Earnings Call: Q1 2020

Jul 19, 2019

Evening, ladies and gentlemen, and welcome to Envigo's Conference Call to discuss the Q1 of Fiscal Year 2020 Financial Results. My name is Aman, and I'll be your coordinator. At this time, the participants are in listen only mode. A question and answer session will follow today's management discussion. As a reminder, this conference call is being recorded. I now hand the conference to your moderator, Mr. Ankur Goyal, Head of Investor Relations for INDiGO. Thank you, and over to you, sir. Good evening, everyone, and thank you for joining us for the Q1 fiscal year 2020 earnings call. We have with us our Chief Executive Officer, Ronan Datta and our Chief Financial Officer, Rohit Saleb, to take you through our performance for the quarter Wolfgang Prokshaur, our Chief Operating Officer and Willy Bolter, our Chief Commercial Officer are also with us and are available for the Q and 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 and A session will be uploaded subsequently. With this, let me hand over the call to Ronu Datta. Good evening, everyone, and thank you for joining us on this call. We announced our Q1 fiscal year 2020 financial results today, and I'm pleased to inform you that we reported our highest ever quarterly profit with a profit after tax of INR 12,000,000,000 Our after tax profit margin was 12.8%. This improvement in profitability was primarily driven by strong revenue performance. In our previous earnings call, we gave you some indication on how the revenue performance was shaping up for the quarter. We continue to see a base increase of 5% in our unit revenues due to our various initiatives. Cetacean of services of jet airways positively impacted our profits this quarter, helping our unit revenues to grow by 2% to 3% to the best of our estimates. This quarter also saw high percentage of bookings in the 0 to 15 day window with close in pairs also holding up and helping our revenue performance. In addition, we continue to optimize our network to drive our overall revenues. As you know, we are growing rapidly into new markets including international and we find that our growth has been accretive to the bottom line. Cargo played an important role in our revenue performance. We have worked on improving our systems and processes and have increased the range of products that we now carry in our aircraft belly. As a result, our cargo revenue increased by 35% for the quarter, helped of course partially by cessation of services of Jet Airways. I would like to acknowledge the efforts of our cargo team in implementing a significant improvement in performance. Our capacity for the quarter increased by 30% compared to the same period last year. As we add more capacity, we see significant opportunities for profitable growth by increasing our connections to tourist destinations in India. We're developing the Buddhist circuit, providing interconnecting service between Varanasi, Gaya and Gorakhpur. The traffic flow into the Buddhist circuit will be enhanced as we add Vietnam and Myanmar to our network next quarter. Adding capacity in these markets not only makes a strong business case, but also provides an economic boost to regions such as Eastern Uttar Pradesh and Bihar. During the quarter, we placed an order with CFM International for the LEAP-1A engines to power 280 Airbus A320neo and A321neo aircraft. With this order, we expect to maintain our strong focus on lowering operating costs and delivering fuel efficiency. This order also includes spare engines and an overall support agreement. We expect delivery of our first LEAP-1A powered A320neo in the coming year. Now looking ahead at this quarter, we expect a continuation of the base increase of 5% in our unit revenue due to our previously discussed initiatives. However, we do not expect any meaningful impact of Jet Airways to continue as all airlines have now replaced the capacity vacated by Jet. Unfortunately, we are witnessing some lower fares in the 0 to 15 day booking window and expect this to add some pressure to our unit revenues in the Q2. I want to remind our shareholders that in the Q2 last year, we registered a negative 16% PBT margin. We will of course do better than that this year, but how much better was still an open question. On our capacity guidance, we expect a year over year capacity increase in terms of ASKs of 28% for the Q2 of this fiscal year. For the full year, we expect capacity increase of 30%. I feel proud to tell you that we received an award for the best low cost airline in Central Asia and India by SkyTrak for the 10th year in a row. And I wish to thank all our employees for the high levels of performance that we are witnessing across the company. And with that, I'd like to hand over the call to Rohit. Thank you, Ronu, and good evening, everyone. For the quarter ended June 2019, we reported a profit after tax of INR12 1,000,000,000 with an after tax profit margin of 12.8 percent compared to a profit after tax of INR300,000,000 with an after tax profit margin of 4.4 percent during the same period last year. We reported an EBITDA of INR27 point 8,000,000,000 with an EBITDA margin of 29.5 percent compared to an EBITDA of 11 point 3,000,000,000 with an EBITDAR margin of 17.4% during the same period last year. As Ronu mentioned, our profitability was better during to the same period last year, mainly on account of strong revenue performance. Our revenue from operations in the June quarter was INR94,200,000,000, an increase of 44.7 percent against a capacity increase of 30.3% compared to the same period last year. Our other income was INR3,700,000,000 for the quarter. Our RASK for the quarter was INR4.10 compared to INR3 point 7 0 during the same quarter last year, an increase of 10.7 percent. Our yield increased by 12.8% to INR4.08 and our load factor was nearly flat at 88.9%. Our CASK for the quarter was INR3.45 compared to INR3.69 during the same period last year, a decrease of 6.3%. Our CASK excluding fuel was INR2.11 for the quarter, a decrease of 2.8% from the same period last year. Excluding the impact of foreign exchange, our CASK excluding fuel increased by 2.6%. This was primarily driven by an increase in employee costs and lower aircraft utilization, which was partly offset by reduction in maintenance cost. Let me talk about each of these factors. Our employee cost this quarter was higher primarily due to three reasons. Firstly, we have given salary increments to all employees. Secondly, we have hired a large number of pilots who are currently undergoing training and as a result, while we are incurring salary expenses, we do not have the associated ASKs. And finally, we have insourced ground handling at most of the domestic airports through our wholly owned Agile Airport Services Private Limited. These services were previously outsourced and were recorded under the other expenses line item. So while this resulted in an increase in the employee cost line item, we have a corresponding reduction in other expenses. We had an aircraft utilization of 11.7 hours during the quarter compared to 12.6 hours during the same period last year. This was partly due to the fact that with the uncertainty of how the Jet Airways domestic slots and international traffic rights would be allocated, we held a certain number of aircraft and reserve till we had more clarity on the allocation. In addition to this, unavailability of pilots under training also impacted our utilization. We expect aircraft utilization to remain at similar levels in the second quarter, but expected to increase in the latter half of the year as we receive more clarity on slot allocation and the pilots that we have hired complete their training and start flying. Now talking about the decrease in maintenance costs, we had a lower number of shop visits for our older A320 CEO engines in the quarter compared to the same period last year. Our balance sheet continues to remain strong. Our cash balance at the end of the period was INR173,000,000,000 comprising of INR77,000,000,000 of free cash and INR96,000,000,000 of restricted cash. As I mentioned on our previous call, we have now capitalized our operating leases in accordance with INDS 116. The capitalized lease liability as of 30 June 2019 was INR161 1,000,000,000 Our total debt including the capitalized lease liability was INR184 1,000,000,000 During the previous quarter, our Board of Directors recommended a dividend of INR5 per share for fiscal 2019. This will be placed for approval at our upcoming Annual General Meeting. Subject to us receiving this approval, the dividend will be paid shortly after the AGM. With this, let me hand it back to Rono. I just want to confirm that we had a Board meeting today and this Board meeting will continue on tomorrow as well. The Board in this meeting today had a discussion on the appointment of an independent woman director to the Board of the company. Of course, we have to take this step to comply with the law. But in order to induct an independent woman director, we need to change the article of association of the company, which now needs to be amended. We are working on this and a final decision on this subject will be made tomorrow. And now I hand it over to Ankur. Thank you, Ronu and Rohit. To answer as many questions as possible, I would like to request that each participant limit answers to one question and one brief follow-up question if needed. And with that, we are ready for the Q and A. Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. The first question is from the line of Kunal Lakhand from AXIS Capital. Please go ahead. Yes. Hi, good evening. Just on the last point that you mentioned, so the Board is going to have discussion only on this one aspect of appointing an independent director or there are other certain aspects which get quoted in the media are also being discussed, increasing the number of directors, overall directors in the Board? The Board is having a fulsome discussion on all issues. We obviously had a number of committee meetings today including Audit Committee. And then the Board covered a whole range of issues and we'll continue to do so tomorrow. I mentioned the woman independent woman director issue because it is a compliance issue with the law. So it is very urgent for us to resolve this and we hope to have a solution tomorrow. That's the only reason I'm mentioning this. Okay. Secondly, the units revenue, you mentioned that this quarter also you'll see a 5% increase. However, like just considering like the fares have again started to moderate in kind of July And like you mentioned that most of the capacity of jet is now absorbed by the airline. This 5% unit revenue growth is primarily on account of the internal measures that you're seeing. Is that assumption you're right? That is correct. And as we've said before, the industry will cycle up and down based on seasonality and so on. And as you know, this quarter that we're in is traditionally a very, very weak quarter. So and that's why we mentioned that we expect to see some downward pressure in revenues. But that is the cyclical effect. But on top of that, we have to add on the fact that we have a base level effect of our internal initiatives. Okay. Sure. Thank you. The next question is from the line of Amy Truesdale from Jupiter Asset Management. Please go ahead. Hi there. Thanks for taking my question. I've seen that there was a positive outcome from this Ernst and Young review that had been done. I'm just wondering when you'll be releasing the terms of reference and the report itself, the Ernst and Young report itself? As you know, we are responding to Sebi on an inquiry. And we have given the report to Sebi. And we don't plan to make it public at this time. Okay. Thanks. Yes, I think I just think it would be quite helpful to have that in the public domain, but appreciate you answering my question. Thanks. Thank you. Thank you. The next question is from the line of Ashal Kumar from HSBC. Please go ahead. Yes. Hi. I wanted to understand a couple of things. First of all, on the engines, so you have ordered CSM engines recently. So now are you sort of planning to move completely to CSM? Or are you still going to have a mix of the CSM and NANDs that pass? And if you're going to have both, how would that impact your maintenance costs or inventory costs? Secondly, I wanted to understand about the international expansion. I mean, you said that you will have 50% of capacity coming on the international expansion. And now it looks like everybody is sort of running to grab the international pie. I mean, you're going at about 90%, 5 gig is about 80% and then Gold Star and AirAsia, all are sort of struggling to win the silver medal. So how do you see in that scenario the yield and the profit outlook on the international side? And then what's your strategy on the international? Are you still going to deploy 50% of the new capacity on the international side? And then lastly, I wanted to understand about your aircraft financing strategy. I mean, in such a wonderful favorable environment, do you plan to buy more aircraft? Or are you still trying to continue with the sale and leaseback model? And when we say the favorable environment, do you expect this environment will also promote the competition and then bring more people and then yield and profitability come back to the normalized level? Just wanted to have your views on that. Thank you so much. Okay. So let me try and take these one at a time. So first on the engines. Clearly, we have a large number of Pratt engines and they're still coming. And CFM engines don't come till next year. And so no, we are not going back and sort of replacing the Pratt with the CFM. There won't be 2 different pools of engines. To the issue of compatibility or commonality, if you will, it's always better to have 1 than 2, of course. But beyond a certain mass, the differences become very minor. You do have a sort of diminishing return. So both pools are large enough, so we don't think that commonality is an issue. Then on the international, you said everyone is scrambling for international. True. I think we started a little earlier than some of the carriers we mentioned. And the scramble now really is to replace most of jet. So this is not added capacity. It's jet capacity that went down is being replaced partially by us, partially by Spiked, Vistrada and so forth. So you don't see a net net increase in capacity. 2, our profitability on international. We are very, very pleased with what's happening with international. The unit revenue is strong. The profitability is strong. So we are very pleased with international. You might have had a few more. I'll ask Rohit to talk about the financing issue. Yes. So on aircraft financing, I think our plan remains the same that we would like to use our excess cash to start buying aircraft outright in addition to supplement the sale and leaseback model that we've historically relied on. We consider the optimal cash balance or minimum cash balance that we need to maintain roughly 15% of revenues, which roughly becomes about INR 4,500 crores. So based on that, we do have some excess cash. We're looking at all the options based on the aircraft deliveries that we have as to what's the optimal way to utilize them to buy some of the aircraft with cash. Obviously, we won't have enough cash to buy most of the aircraft that we would be taking delivery of. So we'll primarily continue to rely on the sale and leaseback model, but we'd like to buy some aircraft with the excess cash that we have. And how about my question on the competition? I mean, just so the favorable environment can actually promote the competition and people can come in and join and that could lead to yield and profitability back to the normalized level. And any views on that, please? So you're suggesting that the revenue environment is strong. There could be some new entrant. Is that your question? I mean, you can say that. Or you can and we can see the race between the existing players to increase the capacity, oh my god, what is solid revenue environment. So how do you see that as such? Well, as you know, we have an aggressive growth plan. We are growing at 30% a year. We are not going to change that based on, oh, this quarter was good or next quarter is weak. Therefore, we're going to slow it down or accelerate. So our growth plan is set. We're going to grow at 30% a year. We have tough coming and we're very comfortable and happy with our growth. If other people tend to grow faster, I guess, we'll just have to deal with it. But as of now, we are quite happy with our growth rate and the revenue environment. Okay. Thank you so much. I do want to caution everyone though. When we talk about the revenue environment, we're talking of a sort of steady state for the whole year. As you know, this Q2 is notoriously difficult quarter for the airline industry. Thank you. The next question is from the line of Bina Singh from Morgan Stanley. Please go ahead. Hi, sir. First question is on the financials. Like when we look at the lease rentals for the company, in I think in notes to accounts, you are stating that in case we were to look at the earlier accounting standard, then the lease rental will go up by around INR 9,700,000,000. Even if I add that, then the lease rental adjusted for the quarter comes to around 11,000,000,000 versus around 14,600,000,000 that you did in the previous quarter. So why would lease rentals be down so sharply on a quarter on quarter basis? Yes. Binaire sequentially or on a year over year basis? Sequentially. On a sequential basis, I think foreign exchange was one factor. On a year on year basis, you'll see sort of the reverse effect actually happen with foreign exchange actually contributing to an increase in the lease rentals. Because the sequential drop, even adjusting for foreign exchange or maybe there's a very sizable sale and leaseback gains that you would have made that could explain that? Because quite a sharp drop from $14,600,000,000 to around $11,000,000,000 Yes. There was also a in terms of that reconciliation, there is a early termination of 4 leased aircraft in the Q4 last year that there was a charge associated with that in the Q4 that sort of on the quarter over quarter comparison will show up in this calculation that you're doing. Right, right. So that makes sense. And secondly, when does the company now reply to SEBI and to Ministry of timeline for these things? So SEBI submission went today or is going as we speak. For the Ministry of Corporate Affairs, we're planning end of next week. And just one last question on this issue. Media has talked a lot about promoter disagreement with regard to international strategy. That whether you go for long haul or short haul. Any comments on that? There's absolutely no disagreement on international strategy. And I think we've said many times that when it comes to overall strategy of growth of international expansion, etcetera, The 2 promoters are totally in sync. They have confirmed that again today at the Board meeting. And the only issue is this disagreement is between of the agreement between the 2 promoters, nothing to do with the company and strategy. Great, great. Very clear. Thanks a lot. Thank you. The next question is from the line of Vijay Gupta from Edelweiss Securities. Please go ahead. So I had a question around Sir, Gupta, we are unable to hear you, sir. Can you be a bit loud, sir? Yes. Am I audible now? Not very clear, sir. May I request you to use your handset? Hello? Yes. Yes, please go ahead. I had a question around the redistribution of Jet's first twelve slots. So would it be possible to get a breakup of, say, the domestic and international slots allotted to Indigo? And potentially, what are the remaining slots which remain to be distributed? Yes. Ulf and Proksha is going to take that question. Yes. On the domestic slots, there were about 150 slots, means departure slots available both in Bombay and in Delhi. This is actually less than Jet Airways had. Jet Airways had around 200 slots, but one airport of the 2 has just could not give as many slots as previously Jet Airways had. And out of these slots, we've got about 30% of these slots. We would have expected more because our market share is 50%, but that's where we stand at this point of time. And we'll see how it goes further than when we move into September, October. We definitely expect more out of these slots to be available both in terms of more slots becoming available, specifically daily, who has not given all the slots for certain reasons and also Mumbai. So we expect some significant impact on that going forward. We have out of the Jet Airways pool of traffic rights, we have been awarded 12 departures in 12 in a day, 12 debottures. Again, this is much less than what Jet Airways has been flying. And out of this 12 we have made operationally and already gone for sale on 7 of that. And remaining 6 are still open because of slot issues we're having also again in major airports here in India. But we work on it and we are very hopeful that these slots can be used will be made available to us in the next say, 1 week or so. So they can use all the slots allocated to us. And then going further, after that, there's more clarity about what is happening to Jet Airways. We also expect here a major boost to our portfolio in international slots and the traffic rights, actually. Okay. So if I'm correct in my calculations, Jet currently or at least at its peak had a total international slot portfolio of $150,000,000 Would that be fair, dollars 150 per day? Is that both departures and arrivals? Is that how you're counting it? I mean, we're doing departures by DGC. So if you are €150,000,000 is the departures per day, but actually Czech Republic had more, 150 departure slots were made available in Delhi and in Bombay. So in Bombay, it was 108, in Delhi it was 52. And as I said at the beginning, Jet Airways had got much more departure slots at its peak as this €150,000,000 But as certain constraints will be removed, we expect that there will be additional slots, departure and arrival slots to be made available going forward, let's say, starting probably October, October, November. So that average is more than the 150,000,000 which were given to other airlines to take. Okay. And so on the international front, as you said, we have just got 12 slots. How is the slot allocation being done? And who has been the primary beneficiary on the international front? So this was a very complicated process, if I may say. So the ministry kept calling us week after week about how do we do this. They were also not sure how best to do it. So they asked every airline to give your top priority 1, priority 2, priority 3. So we ranked. And then they called each of us and said, okay, lottery. So let's say, Spice, you go first, what do you pick? And let's say they said, I pick Bombay, Hong Kong. Okay. Go, you're next. What do you pick? And they might have picked Bombay Kuwait. Okay, Indigo, you're next. And so that's how it went round after round until all the slots were exhausted. Okay. And so right now, how many international slots are still in the pool, in the distribution pool, I don't think they gave out everything, but they gave us a limited number and we all drew from that. They are still holding on to a few, I think, but I can't be sure. Okay. Thanks a lot. That's it from my end. Thank you. The next question is from the line of Avinash Fazirani from Jupiter Asset Management. Please go ahead. Gentlemen, thank you very much for taking my question. Am I correct in assuming that there are no directors on this call? That is correct, yes. That is correct, mate. And who are there any members of the audit committee on the call? I assume they can't be because there's no directors on the call. Right. Right. I mean, so our General Counsel, our CFO, they participate in the audit committee. They're not obviously members of not members of it, right. So when I look at the business standard report today, which says that they have looked at this audit committee report, right. I think as shareholders, I think we would quite like to see that report together with the full terms of reference of it. Clearly, it is being leaked. And I think it is unfair on us as shareholders not to be aware of what is in the report and much more importantly, what are the exact terms of reference of that report? And I think in order for the company to pull this noise as some of your directors have said behind it, it'll be best done in a transparent manner. And if the report and the terms of reference of the report are put out in public domain, I think that will be the best way of dealing with this issue such that it doesn't come up again. So would you please mind taking this recommendation to your board and putting it out in the open? Thank you. No. We very much respect what you just said. We're taking it under advisement. And yes, even as you're speaking, we're like, hey, we need to get together and decide how to deal with this. And yes, thank you for that input. It's very valuable and we will take action. Thank you. Thank you, Chen. Thank you. The next question is from the line of Ashish Shah from Centrum Broking. Please go ahead. Yes. Hello. So my first question is on the accounting change that has happened. So we have said that the capitalized value of the lease is about INR 16,000. Would this represent the liability or the life of a lease for the aircraft? Or this is an estimate in terms of the lifespan of the aircraft? What I mean to say is that typically the way the aircraft rentals were earlier valued is that one would take give it a factor of, let's say, 8 or 7 and which would represent the liability over the corresponding life of the aircraft in that sense. So does this represent in terms of the life of the aircraft? Or is it simply the liability over the residual period of our leases? How has this been taken? Yes. Sure. Sure. So it's done based on the standard, which is basically a present value of the future lease payments. So it's based on the lease commitment, and that's what gets capitalized on the books. Right. So would I be fair in saying that as compared to the earlier practice where one would use a factor, whatever, 7 or 8 people used, this understates the liability to that extent? I don't believe it does. I mean, I believe when because the fact that we have a practice of Hello? Sorry. Yes, ladies and gentlemen, it seems we have lost the line for the management. Kindly stay connected while we reconnect them. Thank you. Ladies and gentlemen, apologies for the inconvenience. We have the line for the management connected. Over to you, sir, you may please go ahead. Thank you. Sorry about the technical problem. We so just to answer the question, I think the by capitalizing it at the remaining lease period, that's the right that's, I think, the right way to look at the debt because that's the commitment. In most cases, people have a much higher sort of longer lease term and that's why typically the lease capitalization factors are when people make an estimate are more like 6 to 7 times. This standard is basically to say what is the actual commitment and what's the debt associated with the commitments that you've made, and that's what the standard says. Sure. So what would be the underlying period of the lease that we have taken here? I think as we've always discussed, our lease terms are typically 6 years. So when you talk about sort of the average remaining term of the lease, it's in the 3.5 to 4 year period. So that's so on average, that will be the lease term. Sure. So on the other parts of the balance sheet, so on the asset side, this would have bloated up our fixed asset as well. So what would be the impact on the asset side of the balance sheet? I mean liabilities part, this is clear, INR 16,000 crores. But what happens on the other side? How do you manage your Yes. So on the asset side, there's sort of 2 factors. There's what's called a right of use asset, an RoU asset that gets put on your balance sheet. And we have a depreciation expense associated with that. But that asset also has an offsetting feature, which is we as you know, we had deferred incentives that from a that was sitting on our balance sheet that from a P and L perspective, we previously would deduct from lease rentals and we'd have a net lease rental and we'd report a net lease rental line net of deferred incentives. Now that deferred incentive balance sheet account is reduced from your right of use asset and we have a net asset and at the end of the quarter it was about INR8,900 crores. So the depreciation number is based on that net asset number that will hit the P and L. So sorry, if I understood correctly, you are saying that the deferred incentives that were earlier been amortized have been reduced from the cost of the right of use assets. And you stated INR8,900 crores as a net asset, net of the deferred incentives. Is that correct? That is correct. So then how does the residual adjustment happen? I mean, your liability side simply speaking, your liability side is inflated by INR 16,000 crores. You added INR 8,900 crores to the asset side. So what else increases to get the balance sheet sort of balanced? There's a right of use. There was already a liability on the books, which was the deferred incentive liability. So that liability is just netted on the asset. So it all syncs up from the accounts. And we can walk you through a reconciliation offline with Ankur. But this is the deferred incentive liability was already on our books. It's just in this presentation now, it's netted from the right of use asset. Fair. So last question. We've spoken about an assessment for the year 'fifteen, 'sixteen and a liability of about 6.35 watt crores and in case in this exposure could increase INR1200 crores. Could you just explain a little bit on this and how this is likely to crystallize or not according to the management's view? So you're talking about the contingent liability footnote that we had yes, that we have and it's the same footnote we had in the last quarter and we've had that footnote in many quarters previously. I think we added some language into the footnote at the last quarter and this quarter is the same as last quarter. It's just based on a tax dispute matter that's in litigation where we have favorable judgments for 3 prior years and ongoing years are still under litigation. And we have disclosed that in while we have favorable judgments and we don't expect to have any negative outcome based on the litigation. We would in a contingent liability, we're disclosing what that amount could be. And then the reason why there's two numbers is because there could be 2 ways to interpret whether if it was tax in the unlikely event was taxable, it was determined to be taxable. Under one method there could be 2 methodologies to say do you tax it on a receipt basis or an amortization basis and that's why we've disclosed both numbers. Amortization basis and that's why we've disclosed both numbers. Sure. That's all from my side. Thank you so much. Okay. Thank you. Thank you. The next question is from the line of Anshooman Beg from ICICI Securities. Please go ahead. Yes, hi. Thanks for the opportunity. My question was regarding the capacity outlook as far as FY 2020 is concerned. So we understand that 30 of the jet aircrafts have come back through Spice and possibly 6 to 10 might come back through Vistara. Still, we will have a significant amount of capacity tailwinds in FY 2020, so to say, because the overall aircraft size would be of jet would have been much bigger. So what is the overall fair outlook in FY 2020? I understand that Q2 can be a very bad quarter, but overall FY 2020 fair outlook, if you could give some color, that would be right? It's hard to go that far out. I can tell you what we experienced last quarter and what we're experiencing this quarter. So to take some of the drivers, there's a lot of talk about is the economy softening. So you read in the papers, auto sales are down, fast moving goods are not moving fast enough, all of that. In the last quarter that we're reporting here, we did not see economic softness. So we were like other industries might be getting hurt, we are not. So we are very comfortable in the quarter we've just reported. Now what's going to happen in this quarter? As we said, we are seeing some softness in the 0% to 15%. And it's hard to say whether that's just seasonal or that's an annual cyclical effect. We're not sure yet. So again, we can only comment on the quarter we're in and we do see some softness. Whether the Q3 is typically strong, whether it'll be strong again, we don't know. So we can't look that far ahead, frankly. Right. But my point was like the point that you alluded that no benefits of Jet. That is like that was my question regarding because we still have some significant capacity, which is not going to come back. So to that extent, the benefit of Jet can be can come back in Q3 also. And that So we really don't see it. Who really benefited from Jet? We had a very small benefit and I'll tell you why. First of all, Air India must have seen a huge benefit because Jet had 65% international, 35% domestic. So, Air India should have seen a big benefit. I'm sure British Airways and the international carriers are seeing a big benefit. Domestically, we just don't see a big change. Like we said, March was strong, April was strong, but by June, the effect is almost 0. And here's why. Most of the capacity came back as you know. And we got like 30, 35 slot departures in Mumbai, which is nice, which is very good. But this 35 departures out of our base of 1400 departures. So it doesn't really impact us that much. It's hard to move the needle on base of 35 new departures in Mumbai. And finally, also, the telltale sign is when we look at what happened in this quarter that we're reporting, where does the unit revenue improvement come from? If it was jet driven, you would say, oh, Bombay must have got a big unit revenue improvement followed by Delhi because that's where the jet capacity was in and out. Well, the answer is no. Of our 6 hubs or not hubs, that's the wrong word, of our 6 metros, Mumbai was actually performed number 2 and Delhi performed a weak number 5. So most of the revenue impact that we're seeing is from our own internal reallocation of capacity, sales initiative, etcetera. We find very little evidence of a strong jet scale. Thank you. The next question is from the line of Mayur Milla from IndiaNIPESH Securities. Please go ahead. Hello. Yes, hi. So, we just wanted to get your attention back from for the lease rental that you mentioned. So I checked that there's a difference of about INR 3.75 crores. You mentioned that there is some benefit of favorable ForEx. And there was some I thought you mentioned 4 aircrafts for given back, is it? Yes. I mean, I yes, we can I mean, just to repeat what I said earlier, On a sequential basis, there's a small benefit on ForEx, and there was an extra hit in rental expense last quarter due to early return of some older CEO aircraft? When you do early return, you take a charge against that and that's what impacted it. So when you look compare it sequentially, that's what will explain the reconciliation. And on a year on year basis, you see that foreign exchange was actually worse on a year on year basis and that's why you see it up. So that's why you'll get 2 opposite effects if you compare sequentially or year on year. Yes. So I was just doing a lease rent per ASK kind of calculation. And if I look at your 5 quarters gone in the past, it was in the range of about MXN 58 per ASK between 4Q and 2Q, and then it drastically went up to MXN64 in Q3 and Q4. And now all of a sudden, it comes down to MXN 47. So that is where I'm lacking the understanding. So what will be the normal for ASK kind of rentals that we should actually look at? Right. So I think one of the things that you need to adjust was foreign exchange that actually affects it fairly significantly. But why don't we I mean, this is just a detailed reconciliation that we can walk you through offline. One of the other factors that you should note is when you're looking at comparing lease rentals from prior periods to the current period, the prior periods had supplementary rent as part of lease rentals. In the current period, the supplementary rent is a separate line item and it's only the base lease rentals that have been capitalized. And so there's a line item called supplementary rent and aircraft maintenance. So that's the reason why the number has dropped because there's just a portion of it that's in another line item. But why don't we I think this is sort of just detailed reconciliation that Ankur can help you with offline. Sure. And just one more question on the RASP part. So yes, we do understand that Q2 is apparently the weakest quarter. And when you say that you're already witnessing some pressure, it could, of course, be the seasonal pressure as well. What I'm trying to understand is can we just have a kind of level that at least a Y o Y, the yields and the RAS looks better? Or we are still not in a position to determine that as well? Yes. Like you said, we lost 16% PBT. We're not expecting anything near that loss. But what we are pointing out is we have a steep hill ahead of us to climb. So yes, things will be better than last year for sure. But we still have a deep hole we're trying to climb out of. Of. The next question is from the line of Deepika Munza from JPMorgan. Hi, good evening. Thank you for taking my question. Just firstly, wanted to clarify on the RASK bid. You mentioned that about 5% from your internal efforts, another 2% to 3% from Jet Airways. Given that the increase was about 11%, what would be the balance be attributed to? So when I'll answer and then Willy can also step in here. So look, when we did our 5% and we said, okay, in the Q1 sorry, last quarter, we did that and we said it's an ongoing effort and we think it will on a full quarter basis should be 5. That doesn't mean we stop there. We continue to reallocate. We continue to take sales initiatives. So yes, we are seeing more than what we had expected. And with that, I'll ask Willy to comment as well. Thank you. I think there's another factor which has come into play, which we've mentioned before on these calls, which is the proportion of revenue that is sold in the 0 to 14 day window as against that revenue that is sold at a much cheaper price further out. And what we saw in this quarter was that, that increased to about 42% compared to 38% in the previous quarter last in the past year. So that in itself had a positive effect on that yield number and accounts for certain percentage of it. Look, we are doing several initiatives across the company to improve revenue. We talked about cargo and how processes are changing. In revenue management, as Billie was alluding to, we used to have this notion that, okay, let's go into the 0% to 15% at 50%. And now revenue management is saying, look, we can be more laser sharp than that. In certain months, it should be 47%. Why should it be 50%. Similarly, in digital marketing, they're doing things that are bringing in online apps, which is helping us. So we do have initiatives across the company. So it's tough to now keep saying, okay, 1% was this and 2% was that. We just have a favorable revenue environment and lots of initiatives across the company. Understood. Just a follow-up to that. You mentioned that the competition has been picking up. So given that the number of initiatives you have underway, is it safe to say that irrespective of competition, your base 5% to 6%, 7% whatever growth in RAS should be sacrosanct? So again, I want to make a distinction between seasonal cyclicality and our base effect. So our base, yes, our base is definitely up 5%, maybe a little more. But within that, we have the seasonal cyclicality. And we don't know the annual cyclicality of is the economy weakening or not. So you have all three dynamics playing out. The only one we are confident of is a 5% to 6% improvement. Got it. And just one last one, if I can squeeze it in. On the CapEx fuel side, any significant tailwind that you're seeing over there? So I mean, going forward, I mean, obviously, this quarter, I mentioned sort of a few factors. One of it was aircraft utilization, which was a little lower because of some sort of what we think are some temporary sort of issues. As we sort of have get the aircraft utilization back to the levels that we had last year, you will see sort of a lot of leverage on fixed costs, especially instead of your aircraft ownership line items, your finance cost and depreciation. So that's an area that we would expect to see some tailwinds. The other thing is just overall on CASK, as the neos continue to come in, they help us and as the old planes go away, fuel costs get a lot better. If you just look at fuel CASK this quarter versus a year ago, fuel CASK was 11% better for us, even though fuel prices were actually only like 1.2% better compared to the same quarter a year ago. So that's already showing up in sort of the aircraft and the fleet plan that we have. So those are absolute tailwinds that we'll have. And as A321s also become a bigger percentage of our fleet, those more seats on the plane actually create some unit cost advantages. So I think we'll be the fleet sort of plan will give us those natural advantages. Got it. Thank you so much. Thank you so much. Thank you. The next question is from the line of Arvind Sharma from Citi. Please go ahead. Hello. Thank you, sir. Thanks for taking my question. My question is again on the accounting standards. Mr. Sharma, can you be a bit loud, sir? Whenever you hear me. Can you hear me now? Yes. Yes. Thank you for taking my question, sir. And again, it's on the accounting standards. Sir, we see that when the expense hits of the previous quarters have been reclassified, there's been actually a slight decline in EBITDA, I'm saying, before reclassification of the rentals and after on the EBITDA per se, purely because some of the Sotheby's rentals have moved above the EBITDAR line. So will it be correct to assume that the currently reported EBITDAR is actually lower than what would have been had you persisted with the previous categorization, irrespective of the accounting changes, only the supplementary rentals moving away from the rental line. Will that be current target assumptions to make? Yes, Arvind, that's absolutely right. It would have been about 33% instead of 27% or instead of 20 yes, about it would remain about 33% if you the EBITDA margin would remain about 33% if we added supplementary net. Okay. So again, I mean, on a quarter on quarter basis, it would have been a substantial increase versus what's reported right now? That is correct. And it's the way the accounting standards work, we are sort of reporting under the new standard and you're not restating the old. So the comparison is not necessarily apples to apples. As we go forward in next quarter, we publish the balance sheet. We'll try to do more sort of details that we can give to help all of you model this better. Having said that, I think when people look at EBITDAR to calculate firm value, typically you look at your EBITDAR margin your EBITDAR, you take a multiple of that, you get an enterprise value and then you deduct debt. So one of the earlier questions said that the earlier people would overestimate would make a higher estimate of debt. Now with the actual debt, it's slightly lower. EBITDA is also slightly lower. So ultimately, on a like for like basis, if you use EBITDA to calculate an equity value, you'll roughly get to the same answer. On a P and L basis also, it actually if you exclude the foreign exchange mark to market, which was a benefit in this quarter, if you exclude that, it's roughly sort of neutral. So that's but yes, you're right. When you look at EBITDA in isolation on a like to like basis, the new standard would have understated compared to the old. Okay. And sorry, I mean, it's a bit elementary, but on the supplementary rentals and aircraft repairs expenses that you shared with us of around INR 10,000,000,000, How should we how should one see these? I mean, how much of it is supplementary interest, which is directly related to the fleet part? Another part is maintenance and repairs, which could vary according to the age of the overall fleet. So will you provide some more further granularity? Or do you think it is not really something that would change materially? Actually, so it's not it's a good question, Arvind. It's about fifty-fifty. It will change a little bit on because the maintenance side of it, as you know, there is a little bit of volatility based on the number of shop visits we have on the A320 CEO aircraft. So there is a little bit of volatile utility on that side while the supplementary rent is will be based on the hours we fly the aircraft. So but it's roughly fifty-fifty. All right. And one more question again on the subliminal dispart, if I may just squeeze through. You gave an idea about the net assets increasing by around INR89100 crores. So if I understood correctly, essentially the deferred incentives which were there in your balance sheet on the liability side, and I believe in 2018, the last annual report was around $20,500,000,000 A part of it would have moved to the asset side and netted against the ROUs. Is that understanding correct? That's correct. And I think we'll publish our annual report very shortly as we send out the notice for the AGM. And so you'll have the March 2019 detailed figures out available shortly. But that's what you said is accurate. Thank you so much. Thank you so much for taking the question. Thank you. The next question is from the line of Santosh Sheer Desai from SBI Cap Securities. Please go ahead. So many thanks for the opportunity. I just want to go back to the last point that was discussed in terms of deferred incentives netted off from your right to use asset. For the incremental aircraft induction that's going to happen, would it mean that there won't be any SLB cash flows into the company and the aircraft would be recognized at cost on the balance sheet? Or it wouldn't actually be so? No, I mean, so the actual transactions will be exactly the same, cash flow will be exactly the same. The Just the P and L impact is that that ends up reducing your depreciation expense instead of reducing lease rental expense that it would have done earlier. So really not much material change. Okay. So the cash flows will continue to come. Instead of reducing your gross lease rentals, you'll see a lower depreciation on account of this netting of gross block from the deferred incentives? Exactly. There will be no change in the cash flow than the cash flows. Sure. 2nd related one, so was also trying to understand in the past for the financials assets, you had talked about the depreciation being higher in the income tax books and because of which the the effective tax rate is much on the lower side. Under the current arrangement of the new norms, would that still be the case so that your tax rate continues to be on the lower side as per the income tax books? I think we've talked about our tax rate being low because of differences in sort of your book and tax of tax things, which have a number of factors, which there's significant line items that are subject to tax and not to tax. And so there's a whole calculation and there's a reconciliation in our annual reports every year and you'll see it this year as well, which will have the reconciliation of your effective tax rate on for purposes to the statutory tax rate. So my suggestion is why don't you look at that disclosure that comes out in the annual report and of these questions, please call Ankur. Sure. Thanks, Manish. Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Sangru Goel for closing comments. Thank you and over to you. Sorry, we could not take all the questions because of lack of time. I hope you found the call useful. Thank you. Thank you very much. Ladies and gentlemen, on behalf of Envigo, this concludes today's conference. Thank you all for joining us, and you may now disconnect your line.