Supply chain problems are clouding the skies for Indian airlines. Recall that earlier this year, Go First’s operations were suspended due to faulty engines from Pratt & Whitney. Thanks to the same supplier, InterGlobe Aviation Ltd’s flight would face some disturbance in FY24. InterGlobe runs IndiGo, India’s largest airline by market share.
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Pratt & Whitney engines are facing a ‘powder metal’ issue, and 600-700 engines are being removed worldwide for inspections. Owing to this, IndiGo estimates its grounded aircraft to be in the mid-30s in the March quarter (Q4FY24). This would be over and above the already grounded aircraft, taking the total count to roughly 75, or about 22% of IndiGo’s fleet as on 30 September.
IndiGo is attempting to mitigate the issue by executing and extending leases. Indeed, it is commendable that the airline has stuck to its capacity growth guidance of more than 15% in FY24. Capacity here refers to available seat kilometres. “Perhaps this is an indication that mitigation measures would be sufficient to cover additional groundings,” said Jinesh Joshi, an analyst at Prabhudas Lilladher. Crucially, a higher number of grounded aircraft means an increase in expenses without incremental revenue. Thus, one needs to watch out for any dent on the margins given the potential rise in costs. An increase in leases would result in higher rental expenses. Moreover, the leases executed by IndiGo are for older generation ceo (current engine option) aircraft, which are less fuel efficient.
Investors will watch out for the extent of compensation from Pratt & Whitney. “Original equipment manufacturer compensation may be tied to costs incurred on the grounded aircraft and also partly to the revenue lost during the period (details aren’t clear to us),” said a report by Jefferies India dated 8 November.
Besides supply chain problems, the fuel price trajectory needs closer monitoring, as it forms a large portion of an airline’s operating expenses. In November, aviation turbine fuel price is lower by nearly 6% month-on-month. But the average price in Q3FY24 so far is up by almost 14% versus Q2. For now, the levy of distance-based fuel charge by IndiGo would provide some cushion.
On the yield front, the news is encouraging. Yield here refers to the revenue a carrier earns per passenger per kilometre. IndiGo expects the yield in Q3 to be at the same level as last year when it stood at a multi-quarter high of ₹5.38. Sure, IndiGo’s yield in October was down year-on-year in high single-digit due to the shift in the timing of the festivities this year. But the airline expects to catch up in the remaining part of Q3. Helped by its market leadership position, investors in the IndiGo stock appear to be on cloud nine, what with the shares rising about 50% in the last one year. Further deterioration in the supply side situation or surge in fuel prices could play spoilsport.