way to a bilateral two-way codeshare. This expansion will enable our IndiGo customers to book itineraries to several destinations in Australia through Singapore.
Starting September, we've also revamped our in-flight menu, incorporating feedback from our customers, cabin crew and service partners. Launched with intent to improve service efficiency and reduced wastage, our new offerings will allow customers to prebook from a specially created menu options comprising regional favorites inspired by the streets and kitchens of India.
We are committed to the course of diversity, equity and inclusion. And I'm very proud to say that we recently won the prestigious DEI Power Award for inclusion of persons with disability at the Global Inclusion Summit 2023. This recognition was conferred for IndiGo's hiring, promoting and advocating innovation and creating a sense of belonging for persons with disabilities.
Further, as recent as today, we're honored to receive the Environmental Sustainability Airline Award for the Asia region at the CAPA Global Environmental Sustainability Awards 2023. We are proud to be one of the lowest CO2 per unit emitting airlines in the world.
With our continuous and massive investments in new generation aircraft, we have been able to reduce our CO2 footprint per available seat kilometer by around 20% in FY 2023 as compared to 7 years ago. This award is a testimony to our strive to deliver our customer promise in the most sustainable way possible.
Looking ahead, demand remains robust. However, we have headwinds in the form of aircraft grounding due to engine issues pertaining due to the Pratt & Whitney supply chain challenges. There's a mitigation plan under execution, and we are confident of meeting our financial year 2024 capacity guidance of the north of the mid-teens. And along that, also our long-term capacity guidance to double in size by 2030.
Let me now hand over the call to Gaurav to discuss the financial performance in detail.
Thank you, Petrus. Good evening, everyone. For the quarter ended September 2023, we reported a net profit of INR 1.9 billion compared to a net loss of INR 15.8 billion for the quarter ended September 2022. It is after a gap of 5 years that we have reported a profit in a seasonally weak second quarter. We reported an EBITDAR of INR 24.5 billion with an EBITDAR margin of around 16% compared to an EBITDAR of INR 2.3 billion for the quarter ended September 2022. This increase is primarily attributable to revenue growth despite some softness in yields and due to reduction in fuel costs and foreign exchange loss.
For the quarter ended September 2023, our unit revenues came in at INR 4.25, which is around 7% lower compared to the quarter ended September 2022. The second quarter was largely in line with our initial assessment. The yields dropped by around 12% and load factors came in strong with an improvement of around 4 points compared to the same period last year.
In terms of capacity, we have been able to meet our guidance as we added around 28% capacity as compared to September quarter last year. Overall, our revenues increased by around 21% as compared to the same period last year.
On the cost side, the fuel CASK reduced by around 27% compared to September 2022 quarter, primarily due to reduction in fuel prices. The past few months have seen consecutive price hikes in ATF. Considering such continuous increases, we've introduced a distance-based fuel charge on our domestic and international flights. While we remain committed to offer affordable fares to our customers, a large part of our operating expenses is fuel cost, necessitating such fair adjustments.
Excluding the impact of ForEx, largely due to mark-to-market and fuel, the CASK ex-fuel, ex-ForEx compared to the same period last year has reduced by around 4 points to INR 2.36 primarily due to certain fee reversals and claims. Excluding impact of these reversals and claims, the CASK ex-fuel, ex-ForEx, increased marginally as compared to last year, primarily on account of contractual escalations and increase in dollar-denominated costs in rupee terms, partially offset by impact of higher finance income.
Now moving on to an important update. We have recently received further communications from our OEM, Pratt & Whitney, with respect to powder metal issues. Globally, we understand that a large number of incremental engines are being removed for shop visits between 2023 and 2026, and majority of these incremental engine removals are planned for 2023 and early 2024.
Our current estimate indicates that these accelerated inspections and incremental shop visits will further adversely impact our operating fleet from Q4 onwards, which is post January 1, 2024, and will lead to a higher number of groundings. We are in constant touch with our OEM to navigate through these challenges.
Further, to deliver our planned capacity and cater to the robust demand, we are executing a range of mitigation measures. In this direction, we've started to take actions months ago and till date, we have retained 14 ceo in our fleets. We have extended and reinducted 36 aircraft, executed damp leases of 2 wide-bodies flying on our Istanbul route, and damp leases of 11 additional aircraft, which will start operating this month.
Additionally, we are executing leases for 12 additional ceos from secondary market with deliveries expected from January 2024 onwards. Apart from this, we will keep on exploring additional capacity from the secondary market. With these mitigation initiatives, we reiterate our financial year 2024 capacity growth guidance of north of mid-teens and we also remain confident in meeting our long-term capacity guidance. On the balance sheet side, our liquidity position has further improved as we ended the September quarter with a free cash of INR 180.8 billion. This translates to a net increase of INR 23.9 billion as compared to the June quarter. Further, we ended the September quarter with a capitalized operating lease liability of INR 455.2 billion and a total debt, including capitalized operating lease liability, of INR 493.9 billion.
We've also taken deliveries of 18 aircraft during the quarter and closed the quarter at a total fleet of 334 aircraft. Given our large book of orders, around 980 aircraft, one of our current endeavor is diversifying our source of financing. For this purpose, subject to regulatory approvals, we are in the process of setting up aircraft leasing units in Gift City in Gujarat, that will enhance our access to capital from lessors around the globe. We're also exploring different forms of leases and have leased 2 aircraft on finance-lease in this quarter. Given the healthy free cash, we are also considering purchase of certain aircraft and related assets in the coming quarter.
Moving on to the third quarter. While we still await the service bulletin from Pratt & Whitney, which will give us further clarity on our capacity, we are currently estimating around 25% capacity addition in the third quarter on a year-over-year basis. Further, as compared to the third quarter of the last financial year, we are expecting similar trends in yields and load factors.
Currently, we do have some challenges in the form of supply chain issues. However, we are navigating these headwinds with our mitigation plan and remain committed to generate shareholder value. With this, let me hand it back to Richa.
Thank you, Petrus and Gaurav. [Operator Instructions]. And with that, we are ready for the Q&A.
[Operator Instructions] The first question is from the line of Amyn Pirani from JPMorgan.
My question is basically regarding the expenditure line items. So while yields and revenue have been like you guided, we had seen at least 2 line items in the form of airport fees and supplementary rentals which have actually seen a sequential decline quarter-on-quarter. So can you help us understand what is the reason for these savings?
If you look at the airport fees, that actually was something that had been going up. But in this current quarter, we've taken a provision reversal, which is impacting the current quarter.
Just to give you some context around that, there was a notification related to increased airport fee through the RCS scheme that was there, which has been reversed out in the second quarter. As a result, there is certain provision reversal that we've taken in Q2 because of which you are seeing a reduction in the airport rental. As far as the SR rentals are concerned, again, there's a certain amount of claims that we have received from our OEM partners, which is leading to a one-off that is in the form of a reduction in Q2. So these are 2 factors which are impacting a reduction at least for this quarter. Other than that, the airport fee you would have seen a sequential increase quarter-over-quarter for the last few quarters.
Okay. So just as a follow-up then, would it be fair to assume that given that there are some benefits of provision reversal and claim, in the second half, these numbers could again move up in line with how 1Q was trending? Is that a fair assumption?
That would be a fair assumption, not exactly in line with Q1. It is -- the revised proposal that has been now given by the ministry related to airport RCS fee that is there, that has now been revised from a INR 5,000 that used to be there to INR 6,000. So there'll be a slight uptick that you will see in airport charges. Supplementary rentals you can consider them in line with Q1.
Next question is from the line of Arvind Sharma from Citi.
Sticking to these one-offs, if you could just give some idea of the quantum of one-offs because it's a substantial reduction and helps the profits. So if you could give what would be the one-off exceptions in both these line items? That would be my first question.
On the airport side, it will be close to INR 150 crores that we have seen as a reversal in Q2. As far as supplementary rentals, like I said, you can probably take it in line with what we have in Q1.
All right. So roughly around INR 300 crores will be the one-off?
You can extrapolate from the Q1. But as far as airport rentals are concerned, it's close to INR 150 crores.
Got it, got it. And just a follow-up on your opening remarks on the Pratt & Whitney impact. I know it's still a work-in-progress, but could you give us an idea about how many planes would be grounded and for what duration are these groundings expected? So how long does the inspection take in terms of days or months?
There is -- so a lot of the information is coming in the public domain as we speak. There is lack of clarity in terms of -- because we are still awaiting, like I said, the service bulletin, which will then enable us to kind of narrow down. As soon as the service bulletin comes, we'll be in a position to then probably communicate a more formal kind of a number around that.
So until then, we will not have exact kind of a guidance related to how much it's going to be, the number of aircraft that are going to get impacted. Again, based on information that has been released by Pratt & Whitney in the public domain, the duration could range between 250 to 300 bps. That's the extent of time that they're expecting it is going to take them for the inspection to be carried out for all the engines that are going to be recalled.
Next question is from the line of Krupashankar from Avendus Spark.
First question from my side is on the Pratt & Whitney issue again. I just wanted to understand as to given the aggressive stance taken by the [indiscernible], is there any sense around what could be the peak grounding one can see during the mid of next year, an approximate number? And what would be the current aircraft -- number of aircraft grounded because of this issue?
So again, like I said, it's very difficult to guesstimate or estimate right now as we await the service bulletin, which would give us a better picture. So until that happens, I'll just request that everyone needs to be patient because we'll wait for the service bulletin, then we'll probably work out what the impact is and then communicate accordingly.
As things stand today, the amount of grounding is in the 40s. So right now, we've got close to 40s. Number keeps moving in that particular 40s kind of a range. So that's the extent of grounding with the older issue. The powder metal issue, which is the new development that has happened related to which we are still awaiting the service bulletin, that's going to be an incremental number to the 40s that we have today.
Maybe let me add here. I'd like to underline that looking at the groundings and the potential future grounding is one angle to look at it. The other angle to look at it is looking at the mitigating measures, which we have been taking and as Gaurav just alluded in his explanation on the numbers, we have taken actually a whole range of measures, which is making us comfortable in living up to our capacity guidance.
And you may recall at the beginning of this year when the number of groundings were still significantly less as compared to the numbers we have today, we gave a capacity guidance in the north of the mid-teens. If you see where we are today, in fact, we are comfortably reaching those numbers till date and even for the third quarter, we're comfortable in reaching those numbers.
So we have taken a whole range of mitigating measures. And as Gaurav mentioned earlier, actually, we started already very early with that with the damp lease of the 2 wide-body aircraft, the extension of leases, the reintroduction of some of the ceos and the new damp leases, which we have now recently inducted.
So I think there's really 2 angles to this. One, of course, is the situation and the supply chain challenges, the one we have today and even the one going forward. But for us, it's very important that we make sure that in a market in India, which today is one of the most vibrant markets in the world when it comes to passenger growth, we have been able to live up actually to our capacity guidance and be able to serve that.
And if you look to our passenger number actually, just in this quarter alone, this second quarter alone, where we do have a passenger number of 26.3 million, which is significantly above last year. That basically speaks to our ambition to provide that capacity.
And we continue to do so looking forward. And the fact that we have announced even in the last couple of days, another 4 new domestic destinations is underpinning that ambition and also the fact that we are confident on our mitigating measures to make sure that we can live up to this year's capacity guidance.
One follow-up on this. So given that there's a positive commentary from Airbus with respect to ramp-up of A320 production. Is there a will to expedite aircraft procurement from Airbus in the coming next 2 years? Is there any possibility on that front?
No, I think I've mentioned before at IndiGo, of course, the number of groundings is something which is -- has a lot of focus on us. But compared to some others, we're actually in a position whereby we do have a very significant order book.
And of course, the overall number of the order book of still another 970 planes to be delivered in probably the decade to come, a little closer to home, if we see that the deliveries every quarter is a significant number. And also for next year, we have a very sizable number of almost every week we got one new plane coming in and that is for the entire year going forward.
So if you look at that, for us, it's important that Airbus reconfirms basically their ability to deliver. If they can speed up a couple of airplanes, we would be, of course, very pleased with that. But the number of planes coming in, one per week, is already a very significant number. I don't think there's any airline in the world, which for such an extended time frame, will have so many planes coming in on a weekly basis.
[Operator Instructions] Next question is from the line of Pulkit Patni from Goldman Sachs.
Sir, there's 2 questions, one on lease cost. Given the fact that we are going and taking more damp lease, given the fact that we are in an interest rate environment that's pretty high, can you give a sense of how should we look at lease cost, say, over the medium term for us? That's question number one.
Pulkit, the lease cost, especially for the secondary use case that we are looking at, there has been a slight increase in the rental cost given the surge in the demand and the shortage of the supplies. So there is an increase that is being experienced. As we speak, we are looking at, like I mentioned, 12 additional ceo aircraft, that's potentially going to be a little more expensive. But at the same time, like we said, there's a capacity constrained environment. So as a result, we feel that these aircraft are going to be coming in, where we are able to meet the demand, which is going to support both the capacity side and for us to meet the demand but at the same time be able to offset this increased cost also. So overall, it should be a net neutral in terms of the increased costs being offset by the demand that we see and the shortage of capacity, which is going to reflect in the [Technical Difficulty]. That's the way we are...
My second question is just to get a sense of the load factors. I mean, as we track the data in the month of October, what I'm a little surprised with is that while for some of your competitors, who obviously have smaller capacities, load factors tend to be much higher than what it is for us today. And I'm unable to figure a reason out for this. Anything that you can help with as to why our load factors are generally 300 to 400 basis points lower than our competition right now?
I think we, at this point in time, it's probably a bit early. We just -- next to that -- October is the first month of the next quarter to be done. So of course, we monitor our load factors. We keep a keen eye. We have developed a lot of new routes and new flying, both domestic as well as international.
I was mentioning the new destinations earlier, but we've -- next to the new destinations, we've added a lot of new routes. It takes usually 1 to 2 months before they're really up-big. I think there's new routes like Delhi-Jaisalmer introduced on the 12th of October. That takes a few weeks before these markets sort of get traction.
So we follow it on a close basis. I wouldn't be able to draw any more firm conclusions at this point in time, other than a lot of new routes, which we have been added. And clearly, there's a couple of seasonal days and traditionally, the day before Dussehra is a bit slower, and we have a couple of other days like that.
Next question is from line of Venkatesh from Axis Capital.
My first question is, so far in the month of October, how much are your yields up on a quarter-on-quarter basis vis-a-vis the previous quarter. And on a related note, what you and DGCA have agreed in terms of winter schedule suggests a 30% capacity growth in the second half whereas your guidance suggests only a 12% Y-o-Y growth. So is your guidance a little too conservative because your winter schedule suggests a 30% growth in the second half? That is the first question.
Could you repeat it? I'm just not exactly clear on your question, sorry about that.
Yes. So the first part of the question was how much are the yields up in the third quarter vis-a-vis the second quarter so far. And the second part of the question is, I guess, all airlines share a winter schedule, which is for the next 6 months, you mutually agree on the slots with DGCA. And according to that data, on a Y-o-Y basis in the next 6 months, you will have 30% more flights vis-a-vis -- you have 30% more slots and 30% more flights Y-o-Y, whereas your capacity growth guidance of mid-teens growth only suggests a 12% growth. So is your second half guidance a little too conservative?
Okay. Let me address your second question and then Gaurav will do the first one. On your second question, when you look to a season, I think we should keep in mind here that the seasons -- that within the season, there's a lot of fluctuation and a lot of variation.
So even if you take the entire IATA winter season running from the end of October until the end of March, there's a lot of, I would say, sub-weeks and sub-periods in between. So if you were to compare a 30% over 30% and the total season over total season, you will probably come to a somewhat different number. So that's one.
Two, there's still a lot of uncertainties in the schedule and some of the, for example, new routes and new openings are depending on some of the processes and steps to be taken around it. So the schedule also includes some of the uncertainties.
And certainly, of course, we take into account some consideration in terms of the capacity, like we have done in the previous quarter. So a snapshot of a season over season or week over week is not per se a full indicator for what is there. And of course, there is some sort of cushion for the uncertainties around the fleet numbers.
I think what's -- again, what's important at the beginning of the year, we gave the capacity guidance of the north mid-teens. Q1, Q2, we are significantly higher, and that was also according to the plan. Q3 is around the corner, and then Q4 is still a bit further away with lots of uncertainties as we indicated earlier.
Related to the first question that you had for October. If you look at October on a year-over-year basis, we are trending actually lower than what we had versus last year. Again, that's largely because of the religious holidays as well as the fact that Diwali has shifted into November. So year-over-year, the trending has been lower than on the yield side. So we're seeing at least on a high single-digit basis, the yields have been lower. We expect that it's going to catch up in November and December, where the yields will trend more in line with how they performed last year. So that's at least what we are observing right now.
On a follow-up question, you mentioned about how short-term damp leases or wet leases, whichever you are taking, are more costlier than your normal leases. On a per plane basis, on an average, how much is it costlier? Your short-term leases, how much are they costlier?
We'll not be able to disclose that to you, please, sorry.
And where does this show up? It will show up in the depreciation and amortization and interest costs, right? When it increases, where will it show up? The depreciation and amortization and interest costs related to lease liability that will go up. Will the supplementary rentals also go up?
So it will start showing up in your aircraft engine rentals. So because it's going to be a damp lease, so it will start showing up in your aircraft engine rentals, it will not show up in the depreciation line items. We are usually using all these damp leases on an ACMI basis. So the entire maintenance as well as insurance is with the providers that we are going to sign up.
Next question is from the line of Achal Kumar from HSBC.
Two for me, please. First, on the demand supply yield. So now you're saying that you will try to increase your capacity by mid-teens next year. Unfortunately, if you see the demand trend, we still have 400,000 passengers. So -- and then, of course, Air India said that they're adding 20 aircraft, in fact, more than 20, 20 narrowbodies, SpiceJet has recently added 5. So what I'm trying to understand is that what gives you confidence -- I mean, I'm a bit concerned because you still have 400,000 passengers. And while we're at the peak quarter, so what happens if the demand doesn't pick up? Would you think you would be adding more capacity then on the international side? Or do you think it will add pressure on the fares? So how do you see the demand versus supply versus fare? And what gives you confidence that you'll be able to fill up additional capacity, which you're adding in -- adding a lot of damp leases? And my second question is about the compensation from Pratt. So now, of course, Europeans are saying that they've been in discussions with Pratt and they're expecting compensation to flow simultaneously as there have been some grounding. So what are the trends? I mean, do you expect compensation to come as the groundings are going on? Or do you think the compensation is sometimes next year only for these roundings?
When it comes to the capacity and demand picture for next year, I think we should have a bit of a holistic view to what the Indian market is likely to further grow. And as we shared earlier, I think there are some pretty good reports, be it from IATA, be it from CAPA, there are some industry reports, which are indicating that GDP times 2 plus a little bit is roughly an indication for how traffic will grow.
And India has sort of consistently either reached these numbers or extended these numbers. So that gives a form of indication for how demand will continue to develop next year. When it comes to capacity, I think there's still a lot of uncertainty, including for us, that's precisely why we have not given yet any precise capacity guidance for next year. We've given the capacity guidance for this year, and we still left it open for next year. And also today, we will not be issuing capacity guidance for next year.
Thinking in general, IndiGo is in a good position with so many leases and incoming aircraft that we can always tune the capacity if the capacity demand or the supply-demand circumstances would force you. For the time being, we have the focus on mitigating measures in order to meet the demand, that's the measures we spoke about earlier.
If for whatever reason, the demand would be less, we can always tune that going forward. And again, I think we have demonstrated that in the past. So we feel confident with what we have planned for the next 6 months. We have taken the mitigating measures for that. We have not finalized our capacity guidance for next year and we will do that going forward.
And the last point you rightfully so addressed is our increasing international footprint. And today, we're at 26% of all our available seat kilometers is international, we have the ambition to go up to 30%. We know that the share of Indian carriers on the international travel is still well below 50%. So there's still room to grow for the collective Indian carriers.
So even if domestic demand for whatever reason would be a bit softer than anticipated, we still have opportunities to further build on our international network and we can see actually that some of our recent additions are also helping to get more connecting traffic. So the more we develop our network, the more we see that India is not only developing as a point-to-point market, but is developing also in line with the vision of the Indian government, is developing also as a hub in aviation, and that in itself is also a good way to deal with fluctuations in demand, if any.
And my second question, please.
Next question is from the line of Joseph George from IndiaInfoline.
I have 2 questions. One is if you can elaborate a bit on the subsidiary that you have set up with the capital of about INR 30 crores and some corporate guarantee of close to INR 1 billion. Is it a cost sense or is it a profit...
But your audio is not clear at all.
Is it better now?
Yes.
So 2 questions. One is if you can spend a couple of minutes on -- to elaborate on the subsidiary that you are setting up with a capital of INR 30 crores and you also mentioned about corporate guarantees of close to INR 1 billion, what exactly is the business model? Is it a cost center? Is it a profit center? If you can spend a couple of minutes on that, point number one.
Point number 2 is, you talked about a lot of mitigating factors to offset the engine issues starting January. Are these measures enough to completely offset the impending challenges? Or do you think it will be difficult to completely offset the impending challenges? So 2 questions there.
Related to the first question, yes, we are in the process of creating an entity in the Gift City because it provides us with options to access capital across a wider geography than what we currently have. So that's one of the initiatives that we embarked on. It also gives us some tax benefits also because any entities that are set up over there, do get some tax benefits in terms of tax holidays as well as waivers on capital gains. So with that intent, it's going to be a profit center. It's going to be an entity largely for aircraft financing purposes. We are in the midst of getting the necessary approvals. Once those approvals are in place, then we'll be doing aircraft financing through that entity. So that's on the entity bit.
When it comes to your second question on the capacity and the mitigating measures, whether that's enough to offset, I would say, so far, yes, it has been. Again, looking at the capacity we provided in Q1, the capacity we provided in Q2 and the capacity, which we will provide in Q3, we can say that all the mitigating measures in terms of capacity have been adequate to offset for the supply chain challenges.
Going forward, the situation with planes on the ground is likely to increase, given the powder metal issue, and that's precisely why we take up a whole new range of new measures and new mitigating measures. I would not be in a position today to precisely say the impact will be offset by the mitigating measures. But I take confidence for what we have done over the past year really in order to get mitigating measures, to have a set of measures in place helping us to deal with that situation.
So, so far, yes, enough to offset. Going forward, we don't know what's the precise number. We know it's very likely to go up. And therefore, we take new measures, and we are confident again that we will come up with a capacity guidance, which we are able to deliver.
Just a follow-up there. For the subsidiary, will it only be for captive use by IndiGo or will you be open to providing these services for other airlines as well?
So this is exclusively for captive purposes only.
Next question is from Prateek Kumar from Jefferies India.
My first question is on fuel charge. So what is the understanding on this fuel charge which we introduced this year versus like we didn't have this fuel charge last year when also ATF prices were higher as it is still the mid of the year. And also because the competition has not like followed suite with rolling the fuel charge like yourself. So has this had any impact on base fare adjustment for yourself?
When you compare this with the same period last year, actually, we were in a regime where there was a pricing cap both on the upper end and the lower end. So that pricing caps were defining at least -- or factoring in rather the fuel elements to it.
As we've seen over the last few months, there has been a significant increase in the ATF and as the outlook also -- the way one looks at the geopolitical situation that is developing, the ATF has been hovering on the higher end of at least the spectrum that we had earmarked for ourselves.
So as a result, that was the reason why we had to introduce the fuel charge because a substantial portion of our cost, obviously, is ATF and that was to mitigate those increases that we have seen. Starting from largely June onwards, the ATF has gone up by close to 30%. So that was the rationale to introduce that.
Post the introduction of the fuel charges, there have been some adjustments that we've done to the base fare, there, n line with ensuring that at least the demand holds because we want to optimize our revenue. So while we've increased the fare side, there were some elements of base fare adjustments that we've kept.
But we'll continue to keep the fuel charge because we do see that the ATF is still on the higher end of our spectrum that we had kind of laid out for ourselves. And we'll keep monitoring this space. As and when things kind of change, we'll take a call on that. But as of now, yes, we continue with the fuel charge and it was largely introduced to offset some of the increases in the ATF that we saw in the last 3 or 4 months.
So this fuel charge suggested like some 10% increase in yields as such, but not very clear at what was the base price of ATF which was considered like while deciding. So let's say, ATF prices dropped below INR 80,000 per kiloliter, then we like sort of remove -- get rid of the fuel charge? Or how does that work?
We'll take that call. We haven't kind of disclosed that in the sense that fuel is just one element, like you've seen in the expense side, there are significant increases that are happening across the line items. We've talked about airport charges being increased.
Fuel is just one element of it. So it's not going to be exclusively just the fuel. Reaching a certain level or going down a certain level, that will influence that decision. It's a holistic decision that we take. But for the time being, it's going to be there.
Yes, so precisely, so what's not very clear, so we kind of like any way adjusted the base fares upwards and addressed all the increases in the cost of operations because other companies have anyway not followed suit. So the decision on fuel charge, which also attracts government attention of various sorts and as well as consumers' attention. So the decision was like sort of not very clear at the first point. So yes, that's what the clarity what we're looking for. But as you are also saying that other charges are also increasing, so it will also address that. So that's what my question was.
Let me be clear. The driver is driven by an increase -- a gradual increase of fuel prices and fuel prices are fluctuating and there are certain trends and certain expectations even also geopolitically what is happening with the fuel price going forward. Therefore, it was introduced as a way to mitigate the rising fuel prices.
You mentioned competitors did not follow. It's totally up to competitors themselves to decide what to do and what not to do. What is important for us is that we find a good balance and therefore, in the dynamic movement of fares based on demand and elasticity, we make sure that the fuel prices are being reflected in the pricing of our tickets.
Next question is from the line of Ansuman Deb from ICICI Securities.
So I have 2 questions. First is on the secondary leasing efforts that we are doing. Do we retain some kind of a competitive advantage even in secondary markets like we do in case of primary market because of our balance sheet and because of our high rating among the airlines? That is one.
Second is that in terms of the international routes that we have already started and been there for some time, if you could share some of your experience in terms of how the actual experience has been versus what you expected when you started those routes and way ahead in some of these high -- and which of the markets you see in international where you can see a better growth going ahead?
The short answer to the first one is, yes, we do see a significant advantage because again, it's related to the brand that we have and what we kind of had experiences with a large part of the lessor community and various service providers who are willing to extend leases to us, damp leases or dry leases to us. So we definitely do have an advantage.
When it comes to these new destinations, I think Central Asia has been a very successful start with load factors above 80% roughly since the start of the operation. Same would go for Jakarta. And for Nairobi, we're still a little bit more up in the start-up phase. So the -- I would say, in general, the start has been actually very successful. It's just a couple of weeks, so it's probably a bit too early to have any firm conclusions.
But it just shows actually a couple of things that when it comes to international direct connections, India was, to some extent, somewhat underserved and for sure, when it comes to offering international flights by Indian carriers, India was underserved. So we are, in fact, inspired and enthused by these first results. And it's also, therefore, that I mentioned Denpasar and Medina as potential new destinations in the quarters to come.
Next question is from the line of Pramod Kumar from UBS Group.
The first question is on the compensation of the OEM. If you can just let us understand how does the economics of that work and I understand sort of...
Your voice is breaking terribly. Can you come in a better reception area, please?
Is it any better now?
Slightly. If you can just speak something.
Yes. The first question is on the compensation mechanism...
Sorry, about one second we are losing your audio. I'll request you to come back for a question.
Yes, I'll do that.
Next question is from the line of Kushagra from Old Bridge Capital.
Just 2 questions. One, last time, you highlighted -- you spoke about certain things on the balance sheet on the capital allocation side. So anything concrete you have finalized in terms of investments and including the amount of cash you want to keep on balance sheet?
And a related question is, there was a press release from your side in terms of the tax demand to the tune of INR 6,300-odd crores. Can you provide some more color as to how much merit is there in that demand? And will it impact your future cash flows as well because it speaks about taxing your sales and leaseback transaction? Those were my questions.
So related to the first one, in terms of capital allocation, yes, we started to make investments. We've talked about investments that we are doing in our digital transformation space. Beyond that, obviously, we've made some investments into our hangers in Delhi as well as Bangalore that we've come about.
We did talk about now making investments into buying of aircraft, especially starting with the smaller aircraft that we have, the ATR. So there's some work that is happening on that front. So we are looking at purchases in the coming quarters where we'll be utilizing some of our capital towards that.
And then from a long-term standpoint, we will be looking at even associated assets like engines, which can be procured on a cash basis. So that's largely the trajectory that we are looking in terms of our capital deployment.
The second question, I'm not too sure related to what notice you're talking about because if you can probably connect with the IR team separately because we are not aware of which notice you're referencing related to that.
Sure, I'll connect separately on this one.
Next question is from Jinesh Joshi from Prabhudas Lilladher.
I just have one question with respect to our fleet size guidance, which we gave some time back at the Analyst Day, and if I recall properly, the guidance was at about 350-odd for FY '24. But if I look at the delivery schedule of Airbus, I mean, it has been consistently declining over the last 4 to 5 years.
In fact, in September '23, there delivery count was 488. And if I simply annualize that number for this year, I mean, they may not deliver something which can be higher than what they did last year. But despite that, our deliveries are steady and we are already at 334 currently. So what I want to understand is that are we getting a higher share in Airbus deliveries? And how does this arrangement actually work and given the count which we are at currently, are we revising our guidance for 350?
Thank you, sir. No, we are not. We are in fact right on track. And I think it was also related to some earlier question. So we're right on track when it comes to the deliveries. We are not changing our guidance for number of planes at the end of the year. It could shift 1 or 2 between the quarters, but we feel comfortable in terms of the guidance we have given earlier. And these planes are not allocated at the beginning of the year, precisely divided in equal number over all the quarters. So some were even rolling over from last year to this year, then we have a breakdown in this year over the various quarters. And you can say that all these planes are precisely allocated over the 52 weeks of the year or the 4 quarters of the year. But today, 334 is what you mentioned, we are comfortable on our 350 guidance by the end of this financial year.
Sure. Just one follow-up. I think in one of your opening remarks, you mentioned that we are expecting one fleet per week for the next financial year. I mean, is that understanding correct?
That's for the FY '25, yes. That's a correct understanding. And then, of course, what is going to be the precise number, it depends on what's the redeliveries. And I think it's actually also a reflection of one of the earlier questions on the capacity and the demand quotation. Again, we know how many planes there are coming. And then we have some flexibility with redeliveries, which is also scheduled for next year. So what I mentioned, indeed, the number was for next year, yes.
Next question is from the line of Pramod Kumar from UBS Group.
Am I audible?
Yes.
Two questions, sir. First was on the compensation from the OEM. If you can just help us understand the economics of that for the existing 40 aircraft on the fleet. Generally, is it more remunerative or how is the economics versus, say, wider aircraft in the air? At the same time, on the rentals of these grounded aircraft, how does the accounting work because these aircraft are something which are grounded and how do you account for that on the rental side and the economics from the -- in terms of compensation from the OEM?
Pramod, unfortunately, we can't get into the specifics of the compensation. So...
But Gaurav, at least directionally, would you -- one is the impact on market share and all of that because the aircraft is grounded. But from a compensation perspective, how does -- as in what are the basic parameters with the OEM or how do you negotiate with? Just to understand are we taking a big hit already for those 40 aircraft on ground and as the number of aircraft get larger and the leasing market also gets tighter, so I'm just trying to understand economically what will be the impact on P&L.
Again, it's complex. It's not as simple as you kind of express something and you get what you kind of wish for. The whole idea is that negotiations are ongoing with the OEMs, primarily to get spares. So the whole idea is to get the AOG reduced.
Aside from that, obviously, there's a dialogue that is happening related to compensation so that it's cost neutral. The whole idea would be towards -- work towards a cost neutral situation. Some of those will get worked out in a particular financial year. Some get deferred over a broader period of time. So stand-alone, it would be very difficult for us to go into more details around it.
But rest assured, the dialogues that are happening with the OEMs are constructive right now to ensure that the AOGs are reduced at the earliest and at the same time, if there is an incremental cost that is being incurred by the airlines, which is us, is kind of compensated. So those dialogues are ongoing.
It may happen that some amount of the compensation may come in a given quarter, some may come over an extended period of time. So as a result, what we can assure you, those discussions are going in the positive direction as far as our dialogue with OEMs has been thus far.
So I'll leave it at that. I can't get into more specifics related to compensation because I'm sure every airlines have their own contracts, and they have their own set of negotiations that they may be doing.
Fair enough, Gaurav. And you kind of talked about salary increase from October. So if you can just help us understand what is the order of increase what we're looking at here? I was just trying to get the employee cost [ line item ] here.
Just if you don't mind, Pramod, can you repeat the question? You're breaking. I'm not able to understand.
I'm talking about the salary increases, which will be kind of getting implemented for the first half.
Pramod, sorry, but we are losing your audio again.
No issues. I'll take it offline.
Ladies and gentlemen, we'll take that as the last question. I will now hand the conference over to Mr. Petrus Elbers for closing comments.
Thank you so much, ladies and gentlemen. Thank you for being with us. I would like to express my deepest gratitude to all our loyal IndiGo customers and our IndiGo employees for their hard work. And as we navigate through some short-term challenges, our customers' unwavering support and trust in IndiGo is what keeps us motivated to deliver better and reach even greater heights.
And I'm sure you have seen, we're well on track in achieving our parameters. Ladies and gentlemen, thank you very much for your attention. Looking forward talking to you next quarter. And for now, happy Diwali next week, full of light and joy for all of you. Thank you.
Thank you very much. On behalf of IndiGo, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.