Good evening, ladies and gentlemen, and welcome to IndiGo's conference call to discuss the second quarter of fiscal year 2023 financial results. My name is Zinba, and I will be your coordinator. At this time, the participants are in a listen-only mode. A question- and- answer session will follow today's management discussion. As a reminder, today's conference call is being recorded. I would now like to turn the call over to your moderator, Ms. Richa Chhabra from the Investor Relations team of IndiGo. Over to you, ma'am.
Good evening, everyone, and thank you for joining us for the second quarter fiscal year 2023 earnings call. We are pleased to have Pieter Elbers with us, who has taken over as our CEO and will take you through our performance for the quarter ended September 2022. Further, we have our Chief Financial Officer, Gaurav Negi, our Chief Operating Officer, Wolfgang Prock-Schauer, our Chief Strategy and Revenue Officer, Sanjay Kumar, and our Chief Programs Officer and Head of Investor Relations, Kirankumar Koteshwar, with us 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. The transcript of the Q&A session will be uploaded subsequently. With this, let me hand over the call to Pieter Elbers.
Thank you, Richa. Good evening, ladies and gentlemen, and thank you for joining the call. It's my pleasure to be among you to announce the financial results for the second quarter of fiscal year 2023. My name is Pieter Elbers, and two months back, as of September, I had the pleasure of joining IndiGo as the new CEO. For the past 30 years, I've worked at KLM Royal Dutch Airlines, of which the last eight years as a CEO. I'm super enthusiastic and excited actually, to have moved to India and delighted to become part of the next stage of this incredible journey of IndiGo, further fulfilling the vision of what the airline can do and will be for both our customers and India.
For the quarter ending in September 2022, we recorded a loss of INR 3.8 billion, excluding foreign exchange loss, as compared to a loss of INR 14.7 billion for the same quarter last year, and compared to a profit of INR 3.6 billion for the quarter ending in June 2022. Including the foreign exchange loss of INR 12 billion, the net loss for this September quarter aggregated to some INR 15.8 billion. For the quarter ending September 2022, which is the seasonally weakest quarter explaining the results of the second quarter as compared to the first quarter, our capacity deployed was slightly higher than in the quarter ending in June 2022. During this quarter, our international operations have increased by over 20% as compared to previous quarter.
Even at this higher capacity, we were able to maintain yields above INR 5 at a load factor around 79%. Historically, we have experienced unit revenue reductions of around 10%-15% in the second quarter as compared to the seasonally stronger first quarter. In this second quarter, 2023, the sequential reduction was much lower by about 2.6%. This is reflective of the continuous pricing discipline in the market, combined with our revenue management practices. The depreciation of the rupee and the high air fuel prices continues to be the major headwind to our profitability and remains a concern. During this quarter, CASK increased by 1.3% to INR 5.15 in the September 2022 quarter as compared to the June 2022 quarter, primarily due to an increase of fuel cost.
I will let Gaurav Negi to discuss the cost elements in detail in his section. We continue to recover from COVID and have deployed more than pre-COVID capacity. This has allowed us at IndiGo to make the best use of the opportunity presented by the robust demand in the market. International air travel has demonstrated a strong recovery, and we believe that this will last while domestic demand continues to rise in the upcoming festive and winter season. We have strengthened our international network by introducing new flights and frequencies to international routes and added Ras Al Khaimah as our hundredth destination. Further to our ambitions of enhancing connectivity for our passengers, we have signed a new codeshare agreement with Virgin Atlantic. This will allow us to access new markets from London Heathrow Airport to India.
On our cargo operations, volumes have been increasing owing to our sheer network presence, and we remain optimistic. Cargo belly capacity will be further augmented with the introduction of the first A321 freighter. We're also expecting second such aircraft to be operational by December. This dedicated freighter operation adds a new dimension to our existing cargo operations and offers new product segment to our customers. These aircraft are on operating leases and are similar to our existing A320 family. This not only gives an added advantage on our cost, but also enables us uniquely to service markets like China, Vietnam, Middle East, and certain CIS country. One of the key after effects of the pandemic in the aviation industry are the supply chain disruptions in aircraft manufacturing and subsequent shortage of spare engines worldwide.
This has affected our operations due to the grounding of aircraft and has impacted our ability to fully deploy capacity productively. However, we are looking at various options to mitigate the shortfall in our capacity deployment, such as slowing down the redeliveries, exploring reintroduction of aircraft into the fleet, and adding capacity on an ACMI basis. We are now operating more than 1,600 daily flights, and that requires enormous operational discipline and innovation. Now going forward, our emphasis will be on three priorities. First one is to reassure key pillars of our service, on-time performance, affordable fares, and courteous and hassle-free service. Let me add here, number four, an unparalleled network coverage for our customers. The second pillar being to develop and align our internal structures, people and processes in line with the size of our operation, customer base and future ambitions.
Last but certainly not least, create the future, and in the coming years, we will build on our strong foundations with more international aspirations. We at IndiGo remain in a strong position due to our consistent product delivery, low-cost structure and sheer network presence. We are enabling air travel to all large, medium-sized and even smaller cities across communities throughout India. Going forward, we will continue to develop connectivity even more. In line with our future growth ambitions, we are continuously evaluating and improving the measures to safeguard the climate and the environment, maintaining responsibility and transparent relations with our stakeholders, and actively engaging in numerous social initiatives. In line with our commitment to sustainable flying, recently, IndiGo became a signatory in the Clean Skies for Tomorrow India coalition, a campaign spearheaded by the World Economic Forum.
Along with this, we have published our second ESG report, Flying Responsibly. As we progress in this agenda, we are constantly looking for feedback from our investors and our stakeholders. Now, with pleasure, let me hand over the call to Gaurav Negi to discuss in detail the financial performance. Thank you.
Thank you, Pieter, and good evening, everyone. For the September 2022 quarter, we reported a net loss of INR 15.8 billion compared to a net loss of INR 10.6 billion for the quarter ended June 2022. We reported an EBITDA of INR 2.3 billion with an EBITDA margin of 1.8% compared to an EBITDA of INR 7.2 billion with an EBITDA margin of 5.6% for the quarter ended June 2022. The reduction in EBITDA in the current quarter as compared to the June quarter is primarily driven by increase in fuel costs, restoration of salaries and marginal reduction in revenue. For a seasonally weak quarter, we produced strong unit revenues, resulting in a steady revenue performance.
Our RASK sequentially reduced marginally by 2.6% to INR 4.57, driven by a decrease in our yields by 3.1% to INR 5.07 and a marginal reduction in load factors. Our CASK for the September quarter was INR 5.15 as compared to INR 5.08 in the June quarter. Fuel CASK increased by 3.9% as compared to June quarter to INR 2.26 due to increase in average fuel cost. As compared to the June quarter, while there was reduction in foreign exchange losses, it was largely offset by increase in other line items, leading to flattish CASK excluding fuel of INR 2.88 rupees for the September quarter.
We continue to maintain a healthy free cash and have good visibility in terms of our financing initiatives. We ended the September quarter with a free cash of INR 82.4 billion, a net decrease of 0.7% as compared to the June quarter. Our total cash as of 30th September 2022, INR 196.6 billion, a net increase of 3.1%. We ended the quarter with a capitalized operating lease liability of INR 361.3 billion and total debt, including the capitalized operating lease liability of INR 409.5 billion. Our right of use assets at the quarter end were INR 222.9 billion.
If you look at our combined results for the six months ended September 2022, operationally, that is, i.e., excluding the foreign exchange loss, we are close to breakeven as compared to a loss of INR 42.8 billion for the six months ended September 2021. This indicates a strong recovery in travel, and we expect this trend to continue in the third quarter. On the capacity side, sequentially for the third quarter, the capacity will increase marginally. However, on a year-on-year basis, it will increase by around 25%. Also, Q3 being peak festive and holiday seasons, we are witnessing a good momentum in our demand parameters and uptick in the revenue metric. At this point, we are carefully balancing the yields and load to maximize the overall revenue.
Operationally, we are continuously focusing on strengthening our customer base, our fleet, network, processes and employee talent pool to cater to the enormous opportunities that lie ahead. While fuel and Forex continue to pose headwinds, we are reasonably confident that we will return to operational profitability in the third quarter. With this, let me hand it back to Richa.
Thank you, Pieter and Gaurav.
To answer as many questions as possible, I would like to request that each participant limit themselves to one question and one brief follow-up question if needed. With that, we are ready for the Q&A.
Thank you. Ladies and gentlemen, we will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Anyone who has a question may enter star and one. Ladies and gentlemen, we will wait for a moment while a question queue assembles. The first question is from the line of Binay Singh from Morgan Stanley. Please go ahead.
Hi, team. Thanks for the opportunity, and congratulations on good set of numbers, and also good to see the work you are doing on the sustainability side. Just two questions. First is on yield and second on capacity. On yield, how could you break it up a little bit more that how was international doing in terms of revenues in quarter one to quarter two? And within yield, how many routes are IndiGo flying at where there is no competition, and that, to an extent, is giving pricing power? And further, any commentary on the third quarter yield. And the second one on capacity is that, you know, if you analyze the capacity guidance for December quarter that we've given, then this will be an all-time high capacity for IndiGo.
In that context, how to look at capacity growth in FY 2024 over FY 2023. Thanks for these two questions.
This is Pieter Elbers. Let me start by answering on the capacity and then hand over your question on some of the yield developments to one of my colleagues. If we look to the capacity, clearly this is the second consecutive quarter that we are back to a capacity level, which is basically higher than the pre-COVID levels, and we expect to continue that development and indeed have for the next quarter, another rise in capacity. As I've mentioned in my introduction words, we are faced with some of the global supply chain issues, which we are trying to find solutions to mitigate that, but our objective clearly is to continue our path of capacity development and have a third quarter with a higher number.
As you have seen on our press release, we welcomed on board a passenger number this quarter of 19.7 million in this quarter. We expect to further develop that, and that means by the total year we'll continue to develop our passenger numbers quarter- over- quarter in line with our expected capacity growth. I'll ask Sanjay Kumar to give a feedback on your question on the revenue development.
Thank you. Thank you, Pieter. On the revenue side, I think we are seeing a very strong demand in the marketplace, especially coming out of the peak season time, the festival time, and also a strong recovery of the corporate business. All these three factors are really resulting in a very strong revenue performance going forward. We continue to see that we will be able to maintain and further you know yield and RASK going forward. It's difficult for us to kind of give a data point. We can understand that. Thank you.
Thanks, team. I'll come back for follow-up questions.
Thank you. Our next question is from the line of Lokesh Garg from Credit Suisse. Please go ahead.
Hi, sir. Good evening. Basically my question also pertains to capacity. Basically, there are several dimensions of that. One is, as you said, not sort of letting go of A320ceo planes. There is obviously some plans to lease planes as we are sort of reading in press. What is it that you're planning in terms of end fleet by FY 2024 or FY 2025, or in terms of ASK capacity that you plan to offer in FY 2024 in terms of international and domestic mix? You are saying that there is shortage with manufacturers and with engines also. There is something which is grounded as well, apart from things not coming at the same pace from manufacturers as you might have expected.
Could you sort of put together all these dimensions with some outlook for 2024, either in terms of ASK or in terms of end fleet?
I think today we're elucidating on the 2023 numbers and not yet on the 2024 numbers. On the 2023 numbers, we have given a capacity guidance earlier this year in the range of +13%-+17% as compared to the pre-COVID period. We maintain that very same capacity guidance for this year, +13%-+17% as compared to pre-COVID.
Sure. There were several subjective elements I touched. Could you sort of put them together as to how should we see this picture evolving, even if you can't give a specific guidance?
I'm not sure if I understand your question. Could you repeat it, please?
Basically what I was saying is there are several elements of this capacity planning which is related to old planes, wide body leasing, shortage of engines in the system. Could you put at least some of the subjective elements in a little bit more detail for us to understand how you're thinking about these things?
I think you're mentioning the list of elements we're working on, some of the redeliveries. It's a lot of work in progress. That's why we are not making any breakdown of the precise numbers. We are indeed working on a proposal also to have some wet lease. That's work in progress. Some of the continuation, but we're not providing a breakdown of the precise numbers as to come to that 13%-17% capacity guidance for this year.
Okay. Could you share a little bit more on international ambitions also, as you touched in the opening part of your speech, what would that entail? Does that mean more destinations, more frequencies? What percentage of flying currently is international in ASK terms, and how would that evolve, if possible? Thanks.
Today, we do have some 25% of our flying is international. You've seen some recent openings. I had the pleasure of myself of being in the Mumbai-Ras Al Khaimah opening. That's one of them. We had the announcement for the Mumbai to Istanbul expansion. With the new fleet coming in, we do expect the coming years to have a higher number. Some of the markets are still close or relatively close, such as China, but other markets which are open, like the Middle East, Southeast Asia, you see a progressive return of our capacity. Indeed, today it's around 25% and it's a number which will go up in the years to come.
Sure. Thanks.
Thank you. Our next question is from the line of Ashish Shah from Centrum Broking. Please go ahead.
Yeah, thank you for the opportunity. Sir, I have a question which is related to the asset utilization. One, in the peak times earlier, we have seen daily aircraft utilization going up to maybe 13 hours, 12.5-13 hours. Given our current route network and complexity, do we believe in the years to come we could reach to that number or a number of around 10, which is there currently is the right number to go by?
Well, there's many different ways to look at aircraft utilization. Of course, IndiGo is in a very unique position with aircraft coming in and aircraft coming out, so there's always some, I would say, aircraft in transition and do we take them into consideration or not. Let me say it from my point of view, coming from a different airline in a different part of the world, the actual fleet utilization of IndiGo is a very efficient way of fleet utilization. With COVID behind us, we're stepping up our efforts. Today, with the fleet we're having, we're operating at 1,600 flights, and I don't think we're giving any sort of new guidance on fleet utilization today, but we're using the assets to the max of our ability.
Right. The second point is on the cargo business. We are adding cargo freighters and we are looking forward to that business. Any kind of indicative growth that you could guide us on, what should we look forward to the cargo business in the years to come?
Again, it's a little too early. We've just started into the freighter side. We'll not be giving any guidances, but the belly cargo has done well for us. We've seen incremental growth on that particular side of the story. As far as freighters are concerned, it's too early for us to give any guidances.
Sure. Just a last quick one from my side. After the fare regulations were taken out, could you just highlight how was the behavior or the change in the fares which happened during the quarter? Because it happened sometime during this quarter. Any qualitative view on how did fares behave in the market after the caps and floors were taken out?
I think, we have seen that there has not been much impact. I mean, there was a lot of apprehension that once the fare bands are out of the system, there will be dilution in the marketplace. Fortunately, we have not seen that happening. You would have seen our quarter two yields, which are only about 3% down compared to quarter one. It is fair to say that fares are holding up, yields are holding up. Thank you.
Thank you, sir. That's all from my side. Thank you.
Thank you. Our next question is from the line of Pulkit Patni from Goldman Sachs. Please go ahead.
Thanks for taking my questions. First question is on lease liability. The increase in lease liability is pretty significant. I'm guessing that's because of the new fleet that you have got in return of the CEOs. Can you give us a sense going forward, while the NEOs are going to be cost effective, they'll come at a higher lease cost. Any sort of guidance on what we should assume in terms of, you know, lease liability per plane or anything like that, which helps us understand that a little better?
Pulkit, I can't give you specifics, but you're right, the increase is largely on account of the new set of planes coming in and the older one going out. At best, the guidance that I can give you is that we've added 21 new set of planes in the first half of this year. With that, you can draw your extrapolations, but that's the best I can tell you. These are largely on account of 21 new planes that have come. Then along with that, we've got some incremental impact of the foreign exchange, which is embedded in these liabilities. Because the FX has been going higher, and that's also being incorporated into the lease liability number that you see.
Okay. Fair point. My second question is, in your recent negotiations, given how interest rates are moving globally, how should one look at the lease cost for the new fleet that is going to come in? Is it something that we've already negotiated, so it should not go up? Or do we expect lease cost to go up in line with how interest rates are moving globally?
A large part of the fleet we currently have is on a fixed rate, so there's not gonna be any impact because of the change that you're seeing in the interest rate environment. Any new leases that we are entering into, we are assessing them, whether they're gonna be fixed rates or we need to do a float. But a large part of our 98% of our fleet is on a fixed rate basis. There's no change that you'll see in that.
Okay. That's helpful, sir. Thank you.
Thank you. Our next question is from the line of Venkatesh Balasubramaniam from Axis Capital. Please go ahead.
Yeah. I had a very simple question in the sense that if you see over the last six to nine months, it's almost been like a honeymoon period for IndiGo when it comes to competition. You had the likes of SpiceJet who's in real bad trouble. You had Go First, which is also not doing too well because their financials are also not very good. You have exploited that. You've done extremely well, increased your market share. The fact of the matter is all these things are not trickling down to numbers. If you look at your EBITDAR margins, both the first quarter number and second quarter numbers are weak. Both first quarter and second quarter massive losses.
It almost seems like whatever benefits you've had in terms of gaining market share has got completely wiped off by the fact that, one, the rupee has depreciated and kept on depreciating. Secondly, ATF prices in India doesn't seem to be falling at the same pace that crude is falling. Is there any thought process at a strategic level from the management that, you know, to take a relook at your historical policy of not hedging crude oil prices? Is there a necessity to look at, you know, should you be looking at, you know, you should be perhaps thinking about hedging crude oil prices or this linkage between, you know, Brent crude prices falling and it is not getting directly linked? If you could throw some color on that.
Is there any way to hedge the depreciating rupee? Because historically, if you see over the last 10, 15 years, it's almost like the rupee depreciates against the US dollar at least 3%-4% every year. It's like you are in a very unenvious kind of a position longer term. Any thought process on how the USD INR thing risk can be hedged or something on the crude oil prices? Is there a possibility of looking at hedging?
You kind of summarized it well. I think in the last six months, while we are very well-placed in terms of the capacity that we've thrown in, fuel and FX has definitely been a headwind that we've kind of faced. As a result, you see what the results are. If you exclude Forex, you'll see some positive story in the operational kind of a performance. When it comes to hedging, candidly speaking, we do analyze, so it's not something that we have ignored. We do look at it, but there's a cost of hedging also. When you look at a short term, hedging does look very attractive from an outcome standpoint, but it does have a implication in terms of volatility.
Because if things are too volatile, one can actually get hit with hedging costs which are disproportionately larger, especially given the volatility that is there both in terms of fuel and to some extent on the FX side also. If you look at a longer window, so we've analyzed this. If you look at a longer kind of a pattern over the 10-20 years, whether you hedge or don't hedge, depending on the cost of hedge, it kind of neutralizes. Where we are today from a fuel standpoint, we are looking at that aspect, I would say. Similarly on the FX side.
Some of the internal assessments that we've done is not leading to us going into the market and placing hedge as a instrument to secure our position because the cost of hedges themselves are coming to be expensive for us.
Okay. Understood. Just as a follow-up, this. Can you kind of explain what exactly is happening? I mean, we have some idea, but if you could give a ground-level kind of a analysis about why crude, the fall in crude oil prices is not having a commensurate fall in ATF prices in India. If you could give some explanation to that.
That's a very good question. Candidly, it's a large, it'll take me a long time to answer that. What I'll give you on a positive front, the Ministry of Civil Aviation and the Ministry of Petroleum and Natural Gas have sat together on this particular subject, along with the airlines and the oil marketing companies. The way the pricing of ATF was being done is undergoing a change as we speak. It started to happen in first of October. We are seeing trends of that. There is now a lot more transparency that is coming in in terms of how the prices of ATF are getting determined in India vis-à-vis the Brent, because Brent is not the right reference point. The new reference point that is being linked to is MOPS Arab Gulf, which is the mean of Platts Arab Gulf.
Already a change because of advocacy from the airlines has already started to happen. There is probably not one-to-one correlation between the two because there's a refining cost that is imposed by the oil marketing companies. Over a period of time, with more kind of transparency coming in this space, with ATF being linked to MOPAG, you'll probably get a better picture. More to come on this, I would say, but the efforts are on both from the airline side, and when I say airlines, it's all the airline companies put together working with the oil marketing companies.
Is the ATF price in India anywhere linked to the Singapore Jet fuel prices? Because what I notice is even though crude is falling, the jet fuel prices premium over the crude oil prices, which historically used to be, let's say $5 or $6 per barrel or $12 per barrel, has gone to almost $30 per barrel. The Indian ATF prices seems to be following the Singapore Jet fuel prices. Is there a linkage between the Singapore Jet fuel prices and ATF prices in India?
There is a correlation between Singapore Jet and the ATF in India, but I'll not say it's one-to-one correlation, so there are elements to it, but it's a good proxy, I would say. What you'll probably hear is, going forward, the pricing is gonna be more not to the Singapore Jet, it's gonna be more to the MOPAG pricing.
Okay. Thank you. I hope you have a better second half when it comes to fuel prices. All the very best.
Thank you.
Thank you. Our next question is from the line of Deepika Mundra from JP Morgan. Please go ahead.
Hi, good evening, and thanks for taking my questions. I got disconnected, so I just wanna check if you've discussed your recent news flow on wide body strategies.
We touched a little in terms of some of the efforts that we are taking in order to expand on the capacity front, but.
Okay, so if I can just, you know, delve a bit further on that. Is this a long-term plan or is it just like, you know, a stopgap? How do you think the operations as well as, you know, profitability, is going to be on some of these wide bodies, as compared to the narrow bodies? I'm assuming again, this will this be single class or dual class for IndiGo?
Let me try to fill you in. Indeed, some of these elements came earlier this evening. We're seeing a very rapid market recovery. If you see on a global level, markets are recovering, but the market in India is recovering even quicker and even faster recently. First of all, we see a very quick market recovery in India and a very robust demand. Secondly, at IndiGo, we would like to serve our customers and therefore you've seen that our capacity deployment is slightly higher today than it was prior to COVID, in order to accommodate that demand. The previous question was speaking about the honeymoon in India. I wouldn't call it like that.
What we do see, though, is that there's a very robust demand, and we're in a good position to accommodate that demand. However, some recent challenges in the supply chain, which is a global issue, those challenges are forcing us to look at different ways and means in order to make sure that we have the capacity to operate. One of the things we have been doing is extending some of the leases, postponing some of the redeliveries, and another element which is under discussion today, we're still in the final stages of clarifying that, is a possible wet lease operation. Today, we're not providing any further details because we're in the process of finalizing that. We're not providing any further details about clauses, aircraft types, and so on.
It's clearly with the objective to deal with the shortage on the supply chain on the one hand side, and yet making sure that we are having the capacity to deal with that demand. That's the key driver behind this.
Right. If I could just follow up with that, how long do you think these supply-side challenges are likely to persist? With that, if you continue extending leases, could you know, talk about a slightly more, you know, medium-term outlook on maintenance costs on the aircraft?
Well, when you speak about the supply chain challenges, I would actually refer to some of the OEMs. They're probably in a better position to answer that question than we are. We're at the very end of the line, and depending on the supply chain issues by the OEMs. What we take into consideration, and that's precisely why we are extending some of these leases and redeliveries, that it's not solved tomorrow. It will take some time. What time precisely? Again, I think you should be in another investor relations call for that. For us, we keep in mind that it will take for some time.
That's why I earlier repeated our capacity guidance for this year in the range of +13% to +17% compared to pre-COVID. We're not giving any capacity guidance for next year yet. We still would like to sort of finalize where we are all ending up this year. I think it's a bit premature to come out with expectations about maintenance costs going forward. We're dealing with the situation now. We're taking all the steps to remain, as I mentioned in my introduction, and to keep our low-cost basis, and with that, we move forward.
Understood. Thank you so much.
Thank you. Our next question is from the line of Vipul Garg from Kotak Mahindra Bank. Please go ahead.
Hello. Sir, thanks for taking my question. My query is that, though the number of planes are same, in Q2 this year and last year, but there's a substantial change in the finance cost. Is this due to lease rentals getting revised due to increasing rates or some other thing?
Again, it's gonna be largely driven by Forex-related impacts that we are seeing. We have seen the Forex going up significantly, so that's what's the driver for us.
How the repricing of interest rate takes place, at what interval they get repriced?
Sorry, I missed that question. Come again, Vipul Garg.
Sir, my query is that at what frequency are the interest rates reset in the leases for you?
Like I mentioned in the earlier question that was raised, these are all fixed costs for us, so there's no reset on the interest rate side. The change that is happening is only related to FX.
Okay. Okay, thank you.
Thank you. Our next question is from the line of Achal Kumar from HSBC. Please go ahead.
I have two things. First of all, on capacity demand yield, of course, you highlighted the yields are strong and they're holding well. I mean, yes, of course they are holding well, but then you know that, you know, SpiceJet was melting badly. Go was sort of, you know, again, melting a bit. Akasa was in the startup phase and Tata is still struggling to restructure. Going ahead, you know, there is a lot of capacity coming in. You yourself said that because you see the demand and you are taking the planes, you're holding the planes back, but then Akasa is growing aggressively and Tata has already spoken about aggressive strategy. How do you see?
Of course, you know, in terms of demand, come on, I mean on a good day a boy is saying, "Okay, I'm going to see my girlfriend," and then traffic touches 400,000 passengers maximum for the industry. The industry is still trading at about 375,000-380,000 passengers every day. Although it came down a bit in between, in the busy quarters it is touching about 375,000. The demand is actually not growing beyond that, and we are seeing a lot of capacity coming in next year. How do you see the demand versus supply versus yield situation going next year? Then, second question, in particular to Pieter.
Pieter, you are in this role, what will be your strategy? Would your strategy be aligned to IndiGo's existing strategy, or do you have some minor or major tweaks to that in terms of cargo business, in terms of overall growth plan, fleet type, mix wide-body, narrow-body, but more importantly, growth on domestic versus international side? Thank you.
Thank you. Let me start with that last question to me, and then I will give the first question to one of my colleagues. In my introduction words I tried to emphasize what's gonna be the priorities going forward. Let me take a little step back. What IndiGo has done in the past 16 years is impressive by any standard. Basically from nothing to 279 aircraft operating today in a highly competitive market, spanning a network of 100 destinations. Again, here, the first priority would be to build on that strength of IndiGo. The first priority I mentioned is to build on the strength with an impressive network of 74 domestic destinations, 26 international, with an on-time performance, with affordable fares and with hassle-free in-flight service.
That's the first part of the strategy. The second, and I think it's fair to say that during COVID, a lot of changes were made, and we need to get back to an operating rhythm today serving 1,600 flights per day. IndiGo today, in terms of daily departures with 1,600 flights, is the seventh largest airline in the world measured in number of daily departures. I think that's an important element to take into account in how we organize ourselves and how we structure the organization. The third pillar of that strategy is indeed focusing on a more international profile. Today, the total presence, and you've mentioned the share of IndiGo on the domestic side, which is significant, but the share on the international side is much less so.
Some of the new route openings we have done, and I mentioned the example of Mumbai to Ras Al Khaimah, I think are underlining the importance of further building on that international network. It's a bit of a long answer, but I would say the three important elements are, one, build on the strength of IndiGo, which is there historically, and to make sure that we continue to build on that. Two, strengthen the internal teams and organizational structure we're having, matching the size of the company as the seventh largest airline in the world in terms of daily departures. And three, build on our international presence. For that, cargo is an element, but developing our international network is equally important. I think this was your easy question. I did that. I'll give the difficult one on capacity, demand, and yield to Gaurav.
Again, on the capacity and the demand side, while the demand has kind of played around, candidly speaking, you would have heard on October ninth, we had the biggest number. While it wasn't part of the quarter that we're talking, but on October ninth there was a substantial increase in the passenger travel that was close to 4 lakh, that was communicated by the minister themselves. From that standpoint, we are seeing demand coming back. For us, we've seen incremental demand in the sense that we've already reached the pre-COVID levels. This is the second quarter in a row where the demand that we are seeing for IndiGo has been ahead of what it was for the pre-COVID levels. We are not seeing any kind of a softness for ourselves. Yes, the industry is still playing catch-up to the pre-COVID levels.
It's a similar story that we are seeing on the international markets also. As demand comes back for the others and the industry, at least from an IndiGo standpoint, we are not seeing any softness and we continue to see Q3 to be positive for us and hopefully going into Q4 we'll see a similar trend, subject to obviously the way the fuel and the FX is gonna behave, because that will become part of the consideration in terms of where the yields will land. Thanks. I'll be looking back.
Thank you. Our next question is from the line of Krupa Shanker from Spark Capital. Please go ahead.
Hi, good evening, and thank you for the opportunity. I have a couple of questions. First relating to the employee costs. I mean, we do realize that the pilot retention is a key challenge in this environment. Are we expected to see further revision in employee costs over the medium term just for retention? That would that, you know, perhaps offset, if at all, the ATF price correction comes through, would that offset that benefit and yields will remain elevated? Is one thing which I wanted to check.
On that specific one, I think the last restoration that is happening or happened was fifteenth of October, so it's out beyond the quarter. What we're talking is Q2. The final restoration to bring it back to the pre-COVID levels has already happened. This is the steady state that we are today in. You're right, our focus now is gonna be on pushing up capacity. On a unit level, this number will now move based on where the capacity settles. Q3 is again gonna be incremental, and likewise, we're looking forward to Q4 to be incremental also, to achieve what Pieter just mentioned, the 13%-17% capacity increase. On a unit level, it's gonna stabilize at this level.
Factoring in the October fifteenth revision also, we do not foresee any further increase in this.
Thank you. That's encouraging then. Second question was on cargo operations. Wanted to check if you know, you did indicate that you're gonna add two freighter aircrafts. Has the second aircraft arrived in the third quarter, and are you intending to add more freighter aircrafts to your operations?
The second one is likely to arrive in November-December timeframe for us, so we've only received one. We do have two others in the pipeline, which will make it in total four, but the other two are due for some time, I would say beginning of next financial year.
These operations will be predominantly focused on international side of things and not on domestic. Is my understanding correct?
Yes. Largely, you're correct. We are focusing largely on the international side, but we'll not miss out on any opportunity that may be there domestically also. At least for the first few ones, we are looking more international, and then we'll see if there are opportunity sets domestically also available for us.
Thank you. That's very encouraging. Thanks and best wishes.
Thank you. We'll take our next question from Mitul Shah from Reliance Securities. Please go ahead.
Thank you for the opportunity. Sir, I know that you replied on yield and trend on traffic, but sir, I have question related to October, that is, particularly Diwali vacation. How has been the passenger behavior change pre-COVID level versus currently after such a high increase in the airfare? And in terms of like any color on how the behavior in terms of 15 days window booking or beyond 15 days and trend there.
I think we have achieved the pre-COVID level as far as advanced booking patterns are concerned. We are exactly more or less the same kind of advanced booking patterns which we used to have pre-COVID level. I mean, almost 25% of our bookings used to happen 30 days out. That is the same trend we are looking at in the current quarter as well. As far as October numbers are concerned, I mean, you know, what we can only make a comment on is on the yield side. Our yields will be slightly on the higher side compared to, you know, quarter one. We are kind of quite hopeful that, with the current season, the festivities around us and also, you know, beginning of the corporate traffic in a much more demand compared to the pre-COVID level.
I think we are seeing all side of business going up in a big way. Thank you.
Thanks, sir. Second question, again on a long-term strategy, related to this adverse Forex, as most people asked earlier also. Here it seems to be not a phenomenon of few months. It can be a maybe medium-term, near to medium-term trend of rupee further getting depreciated. What we can do, sir, in terms of, not only ATF, but across we have sizable exposure on Forex side, direct, indirect. Follow-up to that, sir, can you give ballpark number on the assets and liability side in terms of dollar-denominated and non-dollar?
On the FX side, again, it's difficult to do crystal ball gazing over here. The rupee has depreciated significantly versus last year, so it's like more than 10%. Like someone also one of the participants had raised a point that typically the erosion is usually a three- point every year. A 10% depreciation has already happened. Now, most of our obligations are long-term in nature, so no one can predict whether we'll see a similar trend to keep happening on the rupee side for a depreciation of that magnitude. If you'll see the historical trends, the average over a 20-year period has been around 2.7%-3%. There are moments that have come where the depreciation has been significant, which we are experiencing currently.
There is a level of stabilization also that one experience.
Factoring those things, currently we do not expect the rupee to depreciate significantly. Again, the jury is yet to be out on that, but we are not expecting rupee to depreciate significantly. We are talking to our various banking relationship partners also to analyze that trend. If a similar trend is coming where there's gonna be significant depreciation, we'll look into hedging as an option. At the moment, there are kind of conflicting views that are coming where the rupee will settle down. On a long-term basis, because our obligations are again long-term, we do not at least see significant erosion as far as FX is concerned. Short-term, we've already seen what's happening over the last 12 months.
Sir, bifurcation on this nearly INR 40,000 on a debt side and INR 20,000 on a cash and cash equivalent side in terms of a domestic as well as USD denominate .
Last part of our liabilities you'll see is capital operating lease liabilities. Those are all foreign denominated liabilities and exposure. Against the $20 million, we've got a restricted cash which is largely foreign denominated. We parked it in foreign currency. Those are obligations related to SLB. That's the breakdown and the mix.
Thanks, sir.
There are some SLB-related obligations that you will see, aircraft maintenance obligations. All the stuff that is related to aircraft is usually a large part is all FX foreign exchange denominated.
Okay. Thank you, sir, and all the best.
Thank you.
Thank you. Our next question is from the line of Aditya Mongia from Kotak Securities. Please go ahead.
Good evening, everyone, and thanks for the opportunity. I wanted to, you know, focus more on consumer behavior and whether there is a possibility of further increasing yields from here on, you know, the airline industry has gone through probably six to seven months of seeing this behavior. We've probably seen yields peak out in 1Q and reduce in 2Q. The question that I have is that, have we broadly seen the most, the biggest, the best yields that one can see and from here on par for the course for us to become inferior? Does that kind of start to bother us a lot more now?
I'm not sure if I precisely understand your question. Is your question focused whether we have reached the peak of the yields? Is that the question?
My sense is that competition is benign and the consumer is the real person who decides where yields will go from here. IndiGo has seen yields drop Q1 QoQ, even though volumes have been broadly flat. The question is, can yields further go up from here? Will the customer be willing to pay more? Should we be thinking of a periodic situation if, like the fuel cost was to go up, like the rates probably won't go up from here?
Okay. Well, I will ask Sanjay to give a bit more flavor to that, but I think in some of the previous questions it already came up that yield at the end of the day is always a mixture of what routes are we flying, what's the mixture of domestic and international, what's the seasonality effect, what are the specific routes where we're expanding. There's a mixture, but I think it's good that Sanjay maybe can give a bit of flavor to the consumer in the market and I think one of the previous question was about the demand around Diwali in the peak there. Let Sanjay give a bit more flavor to the consumer behavior.
I think we have seen that there is a strong recovery from all segments of the marketplace. A couple of segments which were not kind of seeing the traction, I think we have started seeing the traction on the international tourist arrivals into the country, which was missing for the last two years. Coupled with that, you know, a lot of corporates which were kind of not earlier doing their mileage travel as a part of their overall policy had kind of stopped completely. They have started doing their mileage travel back in the business. We are seeing a very strong demand on the corporate side as well, along with the international tourist arrivals. That is one thing.
Second thing is of course, you know, due to the seasonal effect and the effect of the holiday, we are going to see much more demand in the marketplace, which will definitely help the industry to push up the yield as a whole, especially, you know, in the coming months, until about February, month of February. We are quite optimistic about the environment overall. We are seeing a new set of segments, a new set of customers continue to fly with the airline industry as a whole. We are quite optimistic about the demand. Thank you.
Yeah, I think that's basically speaking to the point that all the initiatives we've been taking, opening up new routes, focus on internationalization, having some of the corporates coming back in the market, that all speaks that we have been very active in terms of managing the yield and making sure that the yields are holding up. In my introduction, I said the decline of the yield in Q2 versus Q1 was below 3%. Well, if you would look historically, that decline is much higher. I think that speaks to the effects which have been done and the efforts which have been undertaken in order to be very yield active and making sure that we dampen the seasonality effects with a whole range of actions.
Thank you for the color, and that was the only question from my side. All the very best to you.
Thank you.
Thank you. Our next question is from the line of Binay Singh from Morgan Stanley. Please go ahead.
Hi, team. I have a follow-on question on operating leverage. In the past, we've talked about hour utilization per day as one driver of leverage for the business, and we've talked about that rising from around 10-11 hours per day to around 13. Could you give us an update as to what was your hour utilization rate in the second quarter? Have you sort of gone back to normal levels now?
Go ahead.
Vinay, we would not want to share that right now with you. All we can say is the utilization levels have been higher for us and they continue to improve as we focus on putting more capacity. We don't want to give any specific numbers.
Yeah. The idea was just to understand if there's any operating leverage left in the business or not. That's fine, you know, so thanks.
I can tell you there is more leverage left, and we'll continue to push but we don't wanna give any specifics out.
Maybe just give a bit more flavor of that. The moment you start to reinstate flights and you see what we're doing by opening up new destinations, reinstating flights, there are some intermediate steps to be taken. IndiGo was a smooth-running machine prior to COVID. COVID came, and all the network had to be adjusted and then the flights had to be rescheduled to a certain way. If we now see the speed and the comparison, our capacity in this quarter compared to the capacity of last year is +75%. That says something about the enormous speed of recovering and moving back in capacity. It's as we said earlier, slightly higher than Q2. With that, some challenges in the utilization are coming.
Clearly, it's our objective and our ambition to bring it back to the levels we had before, and it will continue to be a competitive advantage for IndiGo in terms of fleet utilization.
Thank you. Our next question is from the line of Pulkit Patni from Goldman Sachs. Please go ahead.
Thank you for the follow-up, and this question is specifically for Pieter. Pieter, you know, as you said, IndiGo is a very smooth-running machine. As you come in at the top of this airline, what are your top two or three priorities in terms of strategy?
Let me sort of repeat what I mentioned earlier. One is building on the strength which has been the historical strength of IndiGo, affordable fare, hassle-free service, and the on-time performance. Here we really see that combined with an unparalleled network. That's really the key pillar. That was the strength of IndiGo pre-COVID, then we had to deal with the COVID crisis period, and we're building that back. As I repeated earlier, if you do 1,600 flights a day in an environment in which we're operating, both domestic and international, that's impressive by any standard. Priority one, getting back to the strength of IndiGo.
Number two, develop an internal structure and people and so on, which is matching the size of our operation. Priority number three is further build on it and further broaden our horizon, including further scope on the internationalization, of which cargo is a part of the business strategy.
Sure. I mean, I wanted a little more specific, you know, but yeah, I think the international part is something that we hear is gonna be the focus.
That again is one of the three pillars, and I think we're in a position that we can do a couple of things at the same time. We should build on what's the original strength of IndiGo, and that's what we see every day. The fact that the market is recovering and not fully recovered, but IndiGo is doing today already more than we did prior to COVID, having more destinations, welcoming more customers, and making sure that we are able to accommodate all these customers in an on-time performance, I think that's a very important element. Yes, also the further international development comes to this. Maybe to add to the words of Sanjay, the COVID has sort of stopped a lot of international travel, not only from India to other parts of the world, but also incoming.
We see that traffic coming back now. Some of the partnerships we're having, and in my introduction, I mentioned the partnership with Virgin, but we do have more with Qatar and Turkish and Air France, KLM, and indeed now very recently Virgin. We see numbers of foreigners coming in, connecting on our network and making sure that that is part of our strategy going forward.
Thank you. That was the last question for today. Ladies and gentlemen, on behalf of IndiGo, that concludes this conference. We thank you.