You talked about early single digit increase in CASK ex fuel, earlier guided as flat. You also mentioned there is counter support in the top line from OEM compensation for AOGs. When you take both into account, does the profitability picture deteriorate or remain unchanged?
Various drivers are hitting CASK. FX - there is no offset to that, so pressure will come from US dollar-denominated costs. The AOG-related offset I was alluding to: if AOG numbers don't move as anticipated, costs for AOG come into the cost side whereas claims come into the revenue side. That is the offset that will be there, but not for all elements - the AOG bit has an offset in revenue, but FX and damp lease increases have no offset. So there is a marginal increase on CASK in the early single digits. Part of it offset in revenue, but large part is still an increased cost.
You are looking to accelerate international, while PRASK guidance remains flat to positive year-on-year. General understanding is that international yields are weaker versus domestic. Does PRASK guidance factor in accelerated international addition?
If you look at yields per ASK, by definition the longer you fly the lower the yield per ASK. But the same goes for cost per ASK - the further you fly, the lower the cost per ASK. So you cannot just conclude that flying international has a lower yield because you also have a lower unit cost. Second, given India's geographical position, we have opportunity to expand East, West, North now with China added. International network allows us to participate in markets with stronger seasonality and variations. The internationalization also helps by addressing natural currency hedges - more international revenues in dollars, euros, or British pounds provides a more natural hedge.
From a cash flow perspective, what is likely to be the growth or relationship of increase in lease payments and interest on lease relative to capacity growth, given the change in aircraft acquisition strategy?
This will take a bit more time, can have a separate discussion. But you will see our CFOA increasing year-over-year. Through that increased cash flow, we've been able to manage to pay all our leases and obligations. Between June to September, we've added close to INR4,000 crores of cash on top. We now need to disclose cash utilization. We already have close to INR38,000 crores of cash accumulated. A large part is a safety net. Beyond that, deploying cash towards MRO investments, infrastructure, digitization, and towards financing aircraft whether in the form of finance lease or outright purchases.
There is a draft paper on cancellation within 48 hours and name change between 48 hours. Any rough sense on what kind of impact it could have if implemented?
No, we need to see what exactly it means. I should also draw some lessons from what happened on a global basis. We have done operationally well but clearly the market and looking at the overall market, these are quite challenging performances here and there. So we should make sure that we find a good balance in that. We will be looking at what does it exactly mean, what are the exact consequences. If we have free cancellations in such time frames, there's going to be some consequences and not per say for us only - it's going to be for everyone. We should look at how to build a sustainable aviation ecosystem. Perhaps a bit premature to precisely react, but more generically, all policies and efforts should strike a right balance between what's good for the customer and how to maintain our vision to build an aviation ecosystem in India which can stand the test of time.
On capacity addition - with high-teens capacity planned for H2 FY26 and competitors also adding substantial capacities, are yields remaining robust? Any challenges with yields? Do you expect any cost escalation that can shape yields in H2?
We're looking at a significant capacity addition in Q3 - high teens. Based on October trends, there is definitely an increase in yields, also given Diwali moved from November last year into October. October has been very strong. For Q3, we are looking at a flattish PRASK if not slightly better. Given last year's strong Q3 performance, we anticipate similar PRASK this quarter and a significant capacity push in the high teens. On cost escalation, FX will have an impact as we have US dollar-denominated expenses. The AOG situation guidance remains that the number will stay range bound. If AOGs don't trend downwards, there is a cost dimension. Additionally, we are bringing in more damp leases at a marginally higher cost. We've mentioned early single digit increases in unit cost structures. Let's see how the yield environment plays out - it's been very strong in October and we anticipate flattish to slightly higher yields.
On pilot inflationary costs given attrition pressures - any comments on that?
The attrition scenario remains stable. The new FDTL norm has kicked in from November. There is going to be some element of cost dimension playing out. We anticipate a slight uptick in cost given the new Phase 2 that has been implemented. While it's a scaled-down version from what was initially proposed by regulators, there will be some incremental cost.
When looking at Q3 capacity guidance, it's one of the sharpest Q-o-Q capacity increases from IndiGo in a long time. Could you share thoughts on the split between domestic and international? And is it fair to assume some of these costs related to this capacity are already built into Q2?
The large part of the capacity increase is going to happen again disproportionate towards international. We are scaling up wide-body operations and long-haul operations. We've already announced Amsterdam, Manchester, Copenhagen and London Heathrow, and there's more to come. We will continue to grow capacity on domestic subject to airport openings that have got deferred. So the disproportionate increase is towards international.
Follow-up on domestic vs international capacity split
Quarter-over-quarter capacity development is not the most important. We look to the strategy launched 3 years ago - from largely domestic operator into an international or global operator. We have doubled our international footprint from a little over 20 destinations 3 years back to 43 today. We've given earlier guidance of 30% of ASKs in international, achieved that, and with wide bodies the percentage will grow to 40%. In Q2, we saw domestic basically flattish - all growth was only on the international side. The opportunity is enormous. IndiGo is very well positioned with an enormous order book. On international, the capacity share of Indian operators was significantly lower than foreign operators - we're rapidly catching up and are now one of the leading airlines on the international side.
Almost 1 year since launching Stretch seats on domestic routes. How has unit revenue panned out on a blended basis on Stretch versus economy segment?
We are very pleased with the start. The routes launched initially like Delhi-Mumbai have really picked up steam and customers are increasingly aware and knowledgeable of the product. The flights launched initially like Delhi-Mumbai has matured, the ones launched more recently are still in the growing phase. The actual load on flights with Stretch and economy class is doing very, very well. Load factors on Stretch on international routes for Bangkok, Singapore and Dubai are actually better even than domestic. We will continue to build on that. The overall unit revenue of a plane with Stretch versus without is a better proposition on the planes with Stretch.
Wide body wet leases going from 4 to 6 - does this mean you have already seen enough evidence of profitability for this type of activity?
When we started wide body expansion, we had ordered the Airbus 350s but they will take a couple of years before delivery. India is in a hurry and so is IndiGo. We signed up for the 6 in 2 steps. It's too early to judge. We started July 1 with Amsterdam and Manchester. The expansion of Manchester and Amsterdam, you can take as a positive sign. Same goes for Copenhagen and London. Both on the passenger side and the cargo side - 90-plus percent of all cargo out of India is flying on non-Indian operators. We actually see good loads on the cargo side, both in and outbound. We're very encouraged. With the start of London, for every airline with global ambitions, flying into Heathrow is a very important milestone.
Your capacity addition guidance is very optimistic. Is it based on data and foresight, or are you seeing traffic demand and bookings being very strong? Because the data we track suggests growth is still subpar.
We built our strategy as part of the India growth story. We look at GDP growth and its correlation to passenger growth. India is still largely underserved in number of planes, seats per capita, and international seats. India has the largest population and diaspora in the world. Those 2 drivers are driving our long-term capacity growth. Quarter-over-quarter we see fluctuations - Q4 last year had Mahakumbh, Q1 had Pahalgam, Operation Sindoor, and the tragic AI171. Q2 was recovery plus Delhi airport restrictions. We are confirming our capacity guidance for the year. We are stepping up growth in the second half because we believe this capacity will be needed. Whether it is exactly the same demand for Q3 and Q4, we are confident that these markets will be there.
Are we fully outsourcing MRO work currently? With the new captive MRO unit in Bangalore, what kind of savings can we expect?
Large part - 90% to 95% of our activities are outsourced to third-party MROs, whether domestic or international. The captive MRO that we are building is going to come up in the next 3 to 4 years. It's going to offset some of the aircraft that we are sending outside to third-party MROs to then be serviced within the captive MRO we are building within India.
The MRO strategic value - can you elaborate on strategic benefits?
It's an enormous strategic opportunity. In other parts of the world, there's a shortage of labour, shortage of parts, driving up lead times, cost, and hurting operational performance. By bringing this work into India, we serve multiple objectives: reduce cost by bringing to India with a lower cost base; build capabilities in a country where we don't have a shortage of skilled people; build an Indian aviation ecosystem allowing better seasonality management. In the long run, this gives not only cost advantage but operational advantage. Given our objective to double by end of decade with 600-plus aircraft in operation, having our own large MRO facilities is not only a great opportunity but a necessity.
For every rupee depreciation, MTM FX impact is approximately INR900 crores, but in the past this number was slightly lower at about INR700-800 crores. Aircraft count is slightly lower now than in Q3FY25, but MTM impact has widened. Can you please clarify?
What you saw in the earlier period - you're trying to translate this in terms of number of aircrafts. The mix of aircraft has also changed. The mix has gone from operating lease liabilities to finance lease liability. With finance lease liabilities, the per aircraft liability is going to be higher than for an operating lease liability. So you will not be able to correlate this on a number of aircraft basis, but you'll have to look at the mix also. The finance lease liability is higher than the operating lease liability - hence the mark-to-market has increased.