The country's biggest airline IndiGo reported net losses of Rs 2,844 crore in the first quarter of FY21. The low-cost carrier also reported 92 per cent drop in revenues which are on expected lines since it didn't operate commercial flights for 55 days in the 91-day period. IndiGo recently became the first carrier to lay off 10 per cent of its staff owing to tough market conditions.
At the earnings call, IndiGo's CEO Ronojoy Dutta said that the fare caps are hurting the airline. How? For instance, when the government allowed the airlines to fly domestically in May, it had set the seven fare bands (depending on flight duration) under which airlines were supposed to take future bookings. In addition, 40 per cent seats were to be sold below the mid-point in each band. Initially, it didn't bother airlines as much since this rule was supposed to last till August 24.
However, these rules were extended till November 24 last week which has made carriers like IndiGo furious. These rules essentially affect airlines in two ways. First, they put a cap on the amount of capacity that airlines can put out. Though there has been some relaxation on that front - from earlier 33 per cent to 45 per cent - the bigger question for airlines like IndiGo is that whether it will be relaxed further or not.
In the recent call, IndiGo has given its investors capacity guidance of 60-70 per cent for October-to-December period. It's likely that IndiGo might be flying at lower capacities if government doesn't allow more easing. That's where the problem for IndiGo really exacerbates. Why?
With about 30 per cent capacity in air, IndiGo's cost-economics have gone for a toss. The airline has daily cash burn of Rs 30 crore on the fixed costs side. The variable costs are in addition to this. With low capacity, the airline is not able to cover its higher costs. If it stays so for a long period - let's say till November 24 - the airline might have to take a plenty of harsh decisions.
The other big issues for IndiGo with government regulations are the price bands, and a series of lockdowns announced by various state governments in the past one week. For instance, flight operations at Kolkata airport will remain suspended for seven days in August. Parts of Lucknow were under lockdown recently after UP registered eight-fold jump in COVID-19 cases in a month. Then, Bihar has imposed 16-day lockdown starting August 1.
"[The first] 20-22 days of July were strong. Then it became news-dependent. The virus has been spiking. Forward bookings react strongly to [the lockdowns in states]. In the last 7-8 days, there has been sporadic lockdowns in different cities," said Dutta.
But Dutta is particularly upset with the fare bands. IndiGo wants them to be removed as quickly as possible because the LCC is not able to manage its revenues well. "So many things are affected by it. Our morning fares should be so different from afternoon fares. Our out of Ranchi fares should be different from incoming fares into Ranchi. In the afternoon, let me put a low fare. In the morning, let me put high fares. We would like to be able to leverage those changes. By opening it up, let people experiment with it. Let's not have someone dictate what the fares should be," he said.
Dutta also thinks that by having a flexibility to play around with fares, the airline can attract a lot of low-end passenger traffic. For IndiGo, in the pre-COVID period, the traffic break-up was evenly divided between corporate and leisure. But now, the corporate travel has literally come to a halt. Travellers are mostly flying for emergency, medical or shifting purposes.
"Corporate travel is going down, so we are going to lose customers at the top end. However, we gain a lot of customers at the bottom end. India has 140 million passengers a year [travelling] by air. It has 1.6 billion passengers [travelling] by train (just the top two classes). I think there will be a lot of substitution into airlines from trains because of safety and the cost of flying is coming down," Dutta said.
But for that to happen, the airlines need flexibility to match the fares of trains which is kind of prohibited under the current scheme of things.