Good evening, everyone, and thank you for joining us for the second quarter fiscal year 2020 earnings call. We have with us our Chief Executive Officer, Rono Dutta, and our Chief Financial Officer, Aditya Pande, to take you through our performance for the quarter. Wolfgang Prock-Schauer, our Chief Operating Officer, and Willy Boulter, our Chief Commercial Officer, are also with us and are available for the Q&A session. Before we begin, 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. A transcript of today's call will also be archived on our website. We will upload the transcript of today's prepared remarks within an hour.
The transcript of the Q&A session will be uploaded subsequently. With this, let me hand over the call to Rono Dutta.
Good evening, everyone, and thank you for joining us on this call. We reported a net loss of INR 10.6 billion in a seasonally weak quarter for the industry. While we had a much better revenue performance during the quarter, the loss was driven by certain cost headwinds. These costs fall into 3 major categories. Number 1, mark-to-market loss due to capitalization of operating lease liabilities. 2, reassessment of accrual estimates for future maintenance cost. 3, one-time adjustment owing to adoption of lower tax rates. Let me stress that each of these cost items is non-cash in nature and does not reflect on the cash flows we generate. Excluding the impact of these cost items, our loss before tax would have been INR 2.8 billion, a significant improvement over the INR 9.9 billion we posted in the same period last year.
Over the half year ended September 2019, post-servicing our debt and lease obligations, we have generated a very healthy cash flow of INR 33 billion through our operating activities, which clearly demonstrate the strength of our business and our company. Our CFO Aditya Pande will go into detail on each of these items. Let me speak to the fundamental operating metrics of the quarter. We continue to see a year-over-year improvement in unit revenues, and this quarter, we reported a 5.7% increase. Our rapid expansion into both domestic and international markets has been very impressive. We opened seven new domestic stations and six new international markets. Frankly, I’m personally staggered by what IndiGo employees have been able to achieve in this regard.
When I set a target for the opening of two China stations, two Vietnam stations, one Myanmar station, one Saudi Arabia station, plus 35 additional frequencies into international markets, I was hesitant as to whether I was demanding too much from the organization. Think of all that it takes to operate into a new country or even to add a new frequency. There are the regulatory hurdles, slots at airports, crew familiarization flights, ground handling contracts, sales agreements, PR initiatives, and much more. The fact that IndiGo employees were able to achieve over 100% in so compressed national market in so compressed a time period, I think is a real testimony to the quality of this organization. Cargo has maintained its rapid growth during the quarter in both domestic and international sectors.
As per the DGCA reports, we now have a 39% market share in the domestic cargo business, a significant increase from the 28% we had in the same period last year. Our international cargo capacity has grown by more than 80% on a year-over-year basis. We are now also focusing on inbound cargo business from Southeast Asia and Middle East, and I'm very pleased with the response we're getting on these sectors. During the quarter, IndiGo was awarded the best domestic airline at FICCI's first edition of Travel and Tourism Excellence Awards. These awards motivate all of us at IndiGo to keep pushing the bar and set higher standards. We are putting a lot of emphasis on improving our service standards. There are two avenues that we use to identify and track areas of improvement.
The first avenue is customer feedback, on which we spend a lot of management time and attention in analyzing and identifying root causes. The second avenue is the Net Promoter Score, which organizations around the world are using. I'm pleased to say that our NPS scores compare favorably with most of the low-cost carriers around the world. Looking forward to the next quarter. The revenues during the festive season have been somewhat subdued. At this time, we're expecting a flattish year-over-year unit revenue performance. Please note that it's still early in the quarter and things will, of course, change, and we take no responsibility to further update our revenue forecast before the next earnings release. We are seeing declines in yield in metro-to-metro markets, where low-cost capacity has replaced former Jet Airways capacity. We are seeing stronger performance in markets where Jet was not previously present.
On international markets, despite a significant increase in capacity, our unit revenues are holding up rather well, with China in particular performing well ahead of plan. On our capacity guidance, we expect a year-over-year capacity increase in terms of ASKs of 22% for the third quarter of this fiscal year. For the full year, we expect capacity increase of 25%. As you are well aware, Aditya Pande has joined us as a new Chief Financial Officer. Aditya has vast experience spanning across more than two decades in several blue-chip organizations, and we're excited to have Aditya as part of our team. Now let me hand over the call to Aditya to discuss the financial performance in details.
Thank you, Rono, good evening, everyone. For the quarter ended September 2019, we reported a net loss of INR 10.6 billion with a negative after-tax profit margin of 13.1%, compared to a net loss of INR 6.5 billion with a negative after-tax margin of 10.5% during the same period last year. We reported an EBITDA of INR 2.6 billion with an EBITDA margin of 3.2%, compared to an EBITDA of INR 2.2 billion with an EBITDA margin of 3.6% during the same period last year. As Rono mentioned, the lower profitability was mainly contributed by mark-to-market loss due to capitalization of operating lease liabilities, reassessment of accrual estimates of future maintenance costs, and one-time adjustment owing to adoption of lower tax rates. Let me discuss each one of these three factors in detail.
You would know that we have capitalized our operating lease liabilities as per the new accounting standard, Ind AS 116. These liabilities are dollar-denominated, and hence they are subject to mark-to-market every quarter. Since during the quarter, INR depreciated from INR 68.90 per U.S. dollar to INR 70.71 per U.S. dollar, there are negative impact of INR 4.3 billion on mark-to-market of our capitalized operating leases. If you recall, we have mentioned previously that we are experiencing a maintenance bubble because of ceo engines. We extended the lease of most of our existing ceo beginning 2016 and also got around 50 used aircraft from the secondary market. A result of this, the engines of these older aircraft are undergoing second shop visits, which are significantly more expensive than the first shop visits. These second shop visits resulted in maintenance spikes in our cost.
During the quarter, we have carried out the reassessment of accrual estimates for heavy maintenance and overall cost of engines. Accordingly, we provided INR 3.2 billion under supplementary rentals and aircraft maintenance costs. This reassessment is confined to our older ceo aircraft. This cost should continue to be in similar range for the next couple of quarters. This maintenance cost should eventually go away around 2022 as the neos become a larger portion of our fleet and these older ceo planes are redelivered. The government has announced an option for corporates wherein tax rate is reduced from 35% to 25.2%, a tax reduction of 9.8%. In addition, the companies adopting the same will not be required to pay minimum alternate tax on MAT going forward. We have decided to adopt the new lower tax rates.
This will lower our effective tax rate, and we will no longer be required to pay MAT, which will result in lower cash tax outcome. The key highlights of our performance during the quarter can be best summarized by the following points. Our capacity grew by 24.2% on a year-over-year basis. Our revenue from operations in September quarter was INR 81.1 billion, an increase of 31% on a year-over-year basis. Our RASK for the quarter was INR 3.42 compared to INR 3.23 during the same period last year, an increase of 5.7%. For the quarter, our yields increased by 9.4% to INR 3.52, while the load factors are down by 0.9 points to 83.5%. Our fuel CASK decreased by 17.3% compared to 8.7% decrease in ATF prices on a year-over-year basis. Fuel was a very good story for us.
We are seeing a much faster decrease in fuel CASK compared to decrease in fuel prices, primarily driven by fuel savings from the new aircraft. Our international operations has also helped us to reduce our fuel cost, both because of lower taxes and higher stage length. We have also taken a number of operational initiatives, which has contributed to a lower fuel CASK number. Our CASK for the quarter was INR 3.85 compared to INR 3.74 during the same period last year, an increase of 2.8%. Our CASK ex-fuel was INR 2.56, an increase of 17.2% from the same period last year. Excluding the impact of mark-to-market loss on capitalized operating lease and reassessment of accrual estimates of future maintenance costs, our CASK ex-fuel would have increased 3.1%. This CASK increase was primarily driven by higher employee costs and lower aircraft utilization.
While we have little control over the depreciation of the Indian rupee, we definitely see some areas of improvement in our CASK ex-fuel in the coming quarters. For the quarter, our employee costs were higher by 56% compared to the same period last year. As stated during the previous conference call as well, the higher employee cost is because of around 600 pilots being under training in sourcing of ground handling at most of our domestic airports through our wholly owned subsidiary, Agile Airport Services Private Limited, salary hikes. We expect the impact of these pilots under training to be negative 2.3% on our CASK ex-fuel. We expect the employee cost for us to start going down from the second half of the year onwards as these pilots complete their training and start flying.
Similar to previous quarter, we continue to hold certain aircraft on reserve awaiting clarity on allocation of Jet Airways slots. As a result, our aircraft utilization was lower by around 9% compared to the same period last year. We estimate that lower aircraft utilization contributed to 2.7% in the increase of CASK.
Let me take over for while he clears his throat for a minute. Let me start again on the last sentence. We estimate that lower aircraft utilization contributed to 2.7% in the increase of CASK ex-fuel. We expect the aircraft utilization to increase and translate into better CASK ex-fuel performance. Our balance sheet continues to remain strong. Our cash balance at the end of the period was INR 187 billion, comprised of INR 87 billion of free cash and INR 100 billion of restricted cash. The capitalized lease liability as of 30th September 2019 was INR 175 billion. Our total debt, including the capitalized lease liability, was INR 198 billion. With that, let me hand it back to Ankur.
Thank you, Rono and Aditya. 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 very much. 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 the attached phone. 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. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Deepika Mundra from JP Morgan. Please go ahead.
Good evening, sir. Thanks for taking my question. The first question is regarding the ASK growth guidance. It is considerably lower as to what you had guided to earlier. Is this because of aircraft delivery issues, or is it just that because of a weak environment, you are postponing deliveries?
No, it's not because of the weak environment. Looking backwards, the reason why we were softer in terms of ASK growth, as I said, is because of the Jet slot issues. This is affecting September, August and September. We knew that we would get various landing rights and slots and bilaterals, but they all kept getting delayed. The aircraft were waiting for, "Okay, next week we'll get it," and it didn't happen. That was looking backwards why we were soft. Looking forward, though, the softness is because of aircraft delivery issues.
Could you just elaborate as to what is the delivery issue?
I'll let Wolfgang talk. Shall I take that?
Yeah, hello. Basically, our delivery stream, and this was planned for the next year, is that the growth rate is coming down anyhow because we used to get something like six aircraft a month. Now this growth rate is expected to come down. This is one element. Also we have certain delays in our aircraft deliveries coming, which may be in the range of three to four months. That also reflects and depresses a bit our growth going forward for the next year. These are the main elements of it doesn't change our fundamental growth strategy going forward.
Understood. Thank you.
Thank you. The next question is from the line of Vinesh Singh from Morgan Stanley. Please go ahead.
Hi, team. Actually, continuing on the earlier question, what sort of a growth are you looking next year in ASKM?
By next year you mean the following year. I don't have that number. It'll be around 25%, roughly.
Okay. Just one question on supplementary rentals, repairs, and maintenance. We've seen that number move up quite sizably from INR 10 billion to INR 15 billion. In your remarks, you mentioned that around INR 3.2 billion is basically sort of a charge for the older engines. A, this INR 3.2 billion number. In a way, are you saying that this INR 3.2 billion number will continue in the coming quarters, so the supplementary rentals and repairs and maintenance as a percentage of ASK will remain at these levels?
Yeah. We expect, this is Aditya. We expect the supplementary rentals remain at similar levels for the next quarter and the quarter after. As I said earlier, that's primarily because of the second shop visit that we're seeing on these older ceo aircraft that we have.
I think we also mentioned we return a bunch of these ceo aircraft by 2022. After that, this engine maintenance cost will show a decline.
The INR 33 billion number that you shared on cash flow, is that your operating cash flow for this quarter? What was that INR 33 billion number earlier in the opening remark?
It's on a six-monthly basis. This is for the half year.
For that. That is your cash profit on six-monthly basis. Okay, great.
Yes.
Thanks. I'll come back in the queue.
Thank you. The next question is from the line of Anshuman Singh from ICICI Securities. Please go ahead.
Yeah, hi. Thanks for the opportunity. I just wanted a little bit more clarification on this maintenance cost. FY 2020, remaining two quarters, we'll have this elevated supplementary cost, FY 2021 we will have a run rate which is lower than this. In FY 2022, we would have a more new fleet, which should kind of not give the supplementary rental. Is this the right understanding?
Yeah, that's actually the correct understanding. For the current year, we will remain in a similar range. 2021, that number should start reducing, and starting 2022 as the ceos actually start retiring starting next year. As they start going out in higher volume in 2022, these numbers will start coming down.
When we are providing for this number, are we paying the supplementary rental on a shop visit basis, or we are providing it upfront?
Yeah. We provide it in our books, and we pay it once the engine visits the shop and we get the bill from the MRO in terms of what that particular cost is for that. These maintenance costs are what you're talking about, heavy maintenance.
Okay. Thank you.
Thank you. The next question is from the line of Achal Kumar from HSBC. Please go ahead.
Yeah. Hi. I want to understand a few things. One is about your stance on Air India international operations. Previously, you said that you're still interested in international operations if it comes. What is your stand on that? When we talk about Air India separately, you also said that you are interested in wide-body. Where are you on that? If you could please clarify on this.
Those are all great questions to which we do not have definitive answers. They are all subject matter of great interest. We talk about it in various management forums, and we do not have something to declare or announce either yes or no. We recognize that we are at a point of our evolution where we have to think of longer range aircraft. Beyond that, really, I don't have much to share at this point.
Okay, fine. Another thing I wanted to understand very quickly on this maintenance cost, which you said, $3.2 billion. Would that be impacted by the Forex? I mean, is it paid in USD and then definitely it will be impacted by Forex? Is that correct?
We have provided for those in our books, and obviously these bills are raised in foreign exchange. It's no different than it's been done in the past. I mean, in the past, we have always operated on the principle that we pay the bill as we get it from the MRO. It's always a dollar-denominated bill, will continue to be a dollar-denominated bill.
That will have an impact from the Forex, right?
Yes, it would.
Okay. Sorry, last two questions. One is on the engine side. Recently, I think DGCA has said this does something, that you cannot fly few particular engines after a specific time period. How that will impact IndiGo? Secondly, on the international operations, you said that your international operations are doing great, especially China. I just want to understand overall as a unit, as an international operation, how you're doing. Why I'm asking is because I was traveling in one of your flights in Calcutta, Hong Kong, and I saw just 30 passengers on board, 20, 30. Then you discontinued the flight probably because of tensions in Hong Kong. Overall, I wanted to understand is that particular case with Hong Kong or how you're experiencing overall international operations. Thank you.
I'll address the international issue, and then Wolfgang will pick up on the engine issue. International, you're right. Hong Kong was doing badly. I guess it was doing badly for everyone with all the unrest there. We have discontinued it. Internationally, we're very pleased with the results. International is on a somewhat different cycle seasonally to domestic, so it has its own swings up and down. The Middle East is very strong. As I said, China is strong. Hong Kong is an area of weakness. We started some flights, unfortunately, not by choice, but by necessity, with a very short time window. I'm thinking of places like Vietnam and so forth. It took us a long time to get all the approvals, which I talked about before, the regulatory hurdles, et cetera.
We had a certain date we had to start by October, given the fact that after that, there's a whole new slot season, as you know. Some of these international markets with very short time windows for booking. International typically has a 90-day booking window, and we were starting flights with like a 30-45 days booking window. Some of the flights didn't get the full benefit of the booking, but overall, we are very pleased with the international profitability. With that, I'll give it to Wolfgang.
Yeah, thank you. On the engine, we can see overall significant improvement in trends. For example, the key event is naturally an in-flight shutdown. This rate has come down to 0.01 per 1,000 engine flight hours, so very low. Just to put it in perspective, the regulatory requirements in FAA, for example, or in IATA is 0.05, so five times as high. We are well within the regulatory limits of the required, let's say, efficiency and reliability of the engine. Basically many of the issues have been fixed. There are three main issues remaining, which we are still very on good track. One is the 3rd stage low pressure turbine, where all our aircraft are delivered from May 2019 onwards with new material. There is no time limit for us.
All aircraft will be delivered, and we have time to change all these plates with new material. Main gearbox, it is fixed. There was a required software change, which is done already. The last element of the number three is the transient vibration, which is in the nature of this engine, which happens. All regulatory authorities outside India have a requirement if it's below a certain threshold, there's no maintenance activity required. We, however, have taken a more cautious approach, and we're fulfilling that. What I hear from your question is that there might be some limits we're having. We continue with all our deliveries. We have no limitations. However, there's one limitation I want to mention, extended range operations, where you have an airport outside. Right now, we operate, every airport must be reachable on our flight track within 60 minutes.
For neo aircraft, we can't use that. We can't use extended range, which goes up to 120 minutes. Our international operation, we have to provide, let's say, a more restricted route, which we are doing. As soon as EDTO, extended range operation, is allowed and gets approval, we can then have all the flexibility. For neo aircraft abroad, it is allowed. We think that we will get this EDTO extension in the next year or so.
Perfect. Thank you so much.
Thank you. The next question is from the line of Miten Lathia from HDFC Mutual Fund. Please go ahead.
Yeah, hi. Just wanted to understand the disconnect between the cash profits and the operating cash flow. While your free cash has gone up by about INR 4,300 crore on a one-year basis, and you suggested that there was an operating cash flow of INR 3,400 crore in the first six months of this financial year itself. When we look at the P&L, there is hardly half of that is cash profit. I just wanted to sort of identify that one big item which is causing this disconnect between the P&L and the cash flow. The cash flow statement has been given, but somehow it's not very apparent.
Yeah. Let me try and walk you through that. Our cash balance has increased during the half year, primarily driven by cash from operations, which you're correct, is one big driver. Our increase in deferred incentives that we get from our vendors, an increase in our working capital. Our forward sales were strong as we looked at the end of September. Those give us the large cash flow impact. That was partially offset by repayment of our lease liabilities, purchasing ground support equipment and paying dividend for the quarter. Those are the key drivers.
Understood. If I can sort of understand the accounting impact of the FX fluctuation on lease liability. Right now, there is an INR depreciation, and you have passed it through the P&L. Because that amount is payable to nobody, it just goes and increases your lease liability on the balance sheet. Is that how it works?
Basically, what happens is that, as per the new accounting rules, we are required to take a charge on a mark-to-market basis. Now, this is neither a payout to anybody, nor is it impacting any of our metrics in any way. Because what happens eventually is that when you end up paying the bill, which is in foreign exchange, in either our lease liabilities or anything that we're paying, at that time, we have a realized FX loss at that point. In some ways, it's just showing you a notional number that had the currency been at this level, what would your liabilities be? The rules require us to run it through the P&L, and therefore it ends up as a charge to the P&L. You're right, it is a non-cash item.
Sort of because it's non-cash, does it also increase the asset side commensurately, or how does that work?
No, it doesn't increase.
It doesn't change the asset side at all. It basically hit on the P&L and increase in liability.
Right. Increase in liability.
How would it reverse itself? Because let's say the liability is not crystallized, how would it reverse itself?
This is a period item, right? You'll state your liability at the level at which the rupee is at that point in time. As you get to the next period, there'll be a change upwards or downwards, and it'll again reflect it through the P&L. It'll keep on adjusting itself based on where the rupee ends at the end of that quarter. You will settle it when you are really due to make that payment. That's when you will truly settle it.
Okay. If I could sort of put it other way, I'm just extending the same question, it's not a fresh question. Effectively, where revenue and costs would have been matched under the earlier accounting because any FX depreciation would have been in some form or the other passed on to the customer. Here, effectively, that link is broken. The revenue and expense is no longer matched because you and your future liability, you have sort of taken into your current expense.
Right. You take it to your current expense, you route it through your liabilities, and then every quarter you adjust it. If you want a slightly detailed walkthrough on that, we can have that provided through Ankur. It's not a problem at all.
Sure. Great. Thanks a lot. I'll come back into the queue. Thanks.
Thank you. The next question is from the line of Bhavin Shah from Sameeksha Capital. Please go ahead.
Yes. You mentioned that you have had difficulty obtaining some approvals. I think it's common knowledge that SpiceJet has gotten a lot of important slots for Mumbai-Delhi and some other important routes. There seems to be some sort of irregular approach by the government in this whole matter. How do you plan to address that with the government?
Let me just clarify. I think I mentioned that we were in a sort of holding pattern for a while the government was sorting through how do we deal with this issue. Jet had many foreign bilaterals, for example. Who gets what? The ministry spent some time deciding that, and while they were deciding that we were on hold with one aircraft. That's one issue. The other issue that you're referring to is how was the final outcome? What were the sort of winners and losers in this? And we can share with you a number. Overall, I'd say we did pretty well in Delhi while SpiceJet did better in Mumbai. And I'll ask Wolfgang to give you the exact slot counts, if you would, Wolfgang.
If I refer to the domestic slots, we got additional 22 slots in DIAL, and we got additional slots for domestic in Mumbai, which was less. Sorry, let me correct. 157. 179 is 22. Yes, 22 in Delhi and slightly less in Mumbai. If you look at the absolute figures, basically what has happened, SpiceJet and IndiGo got the same amount in absolute figures, whereas our position was that we as a bigger carrier should have gotten a higher share, but it was done as it was done. It was a special SOP which was implemented, which gave Spice and IndiGo the same amount of additional slots in these two big cities. A similar thing has happened on the bilateral rights, where SpiceJet and IndiGo got the same amount approximately of freed up traffic rights because of the stop of operation of Jet Airways.
We took it as it is, but we believe that with our capacity coming in and our operational capabilities, we eventually will get our fair share of these additional resources which are available going forward.
Okay. In the second quarter, you generated additional free cash flow of about, I guess, INR 1,000 crores. Could you tell us in third quarter, knowing where the fares, whatever you have seen till this date in October, and knowing what you know about your costs, and assuming that those factors don't change, and fuel prices don't change much, what can we expect in terms of free cash flow for third quarter? I'm asking this question because there are very large number of moving parts in the second quarter results. It's impossible to put head and tails together and kind of figure out because your spread is very negative, yet you have good reasonable free cash flow generation. How does one think about free cash in next quarter?
Let me tell you what we can forecast with some degree of confidence and what we can't. We know roughly that the market is softening. There's no question about that. We were on a pretty good growth path in terms of revenue, 5.7% this quarter. I think the quarter before that, we did even better. As we've said in our remarks, we now think it'll be flat. There's some softening in the marketplace. We've told you that our maintenance costs will be roughly the same next quarter. We think aircraft utilization will improve a little. That will help our CASK. Fuel, we don't really know. Beyond that, we also can't put all the numbers together and tell you, ha, this is what the net cash flow will be.
That is going too far into the future, which none of us have the capability of forecasting that accurately.
Is it fair to say that some of these one-time adjustment items that you had in second quarter, such as, for example, additional supplementary rentals and the whole change in accounting, that won't be there in third quarter vis-a-vis second quarter? We are sort of back to more of the normal line items and change in those with respect to.
As we said before, we do expect our maintenance cost to remain elevated for the next two quarters. We don't see a decline in our maintenance costs. That continues, as we said, till 2022, when it goes down.
Yes. You took one-time charge that led to an increase in supplement rental that's related to your future costs, similar to the FX. It's a future cash cost, but obviously you booked it in accounting in the P&L for a one-time basis. That results in a significant deviation in the accounting number and the cash flow number.
Right
from first quarter to second quarter, such big deviation won't be there. Is that fair to say?
We will continue to accrue these costs based on when do we need to send these engines for shop visits. That accrual will continue, but these engines will also then start visiting the shop as well. The accrual will then get knocked off against the actual expense. We will see the accrual build up, and then we will see the engines going in to the shop visit, where this will effectively get knocked off from accrual that we've created. It's a non-cash charge, you're right. As and when these engines go for the shop visit, we will end up paying the MRO for the services provided.
Thank you.
Thank you. The next question is from the line of Charles Cartledge from Sloane Robinson. Please go ahead.
Thank you very much. My first question is, in the last quarter, maybe the last two quarters, you talked about self-help improving your yields by about 5%. Could you update us on that? Secondly, in the broader environment, you say the market's softening. I'd just like to understand that a bit better because the overall ASKs for India are in the low single digit, and one would have thought that underlying demand might be such that we saw overall yields increase. I'm sort of getting a different message. If I may, the third point on your aircraft deliveries, I think earlier in the call you said that there were some delays. Are these delays outside of your control then? Are they Airbus-type delays? Could you elaborate on that? Thank you.
Yes. First on the self-help issue. We said earlier in the year that we are doing certain things in network optimization, in our revenue management, sales initiatives, et cetera, which should give us a 5% boost in unit revenue over and above the industry trend. Basically, we are saying we're stealing revenue share, if you will, over and above our capacity share. We see that continuing, and as you can see this quarter again, we saw that 5% boost in unit revenue. We'll have to see how the industry does as the rest of the quarter unfolds. We are absolutely convinced that that will continue into the third quarter. The question is, how is the industry going to do? No matter what the industry does, we'll do 5% better, we think. The industry itself, we see the softening.
Let me tell you that there was a little bit of a sort of tipping point, if you will, come this festive season and starting in September. July, August were good strong months. We were quite confident of what was going on. September, we started seeing some weakening and we thought, "But wait, September is always weak." It was difficult to sort of separate the seasonal weakness from any economic weakness. Now October typically is a very strong month. You may not be familiar, there are two big Indian holidays in October. The first is called Dussehra, the second is called Diwali. Generally, you don't see anyone coming out with sales during those periods because the demand is so strong. This October was unusual. In the middle of Dussehra, the first festival, we had one of our competitors do a sale.
Again, now we're in the middle of Diwali and a second competitor has done a sale. That says there is weakness. Otherwise, why would all these sales be coming up? Of course, we are seeing it in our numbers as well. I'm not trying to be like, "Oh, my God, things are really bad." Things are softening is all I'm saying. Looking at our actuals and our forecast, last quarter, we had a 5.7% unit revenue improvement. Right now, we are forecasting a flat unit revenue year-over-year. Those are the first two points. Your third point, I think, was about aircraft deliveries. The aircraft deliveries delays are beyond our control. We are in no way pushing back deliveries. If anything, we are hungry for more airplanes. There are a lot of routes we'd like to fly.
We are after Airbus and pounding the table, "Come on, come on, give us these planes." Unfortunately, I think you'll see this all across the aviation industry worldwide. There seems to be a problem within the supply chain, and people talk of castings and forgings, and those things are not available. All engine manufacturers, all aircraft manufacturers seem to be struggling with keeping up with the demand. The aircraft deliveries are totally not of our own making.
Thank you.
Thank you. The next question is from the line of Sonal Gupta from UBS. Please go ahead.
Hi. Good evening. Thanks for taking my question. Sir, just wanted to understand one, in terms of the FX side, previously we've indicated that the restricted cash would be now you're moving more and more towards dollar-denominated. I just want to understand where would be that percentage?
We are now 100% hedged for all our supplementary rent payments, so we don't carry any mark-to-market exposure as it relates to supplementary rentals going forward.
All the restricted cash now, which relates to the rentals or lease payments, is now dollar denominated?
Yes. That's true. 100% of that.
Okay, that's great. Just on the international operation versus domestic, clearly the stage length would be much, much higher. I think domestic, maybe 1,000 kilometers on an average. The international would be maybe 3x of that. Could you just give us some sense in terms of how does the yield versus cost metrics work, and what would be some sort of a rule of thumb or equivalent number that we should think about? Because obviously a higher international will sort of depress yields a bit, but it may be actually more profitable. I just want to understand that.
Look, there is, again, this seasonal idiosyncrasies, if you will, that you have to deal with. Certain seasons international and domestic is not as strong, and then it reverses itself again. Net-net, when we look at it, we're very happy with our international growth. Really, we have put in that 100% growth in ASK, and then you would've thought, "Oh my God, this would really depress yield and profitability." That has not happened. Some of the sectors are actually very strong. I can point to Saudi Arabia, China. They have surprised us with this trend. Obviously, at the same time, Hong Kong was weak, and as I said before, we started Vietnam with very little booking availability, and we're waiting for that to play itself out. Overall, I'm guessing that over the long haul, domestic and international will both continue to do equally well.
To the extent that some domestic flights a week, we cancel them and move to international. To the extent that some international flights a week, we cancel them and move them to domestic. We really don't see a big demarcation between one versus the other. The same thing applies to all our six metros. Sometimes Chennai does better and sometimes Delhi does better and we move capacity around. There's no hard and fast like, "Oh yeah, we know this is good and we know that is bad." This all seem to have economic dynamics, regional dynamics, and we move the capacity around constantly.
Hi, it's Willy Boulter here. Maybe I'll just add, you were asking about the stage length effect.
Yeah.
Basically what you have to bear in mind is that, yes, the yield per kilometer on a longer stage length will be lower. Equally, the costs are too, because for a number of reasons, but one, operationally, the aircraft is spending a longer time at cruising altitude as a proportion of the flight. Again, the fuel cost per ASK is less. The crew productivity is obviously better and there's a number of reasons. Longer stage lengths, yes, they mean usually lower yield, but equally they mean lower cost per ASK.
Sure. Just on that's what I was trying to understand that if your stage length is, domestic is roughly 900 or 1,000 and international is 3,000. Will that mean that even with a 10% yield, you would be equally profitable? Lesser, lower yield, would you be equally profitable? Just, is there a rule of thumb there?
There are very well-established charts of revenue and cost by range, and we can share that with you. I'll ask Ankur to reach out to you. These are internationally available amongst all airlines. What happens at a short stage length? What happens at long stage length? How does the revenue curve and the cost curve behave? They tend to go down in parallel, as Willy suggests. Net-net, profitability wise, it doesn't make that much of a difference.
Sure. That will be very helpful. Just lastly, how much of a capacity is on metro routes on the domestic side?
The total metro-to-metro capacity is 24%-25% of our total capacity for the quarter under review.
The total including international, you're saying?
Correct.
Total for domestic?
Yeah.
Okay, great. Thank you so much.
Thank you. The next question is from the line of Lokesh Garg from Credit Suisse. Please go ahead.
Yeah. This is continuing an earlier discussion, which we heard from your side that your plane deliveries are sort of coming down. We have also been observing that plane deliveries have come down to probably two to three planes per month. The question is, going at this rate of three planes per month, which seems to be a comment from your side, could we get to 25% also, or would we undershoot that as well?
Really it depends on whether we catch up on the deliveries or slow down further. That's a bit of a moving target. As I said also, that we will also be increasing utilization a little bit. Not a lot, but slowly. Between all that, I think it's around 25%. It could be 22%, 25%. We're not as precise at this point, depending on how the deliveries shape up. We're in constant touch with the manufacturers, of course, trying to urge them to send us more airplanes.
I think also there's another effect, which is the A321s are coming in. That's adding more capacity, even though the number of airframes is not as fast as we'd like. A321 obviously has about 40 more seats on it.
Yeah. Just sort of continuing that, we have particularly observed that 321 additions have specifically slowed down even more, I think your commentary seems to suggest about nine 321 aircraft only so far. Do you face even more stronger constraint in 321 deliveries versus the A320neos?
Yeah, that's correct. A321 might slow down because they primarily are produced in Hamburg is the place where the industrial issues are, where most of the delays happen. It's only a temporary thing. The forecast we have from Airbus shows a catch-up within three to six months.
Okay. My last question probably, there is lot of discussion, particularly in the press, related to your Europe offering starting someday. News reports seem to suggest that you sometimes take slots which you have not utilized on London sector. Any outlook on that that you can share?
Not at this point, no. As we said, I think earlier to a question, we are studying it. No definitive projections on dates yet.
Okay, sure. Thanks a lot.
Thank you. The next question is from the line of Deepak Krishnan from Goldman Sachs. Please go ahead.
Good evening. This is Pulkit from Goldman Sachs. Sir, regarding international operations, clearly for the last six odd months, we've been adding capacity quite meaningfully there. Are we pretty much done with a large part of the short-haul routes that we can address with our current fleet? At what stage should we expect our international expansion relatively slowing down, assuming we don't really go the long haul? Basically, what we wanted to really understand is there more opportunities for us to really grow on the short-haul international route after what we've done in the last six months?
Yeah, there's lots of opportunity. Look, we fly to just two Chinese cities, and we fly to Vietnam from only one city. As you know, we have six metros we can fly from. China, Vietnam, Middle East, Russia, all these are available to us, Africa. We're not short of opportunities at all. If anything, it's timing in terms of aircraft deliveries and, of course, bilaterals. Bilaterals are a big factor in all this. The governments. China, we have seven more frequencies we can fly, then we need to add to the bilateral. Same thing in Vietnam, so forth. Bilaterals are a constraint and aircraft deliveries are constrained. Opportunities are not an issue.
If I may add here. Within the 6-hour range of our aircraft, on both sides, with Istanbul on one side and Hong Kong or Guangzhou on the other side, two-third of the world population is living. For 6 hours, our aircraft and our business model works very well. If you take this, it shows you how much opportunity we have with our aircraft and with our business model here.
Fair point, sir. Thank you. That's it from me.
Thank you. The next question is from the line of Abhishek Joshi from CGS-CIMB. Please go ahead.
Yes. I wanted to ask what % of tickets were sold in the 15-day bucket during the quarter, and what has been the trend right now?
Yeah. I can answer that. For the quarter under review, there was an improvement, certainly in the domestic market, from 47% sold within 15 days to 51% out of our load factor. Whereas beyond 15 days went from 40% down to 36%. Domestically, and that helped obviously produce the yield improvement that we saw of almost 10%.
What was the price behavior in this 15-day window if we compare it with Q2 and Q1 quarters?
Sorry, what was the price?
Yeah.
It depends on the pricing in a particular segment that you have in mind or just system-wide?
Just in total. Domestic.
Our yields are up by 9%, right?
Yeah.
Isn't that the answer?
Okay. Can you comment on, you are saying that the market in terms of price is softening. Is it just the domestic market, or we are facing the same issue in the international?
No. It's mostly the domestic that we're seeing the impact. Again, like I said in my opening remarks, a lot of it is focused on the metro to metro. As you know, a lot of new capacity came in those markets that's yet vacated. That's where we're seeing the biggest pressure because there's new capacity coming in, which has not yet found its footing, if you will. That's where we're seeing the major softening.
What kind of shares we are having right now in the 15 days bucket window in the current quarter?
We can't share that, I think.
Okay.
It's tough to get that number, frankly. We'd have to know every competitor's 15-day bucket sales, and we don't.
Okay. Lastly, as you said that from next year onwards, there would be slower growth in the number of fleets that we would be adding. Is there any possibility that you maybe start replacing your ceo fleet with neo fleet?
No. If we got planes faster, we would. The issue is in the supply side, right? The reason we are not growing fast enough is because we are not getting the airplane fast enough from Airbus. Yes, if we got them faster, we would be replacing the ceos faster.
What rate would you target to replace it? Any goal on that?
Really, we don't have those numbers.
Okay.
If and when we get more aircraft deliveries, we'll have to see whether we should be adding capacity or replacing.
Okay. Thank you. That's all from me.
Thank you. The next question is from the line of Deepika Mundra from JPMorgan. Please go ahead.
Hi. Just following up on the maintenance expenses again. The one-time charge that you have taken, is it also because you are expecting the ceos to stay longer in the fleet now versus earlier? Just to re-clarify, it's 0.6 per ASK for the quarter, and you're expecting this 0.6 to continue for the next couple of quarters as well?
To your first question, no, we are not planning to extend the leases on the ceos. The ceos, as we said, start going out on 2021 and by 2022, they're pretty much gone. We have sort of upgraded or re-estimated, if you will, our actual experiences with the ceos, and we said we need to take our accruals up based on what we are seeing. That's all we've done, and by end of 2021, we should be out of this problem.
The 0.6 question, I didn't get it. Can you come again on that?
Sorry. Just some confusion on whether that INR 3 billion is a one-time charge or not. If you look at it on a per ASK basis, it is 0.63 for the quarter. What I want to understand is that this same level continues, right? Of 0.6 per ASK for the next two or three quarters, depending on how you taper down the maintenance expenses.
I think you should look at this as an overall bucket of our supplementary rental and lease costs. We expect that bucket to remain in that range for the next two quarters. This is defined by the engines going on shop visits. It's defined on the cycles it's running in a particular month, in a particular quarter. It's very difficult to estimate engine by engine for the overall fleet, what it means. The guidance that you should use is that on a supplementary rent bucket overall, the number should remain in that range.
Most importantly, I don't think you should use the ratio because this is not engine cost spread over all airplanes. The neos don't have this problem. If we add more neos, it doesn't mean our engine maintenance costs go up. Engine maintenance cost on the ceo is a fixed pool, and that's the number that we are using, and that's what you should use. If we add more neos in our growth plan, it doesn't mean our engine maintenance cost goes up proportionately to the 0.63 that you're mentioning.
Got it. Also, I think sometime next year, this may or may not happen, but the MAX planes are expected to come back into the system. Given that the kind of softness that you're seeing, do you expect that it could continue well into next year if the ban on the 737 MAX is lifted?
The softness is an economic issue, and your crystal ball is as good as mine. Are we in a softening economic environment? Looks like it, looking at the Diwali experience. When will this stop? Next year, will the economy get stronger? I think you are a better economic forecaster than I am on that issue.
Okay. Thank you.
Thank you. That was the last question. I now hand the conference over to Mr. Ankur Goel for closing comments.
Thank you all for joining us. I hope you found it useful, and hope to speak with you again. Thank you.