How the rupee grounded Indigo’s profits

**Akshara** (0:04)
In today's episode, we'll break down two important stories. First, we'll talk about IndiGo's Q4 marred by turbulence, and then we'll talk about what better access to Indian banking really does.
Welcome back to The Daily Brief by Zeruda, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Friday, 5th June. Coming to the first story. For years, IndiGo Airlines would post rather predictable results. Aside from moments like the COVID rupture, its growth seemed mechanical. Quarter over quarter, the airline would add planes, more passengers would choose it, and more profits would flow through. And with a market share so large that it catered to two in every three Indian flyers, IndiGo's story was the story of Indian aviation as well. But recently, that story appears to have gone awry. In December, the airline's operation suffered a catastrophic failure, leaving hundreds of thousands of passengers stranded in airports across the country. And then in the March quarter, IndiGo reported a massive loss, bleeding just over rupees 2,500 crore in three months. This was a sharp reversal in fortunes. The same quarter one year ago, it had profits of rupees 3,000 crore. Now, there's a simple version of this story, that the company is in trouble. But that isn't what we think is happening. Very little of this loss from what we can tell has to do with flying planes. But it does tell us a lot about the peculiar risks of IndiGo's business model, the way it interacts with fuel prices, the rupee, and everything happening in the world outside. Now, from its top line alone, IndiGo seemed to have a normal quarter. Its revenues barely moved one way or another, rising by a few percentage points to about rupees 23,800 crore. It was roughly the same last year.
But shift your eyes to its bottom line, and its post-tax profits have created, from a healthy profit last year to a rupees 2,500 crore loss.
So how did a business with roughly the same sales figures as before see its profits collapse? So there are two parts to this story, and most of the damage came from something the airline had little control over, a collapse in the rupee.
But there's a quieter story in there, one where India's leading airline has a slightly softer belly than a year ago, tortured by the Iran War and the long shadow of its December nightmare. So IndiGo, like most airlines, lives between two currencies. Most of what it earns isn't rupees, but most of the money it owes is priced in dollars. An overwhelming majority of its planes are leased, and those leases, along with the cost of maintaining that fleet, are all billed in dollars. So it's always a challenge to manage the split. But in a quarter where the rupee saw one of its deepest falls in memory, sliding by approximately 5% in just 3 months, its dollar-based bill suddenly pinched much more than before. Now, this isn't just true for bills that were due this quarter. Under accounting rules, if you have a dollar-linked liability on your balance sheet, and it suddenly looks much larger in rupees because of the exchange rate, that's a loss you need to book immediately, even if the money itself is to be paid off over years. Now, for IndiGo, that translated into a sudden paper loss of Rs. 4800 crore, enough to pull its quarter into the red. But strip currency movements out, and the picture looks much better. Without it, the airline saw a profit of around Rs. 1670 crore. But that too was only after some one-off charges, like a Rs. 250 crore provision the airline had to make to accommodate the new labour loss. Set that aside too, and the company made a profit of Rs. 1920 crore. That figure is much less worrying.
But then again, it's more than Rs. 1000 crore short of the Rs. 2980 crore it made in profits the same quarter last year.
You can see signs of that all through the company's business. The company's core operating margin, which is what it keeps before major fixed costs like aircraft rentals or interest, slipped from about 31% to a little under 29%.
Its seat occupancy dipped slightly, as did the average fare for the seats it did fill. At the same time, its costs per kilometer other than fuel went up by more than 7%.
That is, even once you strip out all the quarter-specific weirdness, the airline did have a soft quarter even if it wasn't drowning in losses. As the airline's management admitted, the scepter of its December catastrophe weighed on the company. And earlier in the quarter, the memory of those days cost the airline some market. It did start clawing that share back by January itself, but the memory of that crisis still lingered.