Good evening, ladies and gentlemen, and welcome to IndiGo's conference call to discuss the fourth quarter and FY 2019 financial results. My name is Aman, I will be your coordinator. At this time, the participants are in listen-only mode. The question and answer session will follow today's management discussion. As a reminder, today's conference call is being recorded. I would now like to turn the call to your moderator, Mr. Ankur Goel, Head of Investor Relations for IndiGo. Over to you, sir.
Good evening, everyone, and thank you for joining us for the fourth quarter and FY 2019 earnings call. We have with us our Chief Executive Officer, Rono Dutta, and our Chief Financial Officer, Rohit Silat, who will take you through the 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 question and answer 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. A transcript of the Q&A session may be uploaded subsequently. With this, let me hand over the call to Rono Dutta.
Thank you, Ankur. Good evening, everyone, and thank you for joining us on this call. We announced our fourth quarter and full year FY 2019 financial results today. Our results for the full year were, of course, not great, in that we essentially had a break-even year. But it is important to note that we made a sharp U-turn during the year with losses in the first two quarters and then a recovery of profit in the last two quarters. We had earlier discussed the challenges the industry faced in the first and second quarters, so it is best now to focus on fourth quarter results and the trends that we see going forward. Fourth quarter ending March, we delivered a profit before tax of INR 6.2 billion, which equates to a fairly respectable 7.8% profit before tax margin.
Our capacity for the quarter increased 29% year over year, with our domestic capacity growing at 24% and international capacity growing at 60%. International capacity now represents close to 20% of our capacity. We were particularly pleased that our international RASPs, RASK or unit revenues, improved at a healthy 13.6% year over year as against domestic RASK improvement of 6.2%. In explaining our revenue trends, it will be helpful to break it up into three factors. The first factor is what is happening to our unit revenues based on the actions we are taking internally to improve them. We have optimized the network, and 10% of our capacity has been reallocated during this quarter. We have also taken some sales initiatives to improve performance on our distribution channels. Finally, we are ensuring higher connectivity on our international flights.
All these factors created a 2%-3% year over year improvement in our unit revenues this quarter. On a steady-state basis, we expect a boost of 5% unit revenue improvement for the next financial year. The second factor is the Jet Airways cessation of service that helped our revenue performance in the last week of February and the whole of March. Overall for the quarter, we think that the Jet Airways effectively increased our unit revenue by 3%-4%. Looking forward to the first quarter of 2020, our April revenues have been strongly affected by the Jet Airways shutdown, and in that regard, April revenues have actually been stronger than even March. By May, however, as the industry has added capacity into Jet markets, the Jet Airways effect has started to dissipate.
By June, I think the effect will pretty much disappear, except in a few international markets where we overlapped with Jet, as in the Middle East markets. That brings us to the third factor, which is the market behavior and pricing discipline. The downside here is that capacity was added rather late in the game without the full benefit of the 90-day booking window. Therefore, the most painful impact is in June in the metro-to-metro markets, where closing fares have come down quite appreciably. Unfortunately, we are also heading into the traditionally weak July-August period, and we are hoping that the new capacity established itself by then. Just to summarize, we have an underlying 5% unit revenue improvement trend because of the actions we are taking internally. We have a Jet Airways bump that is pronounced in March and April and largely dissipates by June.
Finally, we have a new capacity in high-yield markets that is still trying to find its way around. We are off to a good start for the fourth quarter, but I have to emphasize that we have no visibility at this time on the seasonally weak second quarter. The shape of the second quarter will depend a lot on whether the new capacity finds traction in the marketplace and if pricing discipline is maintained. For the quarter ending June 2019 and for the full year of fiscal 2020, we expect that our total capacity will be up by 30%. Looking at our on-time performance for the quarter, our OTP was 76.6%. Our OTP has improved from March onwards, and we have reported an OTP of 90% for each of the months of March and April.
We are also very proud of the many awards that we have received during the year, and I would like to thank our 22,000 employees for enabling the airline to expand rapidly, ensure profitability, and simultaneously win all these customer service awards. I am also pleased to announce that our board of directors has recommended a dividend of INR 5 per share. I would like to share with the investors our internal discussions as it relates to this announcement of dividend. Ever since the IPO, we have been profitable every year, while this year has just been a breakeven year. We think this past year was an anomaly, an aberration, and going forward, we are bullish on our financials. Given the profile of our profitability, past, present, and expected future, we decided that we want to establish ourselves as a company that gives out dividends every year.
We realize that having set such expectations, we will of course have to deliver on them. But this management team is indeed resolved to do exactly that. With that, I turn you over to Rohit.
Thank you, Rono, and good evening, everyone. For the quarter ended March 2019, we reported a profit after tax of INR 5.9 billion, with an after-tax profit margin of 7.5%, compared to a profit after tax of INR 1.2 billion with an after-tax profit margin of 2% during the same period last year. We reported an EBITDAR of INR 22 billion with an EBITDAR margin of 27.8% compared to an EBITDAR of INR 11.3 billion with an EBITDAR margin of 19.5% during the same period last year. We reported a profit after tax of INR 1.6 billion for the full year. As Rono mentioned, our profitability was better during the quarter compared to the same period last year, mainly on account of better revenue performance.
Our total capacity for the year was 81 billion ASKs, an increase of 27.6% compared to the same period last year. Our total capacity for the fourth quarter was 22 billion ASKs, an increase of 29.4% compared to the same period last year. Our revenue from operations in the March quarter was INR 78.8 billion, an increase of 35.9% over the same period last year. Our other income was INR 3.8 billion for the quarter. Our RASK for the quarter was INR 3.63 compared to INR 3.43 during the same quarter last year, up by 5.9%. This improvement in RASK was primarily driven by higher yields, partially offset by lower load factors.
While our yields were up by 12% to INR 3.7, our load factors were down by three points to 86%. Our CASK for the quarter was INR 3.35 compared to INR 3.33 during the same period last year, up by 0.6%. Our CASK excluding fuel was INR 2.09 in the current quarter, an increase of 6.7% through the same period last year. Excluding the impact of currency depreciation, the increase was 4%, which was primarily driven by an increase in our maintenance cost. Our balance sheet continues to remain strong. Our cash balance at the end of the period was INR 153 billion, comprising of INR 61 billion of free cash and INR 92 billion of restricted cash.
Our debt at the end of the period was INR 24 billion. Before I close my remarks, I would like to mention that we have adopted the new lease accounting standard, Ind AS 116, with effect from first April 2019. This standard requires us to capitalize our operating leases, and as a result, we will record a lease liability and a corresponding asset associated with these leases on our balance sheet. In our P&L, there will be a reduction in operating lease expense offset by an increase in depreciation and interest expense. I would like to emphasize that while you will see some changes in the balance sheet and P&L as a result of this new accounting standard, there have been no changes with respect to the fundamentals of our business or the cash flow that we generate. With this, let me hand it back to Ankur.
Thank you, Rono and Rohit. 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 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 one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star two. Participants are requested to use hand sets while asking a question. Ladies and gentlemen, if you could wait for a moment while the question queue assembles. The first question is from the line of Ansuman Deb from ICICI Securities. Please go ahead.
Thank you for the opportunity, and congratulations on the good performance. My question was regarding the structural improvement measures that you were referring to, in terms of capacity relocation and higher international share and the sales and distribution mix. The effect of this would be around 5% for the next year in terms of fare growth. Was that what you meant when you said that?
It's not necessarily fare growth, it's unit revenue growth.
Unit revenue growth.
Could be fares. Could be fares or load factor. Yes, 5% year-over-year improvement is what we see going forward.
Okay. My question was regarding the wide-body order, which we kind of contemplated for international expansion. Do you have any color on that? Any specific details on that?
Wide-body, there's nothing imminent.
Okay.
Are we studying it? Absolutely. Are we about to place an order, or do we see something happening in the near future? No.
Okay. Thank you.
Thank you. Next question is on the line of Himal Singh from Morgan Stanley. Please go ahead.
Hi, Deepak. Thanks for the opportunity. My question is, basically, we've guided for around a 30% expansion in ASKM. Could you share just what percentage will go in international, and what is the impact of that, positive or negative in the P&L? We are growing quite fast in the international business. I assume that would be a little bit of a drag on earnings. Similarly, what percentage of that is going to go towards neos? Thanks.
We've consistently said that of the capacity coming forward of 30%, half will be domestic, half international. Half of the 30% goes domestic and the other half goes international. All our new aircraft are coming in on neos. It's all 100% neos, which is helping us reduce our cost. In terms of the international being a drag, we really have an S-curve of profits by markets, if you will, but both domestic and international markets. Some of the international traffic is very profitable, higher than some of the domestic profits. There's no blanket statement of one being more profitable than the other. The reallocation tries to optimize all that, to try and move this S-curve to the right, if you will.
Whatever average profitability we have, we have a goal of moving the entire basket of markets to the right, and some of those are domestic, some of those are international. Did that answer your question?
No, yeah. That's quite helpful. We know, like in the previous presentations, you've talked about when the ASKM growth slows down, the unit profitability will start to improve. That sort of flavor is still left with us, right? Probably two, three years down the line when you see ASKMs going down there, that will kick in.
You're right. That is the accepted wisdom in the industry, that, hey, slower growth is good, higher growth is bad. Fortunately for us, that's not true. We have so many high-profit markets which we are going into that we are very, very excited about that. There's always a sort of soft issue or a constraint of some kind. When we find them, they're actually more profitable than averages. I wouldn't assume that growth comes at a price of profitability.
Okay. That's very helpful, and I'll come back if need be.
Thank you. The next question is from the line of Rahul Chadha from Nomura Capital. Please go ahead.
Hi. I have two questions. My first question is on the international strategy. You said you're aggressively growing in international. How do you think that you'll be able to compete with the much stronger balance sheet and experienced players? What is the strategy there? Because so far we've been focusing on domestic, but for the last year or so, we are looking to move in international. My second question is on the domestic front. Being the largest player, how do you think fares will behave given passenger demand is coming down despite capacities are going up? On the antitrust, if there's any kind of information you can give, because your market share is near 3%.
Okay. Let me take, you had two, three questions there. I'll take one at a time. The first question is competing internationally with the established players. I assume you're talking about British Airways, Singapore Airlines, Emirates, all of those. They have a very different business model than we do, as you know. They have full-service carriers. They have business class. The economy is a smaller part of the entire cabin, and the cost structure is much higher than ours. We are a different animal in the market, if you will, and we don't go head-to-head with them, and we are very successful with the business model. When we fly to Dubai, yes, Emirates is well-entrenched, and we are new there, but we are highly profitable. We expect that to continue.
If you look at our international expansion, when we talk about the four corner strategy, we really try and fly the shortest flight to get people into our network. We really are a low-cost operator. Frankly, our model has proved to be hugely successful to us. There was a second question, I think, on-
On domestic. Domestic.
I have to say, part of our business model is affordable fares. Please don't assume that what's happening is a lot of fare increases. Of course, we adjust. Admittedly, March, April, there was a fare increase, but as I said, by June, it's back down again. Our profitability is not driven by increasing fares. Our profitability is driven by flying into the right markets with a low cost. Then there was a third one about antitrust or market share or something. Look, we are dedicated to building an air transportation system in India that's second to none. That's what we're trying to do, and we don't know where that model takes us in terms of market share. What we do know, that we'll be connecting all these tier 2 cities in sort of high-frequency flying so that people can move around more easily.
That's what we're trying to do. Let me show you some examples of that. We know how important tourism is to India. So we are building this Buddhist Circuit now connecting Gaya, Varanasi, and Gorakhpur, which has never been done before. We are connecting it to both Kolkata and Delhi, and we expect to sort of really boost tourism into those markets. In the Northeast, we are not waiting for the government to tell us to increase flying, but we are taking the cities there, like Dimapur, Silchar, Imphal, Aizawl, and we're connecting all those cities to both Kolkata and Guwahati. Then again, as I said, we're developing a plan to take tier 2 to tier 2 connections without going through the metros. These are all things that we are doing to improve the transportation system in India.
I hope the authorities, when they see what we're doing, will appreciate that.
Sure. One last thing. Actually, besides focusing on the passenger revenue and ancillary revenue, is there any thought over the medium to longer term to enter, say, allied businesses like, say, just on, say, airport infrastructure or something where you maybe have some sort of tie-ups with, say, tourism companies or, for example, some booking service companies?
Look, we stick to one thing. We know what we're doing, we are good at what we do, and we have no plans to sort of expand into other areas that we know very little about.
Sure. Thank you.
Thank you.
Thank you. Next question is from the line of Achal Kumar from HSBC. Please go ahead.
Hi. Thanks for that. I had three questions actually, if I may. One is around the operational challenges. Where are you in terms of your operational challenges on the PW, on the pilot problem? The third one, which is not yet started, is IFRS 16. When are you planning to incorporate IFRS 16 into your books of account, and what sort of challenges do you see around that? Second, I wanted to understand about your aircraft financing strategy. Are you still looking at complete sale and leaseback, or is there any change in your aircraft financing strategy? The last one I wanted to understand about, what's your view on the low-cost business class on the long-haul operations? I mean, I understand that it doesn't mean that you're planning to. You're thinking about offering low-cost business class seats. Is that true?
What's our strategy you are looking around that? Thank you.
Wolfgang here. I start with answering the questions on PW and the pilot questions you asked. First on PW, we see a strong improving trend for our performance. Our technically due special liability is 99.85, which is actually comparable, 100% comparable to other engines. A lot of improvements have been achieved in the last one year. If you look at, for example, the always rolling trends of certain parameters of the engine performance, which have, let's say, in terms of in-flight shutdown rate, has been reduced by half and is now very much below the international required standards. We are absolutely confident that all these measures which have been initiated by PW show results. For most of the issues, resolutions have been found and are implemented. We have right now two areas where we focus on together with the manufacturers.
For one, this is the blade at the third stage of the engine, a solution implemented for all deliveries in June, it starts. Another area for a gear, where we have also expected solution by September to be implemented. All these matters are under control. We have no MTFs with sufficient spare engines, and we are absolutely confident in how the engine is operating. On the second point, you mentioned the pilots. If you recall, we had a pilot shortage three, four months ago, I have to admit that. In the meantime, we release about 40 captains every month. In the meantime, we have coupled with sufficient pilots and have enough numbers to execute our expansion program. We are well on track.
Looking forward, we also have something like 285 Jet Airways pilots who already joined us, and they will be online within three to six months. I expect this number of 285 to increase further. Looking forward, we will have sufficient pilot strength to support our expansion program.
Great. This is Rohit. I will address your questions on Accounting Standard 116 and the sale and leaseback question. First on 116, I think in my prepared remarks, I talked about the fact that we have adopted the new standard as of the fourth April, where our operating leases will be on balance sheet. I'll give you a little bit more color in terms of rough numbers. Roughly we will have a lease liability of approximately INR 140 billion that will be on our balance sheet, and a corresponding asset of about INR 150 billion will also be on our balance sheet. That will be the balance sheet impact. On the P&L side, for the financial year FY 2020, the coming year, we would expect it to be roughly neutral.
The reduction in lease rent expense will be almost exactly offset by the increase in depreciation and interest expense. P&L impact will be neutral, which is kind of what you would expect with accounting standard is only trying to bring a liability on the balance sheet. The only other issue that I will point out is we will be marking the liability to market, and that impact will flow through our P&L. Depending on the change in the exchange rate, the mark to market of the liability will also affect our P&L. That's 116.
On the business class issue, we've said repeatedly, I think that, look, the airline business really segmented out strongly of less than six hours flying and over six hours flying. In the less than six hours flying, the business model has been tried, tested, and is established everywhere around the world. In the long haul, over six hours flying, many people have tried, no one has come up with a good model yet. I'm not saying we have any of the answers either. When people say, "Are you going to do a business class? Are you going to go wide body? Are you going to go long haul?" This is very preliminary in our thinking. We're just putting our thoughts together. All options are open at this point on that regard.
This is Rohit. Just to finish up on 116. There's just one more point I wanted to add. I think most of you on the call are very familiar with the fact that the airline industry for years analysts and investors have always looked at off-balance sheet debt and estimated an adjusted debt number using different lease utilization factors. Some people use five times rent, some people use seven times rent, et cetera. There's nothing really new with the standard other than it puts it on the balance sheet. I also wanted to address your question on the financing model. We primarily have been relying on the sale and leaseback model to finance our planes. Having said that, over the last year and a half, we've signaled that we would like to start owning some planes outright with the cash flow that we generate.
We had started buying, I think we own about 12 of our ATRs, which we bought outright with cash. We had planned to buy some A320s, because of the little bit of uncertain financial environments over the last year, I think over the last many calls had explained that we sort of temporarily slowed down our thoughts to buy planes. As our cash starts building up, it's certainly something that we will utilize some of our cash flows to buy some planes as well.
Okay. What I understand is that I take this very positive which you said that there is a neutral impact on the P&L other than the Forex impact. Generally what I understand, the young leases are penalized more in the initial years, and you have all the young leases which are not appreciated. In the initial year, that should have a more impact on the P&L. I'm not sure if I'm true, that's what I get from the national airlines and international standards.
Yeah. You're absolutely right. The issue is with most of our leases are 6-year leases, which on average will have our leases that we're entering, which will sort of be on an average life. That would be true if our leases were 12-year leases. Here, this early part of the lease is the first three years and the latter half is the next three years. Because our leases are short-term, that's why the effect you won't see that material impact.
Okay. Thank you. Thank you so much.
Thank you. Next question is from the line of Sonal Gupta from UBS Securities. Please go ahead.
Hi, good evening. Thanks for taking my question. Could you give us some more insights on the 5% unit revenue improvement that you talked about? Is this going to come because of faster ancillary revenue, cargo growth, et cetera? You said this is driven by internal initiatives, right?
Right. Cargo, ancillary, those are also important areas for us. I would also say that so far we've been handicapped in cargo a little because we are flying routes that are not cargo-rich. As we go internationally, we do get more cargo-rich. Those are add-ons. Yeah, cargo should do better. Ancillary, the same thing. As you go long haul, people will tend to buy more meals. They will tend to sometimes have two meals. All that are potentials, but I'm not including that in the 5%. We had a project team put together in around December, January, and we said we need to improve our unit revenue and what can we do? These are the three areas we focused on as low-hanging fruit. That doesn't mean that that's all there is going on in the company. Of course not.
We have got initiative to improve customer service, initiative to improve cargo, initiative to improve ancillary, as you suggested. Those are not included in the 5%.
Just another question, if I may, is just on the international slots. How does that allocation take place? Do you need permission from the like say if flying to Middle East or somewhere?
Absolutely. There are two issues, and they're looked on almost separately. Domestically, it's about slots. It's not just Delhi and Bombay as people seem to think. It is also like I need a slot in Pune and Goa. Everywhere there's a slot issue. Those are domestic. You come to the international flying, and they are governed by bilaterals. Who has how many bilaterals by country is an issue, and who has applied for it. Jet is a good example to focus on. Jet has shut down and a lot of authorities, if you will, they are now available. Several discussions going on with the Ministry. Everyone's applying for some of those, but we can't fly them until the Ministry approves them.
They'll approve them by saying, "Okay, IndiGo, you get this, and GoAir, you get that." After they give us authority, we have to start the slot process again. Because if they just say that you can fly Mumbai to Hong Kong, it doesn't mean you can start flying. You still have to go to the Hong Kong airport and get a slot. You still have to go to the Bombay airport and get a slot. Yeah, international is a two-step process. First, get the bilateral authority, get the slots at both airports.
Would that require any payments also for international slots, like say to Hong Kong?
No. If you're going to Heathrow, yeah. Yeah, highly slot constrained, let me tell you. Getting a slot in Hong Kong is not easy. We have some rights that we have not been able to use because we don't have the slots. These are tough to negotiate inside.
Sonal, it's not like this. The slots itself, the airports don't charge you. They charge you landing fees. That's their model, is they charge you landing fees.
Sure. Basically, given that we have a certain fixed number of bilateral rights which are there from India, and say now Jet's allocation obviously going out, you can get it or other people can get those slots. You don't need an approval from the government to fly, right? You just need approval from the Indian Ministry and then negotiate for the slots with the.
That is correct.
Okay, great. Thank you so much. I'll join back.
Thank you.
The next question is from the line of Deepika Mundra from J.P. Morgan. Please go ahead.
Hi. Good evening. Thank you for taking my question. As your seat rent increases with the increasing international mix, does that factor in into your 5% unit revenue growth?
The 5% unit revenue growth is a set of actions we're taking on a specific project. Everything else remains the same. As we talk about cargo, our CASK, our RASK, everything remains the same and goes along with the trend, which was a very concerted, specific project effort to try and drive our unit revenue. It doesn't affect anything else.
Understood. Could you give us a little bit more color on the slightly longer-haul routes? How is the utilization now trending? I mean, the newer routes that you've launched, and specifically on the return, are you getting enough demand on the six-hour, seven-hour routes?
Yeah. We are very pleased with it. I'll tell you the only route that, as you can imagine, with Delhi-Istanbul, because we now have a fuel stop. That one is an issue for us until the Pakistan airspace opens up. By and large, most routes are doing well. We are happy with the utilization, happy with the profitability. As I just read in my prepared remarks, year-over-year, international actually improved sharper than domestic did. We know how much of an impact Jet had on the domestic. International overlap with Jet is not that large, except in the Middle East, and yet we are performing very well. Yeah, we are pleased with international.
One last question, if I may. You mentioned that you plan to give out a dividend each year. Any specific dividend policy in terms of a payout?
You mean in terms of what yield are we targeting?
Yes.
No. It will depend on profitability. What we're saying is we are committed to make sure we earn enough profits to give out enough dividends, but it will all depend on what percentage profits we are making. Our other cash needs for that matter, as we said. We would also factor in that we'd like to own some more airplanes.
Got it. Thank you so much.
Thank you.
Thank you. The next question is from the line of Santosh from SBICAP Securities. Please go ahead.
Many thanks for the opportunity. I have two questions. First one on the non-fuel CASK side. You had mentioned it's gone up in the quarter by 6.7%, and part of it is due to the movement in Forex. You did mention that some bit was attributable to the maintenance side, which has seen an increase. Just wanted to understand, is this more of a one-off, or we should expect this to continue going ahead?
Santosh, you are absolutely right. I said the 6.7% was partially Forex and partially maintenance. Without Forex, it was 4%. The majority of the 4% is maintenance. This is something that has been there for the last year or 12 to 15 months, as we've had a number of our older aircraft, the ceo aircraft that went through lease extensions, go through a second shop visit. The second shop visit is usually at the eight-year mark, which was not sort of originally anticipated, because originally we expected to keep all these aircraft only for six years. I think I've explained on the last couple calls as well that we had this bubble. I think this bubble will continue through the next year or so, but it starts to dissipate over the next year.
You'll see it come down slightly over the next year, but then this sort of bubble will be behind us two years from now.
Sure. This is mostly linked with the average age of the fleet, so to say. That's how one should read it, right?
Yes, that's correct. As those older aircraft exit the fleet and are replaced by Neo, this bubble will sort of be behind us.
Understood. The second one was around the A321neo that you started adding now. Just wanted to understand the unit cost structure. How is it different from the A320neo?
It's in the range of 8%-10% better on a unit cost basis than the A320neo.
This is compared to A320neo, is it?
Yes. neo to neo. 321 versus 320, neo to neo.
Okay. All right. Thanks so much.
Thank you.
The next question is on the line of Joseph George from IIFL. Please go ahead.
Thank you. This is Joseph from IIFL. I had a couple of questions. One was, right now, when we look across the economy, we are seeing a significant slowdown in many consumption categories be it autos, be it FMCG growth or consumer electronics, et cetera. I just wanted to check whether you are seeing a similar trend in your category as well, especially when you hold fares constant on a year-to-year basis.
Actually, we are not seeing that kind of slowdown that the press is reporting. The press reports that traffic has gone down. The fact is passenger traffic is very closely correlated to capacity. If capacity goes up, traffic goes up. If capacity goes down, traffic tends to go down with it. Recently capacity has gone down, led by the MAXes, the grounding of the MAXes and then, of course, Jet. The correlation is very tight. Going forward to May and June, looking at our load factors, they're bouncing back up nicely. If you were to say, what do you think is happening to airline traffic in the next year, in the sort of shorter term? We'd say it's going to be up 20-some%. That's our best forecast.
All right. My second question was, based on your internal estimates, what do you think domestic industry capacity will grow in FY 2020? Any rough trends that you'll be able to give us?
That's very hard to say, because we know our numbers and everyone else's numbers I think are sort of speculation. As you know, Spice got a lot of Jet airplanes. With TruJet it's sort of the same. No, we don't have a clear sort of sight into other people's growth plans. Seems very volatile at this point.
Okay. Thank you.
Thank you. The next question is from the line of Nit Manu from Birla Sun Life Mutual Fund. Please go ahead.
Hi. Good evening. I heard you say that your fares have not gone up. It's more about your margins have basically increased because of different routes and costs being under control. I just want to understand, your yields show a pretty decent increase on a year-on-year basis. If you could throw some light on that how much of it is mix?
Right. As we said, March and April were strongly affected by Jet. Fares did go up. Remember, Jet overlaps on maximum about 40% of the routes. 60% of the routes, there is no Jet effect as such. What is happening there is we do have strong routes, we do have weaker routes. To the extent we optimize our network by saying it's almost like a plumbing problem. Where are the choke points? Try and add capacity there. Where are the pipes empty? Try and take capacity out of there. When you do that, you get an automatically improvement in yield. Although in each specific market, fares haven't gone up. It's this mix change that creates most of this impact. Acknowledging completely that March, April and May are affected by Jet.
Sure. Now I want to understand, let's say your yields show approximately 10% improvement over last year in this quarter. Would it be fair to say that more than two-thirds of it is because of mix and the rest is because of fare? Because not all routes would have seen fare increase.
Right. As we said, of a 5.9% improvement for the quarter now, I'm not steady stating it for the next quarter. Last quarter, we had a 5.9% unit revenue improvement. We looked at that and said, how much is that because of our actions and how much of that is because of Jet? Our best guess is that 2.5% of that is us doing stuff for the quarter, and the remaining 3.5% or so is because of Jet. You can use that ratio as to what's happening in the marketplace.
Okay. When you say fares have now again come back down. That means only that part will actually go down. The balance there you'll actually continue to retain going ahead. Is that a fair understanding?
That's why I try to give it as you have to understand three different factors. One is what are we doing in terms of this mix? Don't forget there's sales channel initiatives and there's international connectivity. Don't just focus on the optimization of the network. All three had an impact. We said, how much is that? We give you that number. That's a 5% steady state. We're saying for the whole year, we should get it. Year-over-year, we should get a 5% improvement. We said separately, there's a Jet impact. We said the Jet impact was strong in March, stronger in April, coming down in May, and disappears in June. That's the bumps effect. We said, however, there's a third effect, which is actually a negative, which is much of this capacity has gone into metro-to-metro markets.
In metro-to-metro markets before we had established players doing their thing, and it was a pretty steady environment. Now we have new players coming into that market and they're coming in very closely. They don't have a 90-day booking window. The third impact is actually negative in terms of this new capacity coming into high-yield markets. Those are the three trends we were trying to delineate one from the other.
Okay. My last question is, Rono, now that you mentioned that initial squeeze which happened and which took place, which is behind us at hump, right? Now how do you see the situation, especially in that up to 15 days bucket, how do you see fares and competition behaving in that bucket?
In June, we said that 0-15-day window, the fares are weaker, appreciably weaker. Up to May we are good. Half of June it seems to be getting weaker. Again, as they get this 90-day booking window behind them, they could behave differently. I mean, clearly, if you're going to put in a flight to Bombay, Bangalore with a sort of 20-day notice, you'll rush to fill those seats, right? It is going to bring down fares.
Okay. Understood. Thank you so much.
Thank you. The next question is from the line of Amit Aggarwal from JM Financial. Please go ahead.
Thank you for taking my opportunity. Sir, like you said, to capitalize these in the industry, we use somewhere around 5 to 7x. If in FY 2019, we see we have a INR 50 billion of rentals. If we use 5 to 7x, the capitalized lease should be somewhere in the range of INR 250 billion-INR 350 billion. However, you said a rough cut as the lease liability which will be coming in our balance sheet will be around INR 140 billion. Can you explain the difference of what is being missed and what maybe to reconcile this for us?
it's actually a very simple explanation. Our leases are six-year leases, while sort of that normal industry standard of five or seven times is assuming more like a 12 or 15-year lease. Because our leases are six years, we have sort of an average life of three years. Our number is going to be more like 3.5x number, which will reconcile more closely with the number I've given you.
Okay. That was my question.
Thank you. The next question is from the line of Mayur Madat from IndiaNivesh. Please go ahead.
Hello?
Yes.
Yeah, hi. Two questions from my side. One, just trying to analyze. DGCA recently reported the April numbers. What we see is that IndiGo has gained significantly. We see a 20% year-over-year growth in passenger traffic for IndiGo versus the -5% for the industry. We see zero market share improvement for SpiceJet. What we don't understand is while there are demeter equipment, this SpiceJet has picked up a lot of Jet Airways aircrafts. We haven't really seen any benefit really flowing there. Just wanted to understand that, do we see the impact coming now? Will it hit both us in terms of competition and the yield benefit?
You have to remember that first of all, the capacity went down because of the MAX grounding. They're trying to bring in this Jet Airways aircraft. The Jet Airways aircraft, they're coming in at a certain pace, if you will. I don't think they're all in there and all flying and all flying at full utilization. They had a bump down because of MAX building up and that's why I say it's kind of volatile when you say what is the domestic capacity going to do next year, in the next three, four months. It'll all depend how quickly SpiceJet is able to get these planes up in the air.
Right. Secondly, continuing on the same thing. While we've seen your personal traffic growth really going up by 30%, you are also mentioning that you're going to see an addition of about 30% in your ASP for the quarter and for the year as well. Even if that growth rate continues, my sense is that your fixed cost will be up for about 30% of the capacity, while you'll be generating revenue for about let's say 20%. That is why I'm assuming that you continue with the same kind of growth, which you yourself are mentioning that you are now seeing a kind of zero to diminishing impact of DGCA really going forward. Just trying to understand that how have we planned our cost when the fixed cost anyways looks to be going up because of higher capacity addition for the company.
Let's see if I can decipher that. You're saying our costs will grow faster than the revenue is that your concern?
My sense is that most of the aviation cost is kind of fixed in nature. When you add 30% capacity, you are definitely adding a cost of 30% addition. As we rightly know that SpiceJet will become aggressive, the other guy will start coming in between micro routes. The yields might again go back into pressure. Just trying to understand, is there any other lever left with us other than the external yield where we could still continue the kind of performance that we've generated?
Look, I mean, I like to say that I look at this at a market-by-market basis and I say, are we gaining or are we losing? I'm very comfortable that we're gaining ground. I mean, our system, remember I talked about choke points. Our biggest choke point was Mumbai. We look at each market, we say, okay, Patna, Coimbatore, Lucknow, I want to do this. That's where we're going. It's like, okay, we're doing well in every direction. But in the direction of Mumbai, we choked. Suddenly now Mumbai has opened up. That clearly makes a big impact to all our markets where the traffic was getting choked before. We look at the Middle East markets.
The Middle East market also long-term, there has been a reduction in capacity because of Jet Airways, and I'm saying, "Hey, that looks pretty good, too." I can go eastwards. We are quite optimistic about the markets we are going to fly into Asia, where actually no one is flying today. As we said, we'll go to Hanoi and China. We'll be the only Indian carrier flying into those routes. Metro to metro, we used to have some gaps in our schedule, and just to make this more live, if you will, we were like, "Oh, if we only had a Mumbai to Chennai in the morning. We're missing that." Well, now we have a Mumbai to Chennai in the morning, which we didn't have before. If I look at every market, it's like, there's lots of room to be positive here.
Just on the cost structure, Wolfgang here. Quite a big amount of our costs are fixed costs, and that's mainly expense. They stay like this or only decrease much below the increase of our capacity. The way we plan our expansion is the most efficient way because we bring in our own aircraft, which we have ordered in the same configuration. We keep bringing also bigger aircraft, the A321. All that tends to lead to much lower unit costs going forward. I didn't fully understand your question that fixed costs grow more or less the same rate as capacity expansion. In our experience, it's not the case. Coupled with the, let's say, very homogeneous growth with our own aircraft coming in, no sudden introduction of business class, which naturally brings up unit costs. We don't need to bring in other aircraft.
All that together, I think your calculation will show that it will have a very positive effect compared to the industry.
Thank you. The next question is on the line of Manish Shah from Nirmal Bang. Please go ahead.
Yes, sir. Thank you for the opportunity. Most of my question already answered. Only one question.
Manish, we request you to use the handset so you're not off mute, really.
Sure. Most of the questions have been answered. Only one question I have. As per the media report, there is some differences between the promoters. Can you update on the same, sir?
Well, like we said at the press release, we want to confirm that there are absolutely no differences on strategy and no differences on international expansion, no differences on management selection. There's one issue that we are discussing right now, and we hope to resolve that in the very near future. Only one issue remaining, which has been stated, and we're very optimistic it will be resolved shortly.
Thank you very much.
Thank you. The next question is on the line of Chockalingam Narayanan from BNP Paribas . Please go ahead.
No, the last question was what I want to ask. Thank you.
Thank you. The next question is on the line of Chintan Sheth from Sameeksha Capital . Please go ahead.
Hi, this is Bhavin. You talked about the unit revenue improvement from the initiatives. Could you comment based on the fleet improvement and the 30% ASP growth? What sort of improvement can we expect for fuel cost, with the pricing assuming the same price? Also because of the possible economies of scale, what sort of improvement can we expect in your CASK?
Yes. This is Rohit. In terms of fuel CASK, as we continue to take on more NEOs, we will see a 15% improvement in fuel burn. If you look at our fuel CASK for this quarter and compare it to the same quarter a year ago, our fuel CASK was 8% better, even though fuel prices were actually roughly the same a year ago and this quarter. That is primarily driven by the improvement in NEOs as well as some improvement in the fact that we've had increased international presence, international capacity, which because of a longer stage length, you burn less fuel on a per ASK basis, and lower fuel taxes in international as well. Those are the two points, but the NEOs definitely contribute a portion of that, and that you'll see going forward.
As we get more and more NEOs and some of the older planes exit, you'll see that increase. As far as the overall CASK goes, with the non-fuel CASK goes, as you see A320s coming in, I think I mentioned earlier to another question that we see about an 8%-10% improvement on unit cost of A321s versus A320s, NEOs to NEOs. That we'll see improvements from that as well.
If I may just ask 1 follow-up on that. If I take a full year on a INR 520 versus Q4 that you just completed, and all else being the same, the prices of fuel and everything, what sort of improvement can we expect on a 12-month basis on those two parameters?
I think I've given you some of the information that I could give you.
Okay.
On both fronts.
Sure. Understood. Your other income hasn't come down. 1 thought that with a lot of money moving into foreign currency, it would come down. What is the reason? Can we expect it to continue at this kind of levels?
It will start from our interest income, which is based on the interest we earn on the deposits with foreign currency will start coming down with the reduction in foreign currency deposits. You'll start to see that coming down.
Thank you. Next question is on the line of Sonal Gupta from UBS Securities. Please go ahead.
Yeah. Hi, thanks. Giving my question again. Just on the international, one is, do we see this expansion largely to be A321 led in that sense? The second thing was also in terms of anticipating your numbers on 50% of capacity going into the international route seems to imply like an 80%-90% growth in international ASK for the year and like you were hinting at that it's not easy to get slots, et cetera. Is this already pre-modeled build-out? Given that things have also opened up with Jet Airways, this is including that benefit. Just some color there.
The growth between now and December of this year is pretty much sort of signed, sealed in terms of we've got the slots, we've got the bilaterals, et cetera. Going forward from December to the rest of the year, we are still applying for slots, applying for bilateral routes and so on. Most of it is done. I would also say that the international really, people think that as you grow, you're growing into less profitable areas, and that really is not true. Many of these international markets we are quite excited about, they'll be highly profitable. Don't forget, for every international passenger, you really get a bump of about 0.3 passengers domestically, because every international passenger tends to do a domestic connect on the domestic route.
All of that makes us quite optimistic about our route network going forward with International being a major add.
David, I would add here that the good thing about the A320 families is that we can use the aircraft in a very flexible way. There are certain routes which might require only A320 size, and a lot of routes will require A321. Actually, we can deploy our family from all parts of the country on our International routes and it will be very, let's say, heterogeneous network we are having on International. That A320 family will play a very important role, both A320 and A321 to us. A321 has the added benefit that we can also use the aircraft on high density domestic routes where the airports are slot constrained. That will also give us an additional advantage with the A321 going forward.
Would you be able to indicate a number for how many A321s you expect this year?
Yes, I think so. I can tell you total aircraft. The total number of deliveries we expect this year is 53 narrow bodies, meaning A320 and A321s and 11 ATR. This is through next financial year. This is not all growth because there's some aircraft returns as well.
We will have an exit of 15 A321 in this financial year.
Okay, great. Thank you so much.
Thank you. Ladies and gentlemen, that would be the last question. I now hand the conference over to Ankur Goel for closing comments. Thank you and over to you, sir.
Thank you all for joining us. I hope you found the call useful.
Thank you very much. Ladies and gentlemen, on behalf of IndiGo, that concludes today's conference. Thank you all for joining us. You may now disconnect your lines.