Good evening, ladies and gentlemen, and welcome to IndiGo's conference call to discuss the third quarter financial results for fiscal year 2018. My name is Aman, and I'll be your coordinator. At this time, the participants are in a listen-only mode. A question and answer session will follow today's management discussion. As a reminder, today's conference call is being recorded. I now would like to turn the conference to your moderator, Mr. Ankur Goel, Associate Vice President, Treasury and Investor Relations for IndiGo. Thank you, and over to you, sir.
Thank you, Aman. Good evening and welcome, everyone. Thank you for joining us for the third quarter fiscal 2018 earnings call. I have with me our President and Managing Director, Aditya Ghosh, and our Chief Financial Officer, Rohit Philip. Before we begin, please note that today's discussion may contain certain statements on our business or financials which will be considered 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 question and answer session will be uploaded subsequently. With this, let me hand over the call to Aditya Ghosh.
Good evening, everyone, and thank you for joining us on this call. We announced our third quarter fiscal 2018 financial results today, and this quarter we have reported a profit after tax of INR 7.6 billion, an increase of 56.4% compared to the same period last year. Our after-tax margin for the quarter was 12.3%. This year-over-year improvement in profitability is driven by better RASK performance. Similar to the last quarter, our year-over-year RASK improvement was due to better revenue management, as well as credits received from our manufacturers. Rohit will discuss this when he takes you through our numbers in detail. We continue to be the leading airline in terms of on-time performance and were ranked number one with an average OTP of 81.8% for the quarter.
In fact, recently we've been ranked as one of the top five airlines amongst the top 20 mega airlines globally in terms of on-time performance based on the data compiled by OAG for the entire year 2017. These are the 20 largest airlines in the world in terms of weekly scheduled flights. IndiGo is the only Indian carrier to have made it to this list. While we are thrilled with this achievement, we take even greater pride in seeing India up there. For the quarter, our technical dispatch reliability was 99.87%, and our flight cancellation rate was 0.3%. Other than our strong profits, we also had several operational milestones during the quarter. We became the first Indian carrier to cross 1,000 daily flights. This quarter was also special since we carried our 200 millionth customer.
These achievements have come within a period of just 11 years of our operations, we're grateful for the support and encouragement that we get from the millions of customers that choose IndiGo. We also inducted our first ATR 72-600 aircraft during the quarter and commenced our maiden ATR flight on the 21st of December from Hyderabad to Mangalore. The induction of ATR will help us reach out deeper into India and also open up our network of domestic and international markets by offering connectivity to and from many regional cities. In order to strengthen our regional operations, we have recently introduced 19 new flight connections that include routes to and from Tirupati, Rajahmundry, Hyderabad, Chennai, Bengaluru, Mangalore, Madurai, and Nagpur.
With this, we strive to take the IndiGo experience to customers in many more cities in India who so far have been subjected to erratic schedules, old airplanes, and high fares. We started operations from Tirupati and Rajahmundry earlier this month with our ATR aircraft, on the very first day of operations in both these cities, we became the airline offering the most number of flights from there. Earlier this week, we also commenced operations from Colombo, our eighth international destination. With this, we now fly to 41 domestic destinations and eight international destinations. We added 12 aircraft during the quarter, of which eight were A320neos and three were ATRs, taking our total fleet count to 153 and our A320neo fleet count to 32. In addition, we are also operating four aircraft under a short-term damp lease arrangement with Small Planet Airlines to meet our near-term schedule requirements.
The first of these aircraft started to fly on the 28th of December, these four aircraft will be operated till the end of April 2018. Talking about neos, we are now receiving the required spare engines from Pratt & Whitney, therefore, all our neo aircraft are in active operation. Speaking of our long-haul plans and Air India While the government has made certain announcements relating to the privatization of Air India, we are still awaiting details of the process. We remain interested in acquiring the international operations of Air India, as we have said previously, we will explore the long-haul opportunity with or without Air India. In that context, we will start seeking route rights and other necessary regulatory approvals as we will require to operate long-haul flights. With this, let me hand over the call to Rohit for an overview of our financials.
Thank you, Aditya, good evening, everyone. For the quarter ended December 2017, we reported a profit after tax of INR 7.6 billion with an after-tax profit margin of 12.3%, compared to a profit after tax of INR 4.9 billion with an after-tax profit margin of 9.8% during the same period last year. We reported an EBITDA of INR 20 billion with an EBITDA margin of 32.4%, compared to an EBITDA of INR 14.6 billion with an EBITDA margin of 29.3% during the same period last year. Our year-over-year profitability was better, primarily because of an improvement in our RASK. Our total capacity for the December quarter was 16.3 billion ASKs, an increase of 13% compared to the same period last year. Our revenue from operations in the December quarter was INR 61.8 billion, an increase of 23.9% over the same period last year.
Our other income was INR 2.7 billion for the quarter. Our RASK for the quarter was INR 3.84, an increase of 10.4% from INR 3.48 during the same period last year. Our load factor was up by 1.2 points to 88.5%, and our yield was up by 6.3% to INR 3.70. This improvement in yield and load factor was a result of better revenue management, as well as the effects of demonetization, which had impacted our revenues last year. Similar to the last quarter, we also received credits from our manufacturers. We do not expect such large year-over-year improvements in RASK going forward. Our CASK for the quarter was INR 3.18 compared to INR 3.06 for the same period last year. CASK excluding fuel was INR 1.94 in the current quarter, an increase of 2.2% from the same period last year.
This year-over-year increase in CASK excluding fuel was primarily driven by an increase in engine shop visits, an increase in airport charges at Mumbai, the imposition of the RCS levy, and a reduction in our utilization because of the grounding of some of our newer during the first half of the quarter. This increase in CASK excluding fuel was partially offset by a foreign exchange gain we recorded in the quarter due to the strengthening of our currency against the US dollar. Talking about GST. As you may recall, we paid a GST of INR 784 million under protest last quarter. Similarly, we have paid a GST of INR 689 million under protest this quarter.
While the GST rate for the re-import of repaired engines and certain parts has been reduced from 18% to 5%, the airline industry in India continues to believe that this should be exempt from GST, and we have appealed against it. During the quarter, one of our founders sold some of his shares through the offer for sale or OFS process. This sale, combined with the IPP offering in September, has brought our public shareholding to the required 25%. Moving to the balance sheet, we had total debt of INR 24.3 billion at the end of the quarter. We purchased three ATRs during the quarter with our free cash, and our cash balance at the end of the quarter was INR 138.9 billion. This comprised of INR 81 billion of free cash and INR 57.9 billion of restricted cash.
Before I close my remarks, let me give you our capacity guidance for the coming quarter. We expect a year-over-year capacity increase in terms of ASKs of 24% for the fourth quarter. With this, let me hand it back to Ankur.
Thank you, Aditya 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 question if needed. With that, we are ready for the Q&A.
Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. An operator will take your name and announce your turn in the question queue. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is on the line of Ashutosh Ramani from JM Financial. Please go ahead.
Thanks for taking my question. Aditya, just wanted to gather your thoughts around the pass-through of crude oil prices. What are the dynamics that influence it? If you look at a period of FY 2010 to 2014, when the crude prices actually shot up significantly, how has IndiGo fared? Vis-a-vis that particular point in time, how has the industry changed now and made the fare hikes unfavorable to take right now, given the competition intensity or the capacity addition or the book mix? If you can comment just directionally or just a structured thought process around how pass-throughs happen in terms of crude oil prices, it will be great.
Ashutosh, it's Rohit. I'll start and then Aditya can chime in. Essentially, you've seen in the past that effectively what happens is, there's usually a lag before fuel price increases get passed through into ticket prices. I think the market typically waits to see how permanent the price increase is, then it takes a little time for it to actually get passed through. It doesn't usually get passed through 100%. There's usually a lag and a not 100% pass-through. That's what has happened historically. We can't really predict what's going to happen in the future, but that's what we've seen historically. Aditya, any?
I think it's in line with what has been happening in the past. Nothing new as such.
Aditya, if you look at FY 2010 to 2014, the pass-through was a significant number. We had upwards of 80% of cost, we were able to pass it on to customers via fare hikes. I think the competition intensity today is a lot different from what it was in FY 2010 to 2014 or the capacity addition. Do you think that will be some of the variables that will influence the fare hikes in the next 12 to 18 months?
While I cannot predict what's going to happen in the future, again, if you're looking at such a long period of four years from FY 2010 to 2014, there will be times when fuel prices would have gone up and down, intensity of competition, like you mentioned, would be similar to what we have today. There are a lot of other market dynamics that come into play. Again, what I'm probably trying to say is that we're not seeing anything different in behavior than what we've seen in the past several years.
Sure, Aditya. Thanks.
Thank you. With the next question from the line of Sonal Gupta from UBS Securities. Please go ahead.
Yeah. Hi, good evening, gentlemen. Thanks for taking my question. Rohit, could you just tell us how much was the FX gain for the quarter? If you could shed some light on the higher other income in this quarter as well?
Sure. The FX gain for the quarter was INR 803 million. It is booked into two line items. INR 408 million is booked in other income and INR 394 million is booked as an offset in other expenses. Just for the reason for that is, between the first and second quarter, we had booked a cumulative loss for the year of INR 394 million. The INR 803 million for the quarter is firstly a reversal of the INR 394, then the net gain of INR 408 is booked into other income. That's what is in other income.
Okay, thanks. I'll join back the queue.
The remainder, Sonal, of other income is interest earnings on our cash balance.
Okay, sure. Thank you.
Thank you. With the next question from the line of Ambar Taneja from Grifol Asset Management. Please go ahead.
My question is, how are the plans progressing for the plane purchase that you had outlined in previous calls? You were saying it's going to be cheaper than leasing, and that's something that you had talked about. The second question is there any movement on direct fuel import versus buying from the national oil companies? Thanks.
Sure. On the first question, I think as I said in my prepared remarks, we have acquired three ATRs outright out of cash rather than doing a sale lease back. We expect that'll save us money. We have not yet started buying A320s with cash, but we fully expect to do that over the coming periods.
Okay.
Sorry, your second question?
On the fuel. Is there any direct fuel import or still buying mostly from the national oil companies?
Yeah, I think as I said previously, we do a combination of buying from national oil companies. There's a private oil company as well. Reliance is in this thing as well. There's local operators, the national oil companies plus Reliance, as well as selectively, we look at opportunities on import selectively. We do import some fuel when we see the opportunities are favorable. That strategy continues.
I'm sorry, would there be a cost saving if you build up an infrastructure for direct fuel import? I mean, just wondering if there's more efficiency to be gained out of importing directly versus getting it from a supplier.
There are efficiencies, there are logistical constraints as well. It's not that straightforward. You have to commit to purchase a fairly large quantity for it to be economical to ship the fuel across. That's why not everyone does it all the time. We look at the opportunities, and we try to take advantage of the opportunities that are in our interest.
Fair enough. Thank you.
Thank you. With the next question from the line of Pulkit Singhal from Motilal Oswal Asset Management. Please go ahead.
Yeah, hi. Congrats on an excellent set of numbers. Just two questions. One is, do the financials contain benefits from Pratt & Whitney?
Pulkit, it's Rohit. I think as we said in the prepared remarks, we do have credits from our manufacturers that are in our results.
Okay. If I understand correctly, you mentioned the RASK performance will not be repeated going in? Or?
Yes. I think just to repeat what I said, I think there were a few things that helped our RASK performance. One was better revenue management. When we talked about that in the last couple of quarters, now when we look at fourth quarter last year is when we had the systems in place last year. That better revenue management from our new systems and processes, that effect is already baked in going forward. The similar quarter last year, Q3, had the demonetization effect, which obviously you won't have that. On a year-over-year basis, that helps. There was the compensation as well. Those are the three factors that helped RASK that won't be there going forward.
Okay. The compensation goes off as well, basically.
Well, compensation, we don't know. It'll all depend on the nature of what happens. Clearly, we had some groundings in the early part of this quarter, which is why we still see some compensation. We can't predict what that'll be going forward.
Okay, just a quick second question on this. Cumulatively, over the three quarters, you've done profits more than anything in the past. Any communication on the dividend policy, given that you will also be buying planes now? Any thought process on where you will be pegging it?
Pulkit, we expect to give you more guidance on that on the next call, at the end of the fourth quarter. The overall policy and framework is no different from what we've articulated the last few quarters, which is that in determining the annual dividend, our board will look at the profits for the year, the cash needs to run the business, the prudent amount of cash that the company should maintain, and of course, now the cash needs of the business also include a use of cash to purchase aircraft. After all, factoring all that in, our board will declare a dividend. Directionally, we expect to pay a much lower percentage of the profits in dividend, but we do expect to pay a dividend. Beyond that, we can't give you more guidance. We will give you more guidance on the next call.
Congrats, guys. All the best.
Thank you, Pulkit.
Thank you.
Thank you. The next question from the line of S. Krishnakumar from Sundaram Mutual Fund. Please go ahead.
Good evening, thanks a lot for the opportunity. I understand this is a seasonal business, there was a demonetization impact during 3Q last year. If I look at the last 3 years' numbers, the spreads that is RASK minus fuel cost, this quarter seems to be the lowest, despite an increase in load factors over the last 4 years. Similarly, your EBITDA per ASK is also on the lower end. Going ahead with increasing fuel cost, even if we have a higher load factor, does this mean that we would sacrifice on our profitability to gain share? Thank you.
Yeah. It's Rohit. I think as we said before, the fuel price increase, the only way to sort of get that back into profitability is to pass that on in ticket prices. We expect there's always a lag and not 100% pass-through. There will be some effect of that on margins as fuel prices go up in the short term. Absolutely.
Your spreads have been declining despite lower fuel costs and higher load factors.
I'm not sure I fully understood the question.
If I look at 3Q FY 2015, your fuel costs per ASK was much lower what it is today. Your spreads were something like 2.66, that is RASK minus fuel cost. Whereas now it is about 2.54, your load factor was around 81%, and now it's around 88%. The spreads have been on a declining trend. Why would that be when your passenger growth has been pretty strong and fuel costs have also been benign when compared to where they were three years back?
You're talking about a longer-term trend. I think really, when you looked at FY 2017, and we talked about it through our calls on FY 2017, that on a year-over-year basis, the revenue environment was weaker than FY 2015, where there was an effect of clearly lower fuel prices. There was obviously a point in time where the fares were very high. The competition had reduced a significant amount of capacity. There was a situation in FY 2016 that was a very favorable environment. FY 2017 was a little bit more challenging. FY 2018 so far is somewhere in the middle of FY 2016 and FY 2017. It's not a declining trend. FY 2018 as a recovery versus FY 2017, but not quite at the FY 2016 margin levels. Does that answer your question?
Sure. Thanks a lot.
Thank you. Here's the next question from the line of Achal Kumar from HSBC. Please go ahead.
Hi. First of all, congratulations on the strong set of numbers. I have two questions. One, if you could please talk about your ATR business. I understand that you said that ATR business is going to be separate, of course, except the top management. How that has been structured, how it is performing, if you can share something on that side. Secondly, if you could talk about your plan on the international versus domestic. You said that your capacity is in Q4 going to be increased by about 24%. How you see that diverting into international and domestic traffic, domestic capacity, and given that in December you increased your international capacity by a lot, I think more than 60%. How that is structuring? If you could please share some light on your international operations versus domestic. Thanks.
Hi, this is Aditya. First on the ATR. It's still very early days. We're just flying three airplanes, and it's barely been a month or since our first flight. It's too early to try and either declare victory or to give a judgment call on how the operation's running. Operationally, it's doing well. Flights are running on time. We haven't had any cancellations. Seems like people like the product. To the question of how we have kept it separately, we have stuck to what we have said in the past. The pilots and the cabin crew for ATRs are separated out from our narrow body operations. That's an ecosystem by itself, which is not intertwined with the ecosystem that exists for the narrow bodies.
As we've also said, this is Rohit, sorry. As we've also said previously that where other functions like corporate functions, et cetera, there's a lot more synergies to not have a separate structure, and we leverage the corporate structure of the corporate. We're largely sticking to what we've talked about previously, which is we think the most efficient way to manage these two fleets.
Back to Aditya. This is Aditya. Coming to international and how we will expand there. As we said in the past, we just look at our international flights as pretty much accidentally crossing an international border. It's the same flight and it's the same airplane, similar product. Yes, you'll see some more international, but you'll see a lot more domestic. We'll just go chase where the opportunity is. It's not that we have either tie down to one or the other.
If you look at our quarter, this quarter, I think we had about 14.5% of our capacity international. The previous quarter was around 13%. A year ago, it was around 10%. Yes, directionally, we have definitely increased our international capacity. As we've added capacity, we still have more capacity domestically, but the percentage has inched up a little bit and will probably continue to do so.
Fine. Thank you so much.
Thank you.
Thank you. Here's the next question from the line of Ansuman Deb from ICICI Securities. Please go ahead.
Yeah, thanks for the opportunity. I had a question regarding the non-fuel CASK. One of our competitors have said they are going to reduce non-fuel CASK going ahead. I want to understand whether we do have similar opportunities to reduce non-fuel CASK, and the short-term leases that we have taken, would there be any material increase in rentals which can increase the non-fuel CASK?
This is Rohit Philip. Absolutely. We definitely have to deal with the fact that we have shorter term leases as well as we've extended the leases of several of our aircraft in our fleet, which in order to meet the capacity needs that we've had as all of you know the aircraft deliveries for new deliveries has not been at the pace that we originally planned. That does put some challenges on the cost side. That's incorporated in our numbers. As we start getting the new planes at the pace we want them and the older planes on short-term leases start to go away, we will see that benefit of that so-called penalty of older planes going away. We actually will see that improvement. We also see improvements in on the CASK side from owning fleet versus leasing, which we've talked about previously.
We've also previously talked about adding A321s into our network. Our A321s will have 234 seats versus 186 on our A320s. Significantly lower unit cost plane that will help our CASK as well. All of these factors will do that. We also will continue to look for productivity and efficiency improvements. I think we've done a fairly good job so far. We see a lot of opportunities to continue to create efficiency. We will continue to push the envelope on the cost side.
Thanks. One other question I had regarding the UDAN scheme. The routes that we have received, I guess 20 RCS routes. Are those which we wanted? In the sense, if you could give some color on the routes that we have won.
Well, the results are coming on literally as we are on the call. You're right. This is what I have also just preliminarily heard that we've been allocated 20 routes. We'll examine it. It's only in the last few minutes that this news is coming in.
Sure. Thanks.
Thank you. The next question from the line of Vinay Singh from Morgan Stanley. Please go ahead.
Hi, team. Thanks for the opportunity. Looking at the ancillary revenues, we've seen a pretty good attraction from around a 1% to 32% growth to almost 21% growth this quarter. At the same time, we had a lot of news flow on cancellation fees and Air India waiving of baggage fees. How do you see ancillary revenues moving ahead?
Hi, Vinay. It is Rohit. Ancillary revenue this quarter, as we said, has been pretty strong. Baggage fees, cancellation fees are two certainly drivers of that, but we also had good performance in cargo as well. We see some continued opportunities there. Going forward, we see some opportunities for continued improvement, but largely in line with capacity is what we would say.
Okay. In terms of capacity, you maintained the 20% ASKM growth outlook for 2019 and 2020. Right? There is no update on that?
There is no update on that, Vinay. We will give more detailed guidance on that in the next quarter's earnings call, obviously for the fiscal year 2019. Directionally, we will say that we expect it to be much higher than the 20%. You recall we said a CAGR of 20% over the next three years.
Got it.
We will expect to be around 17% for this fiscal year based on the 24% for the fourth quarter. Next year will be significantly more than 20%, but we'll give more detailed guidance on the next call.
Great. We'll wait for that. Thanks a lot.
Thank you.
Thank you. The next question from the line of Charles Cartledge from Sloane Robinson. Please go ahead.
Thanks very much for the call and congratulations on the results. I just wanted to make sure I'm understanding the messaging here. For a couple of years now, you've unfortunately suffered from price competition from your competitors, as will always be the case, but it was quite aggressive. Your competitors have higher cost structures than you do. Picking up on a question made earlier, the expectation, I think, is that because jet fuel prices have risen so much over the last couple of years, your competitors will find it harder to compete on price because of their higher cost structure. Is the expectation that the competitive intensity you've been suffering under will sort of go away because of higher fuel prices, which gives you a more competitive edge?
To your comments earlier, that it just hasn't come through yet because it always takes a few months to pass through the pricing cycle?
Hi, Charles. It's Rohit. I think as we said earlier, what you just said, it takes a while for the market to sort of embrace the fact that there is higher fuel prices and then for it to get passed through. That's just what normally happens. We can speculate about what would drive the competition to ability to absorb higher fuel prices and make that a catalyst to raise prices. I think your speculation's probably as good as ours. We'll wait and see and really not put out a comment on that. Certainly, as we said, historically, we've seen certain behavior, and we would expect that to continue.
Thank you. Forgive me if I've missed some policy statement on this subject, per the earlier question, do you actually disclose the amount of compensation from Pratt & Whitney, or is that simply left undisclosed?
That is not disclosed, Charles.
Okay. Thank you.
Thank you.
Thank you. The next question from the line of Himanshu Varia from Motilal Oswal Securities. Please go ahead.
Good evening, team, and congratulations for a good set of numbers. I just had one small query regarding the credits received. Wanted to just clarify, does both our revenue and cost per ASK both individually affected positively by credits received from manufacturers as it says on page four of the presentation?
Yes. It does.
Great. Thanks.
Thank you.
Thank you. The next question from the line of Ashish Shah from IDFC Securities. Please go ahead.
Yeah. Good evening, sir. First question is in terms of your international long haul.
Ashish Shah, may I request you to speak a bit loud, please?
Sure. The first question is in terms of the international long-haul business, as we spoke about. Could you elaborate a bit on what would be your fleet acquisition plans, what sort of routes would you look at? What sort of a product offering you have in mind? Would it be a low cost or a regular international service?
Yeah. It's too early for me to comment on the exact nature of the product and which routes we'll be flying to. We'll update you as we get closer to those plans.
Sure. Would that be in a 12-month horizon or longer than that?
Well, I've actually said in my opening remarks that we will go ahead and apply for some route rights.
Okay.
A lot depends on what happens after that.
Sure. Second is on the load factors; we already are at about 88.5%. In terms of the what mix we have, do you think there is a scope for load factors to rise further? You think in terms of practical feasibility, this is where we could be?
The answer to that question is practically you can have higher load factors, absolutely. From our perspective, the focus is not to maximize load factor in isolation, it's to maximize our RASK, which is a combination of yield and load factor. Really all our revenue management systems are basically geared to optimize RASK. Sometimes it means higher yield and a slightly lower load factor, or sometimes it's the reverse. Practically load factors, there's no reason why it can't be high.
Sure. Just last question. Since we have plans to add assets, aircrafts on the balance sheet, could you indicate a broad CapEx plan? What would be the gross block addition in FY 2018 or FY 2019 vis-a-vis the previous year?
I think when we give guidance on the dividend next quarter, we'll be able to shed a little bit more light on that as well. Essentially, we'll look to use some of the cash that we raised. We look to use the cash that we raised through this IPP offering to acquire aircraft. That's in the range of around $400 million. That will eventually be utilized all for aircraft purchases. In addition, we will expect to use a portion of our free cash flow that we generate every year, to buy aircraft. Directionally, that's what I can tell you.
Sure. Thank you so much for your time. Thank you.
Thank you. With the next question from the line of Prithvi Raj from Unifi Capital. Please go ahead.
Hi, good evening. Thanks for taking our question. Could you give a sense of what the ASK potential is from the new 20 routes that you've added under the UDAN scheme? Importantly, are they incremental to the existing routes or would they subsume a part of our existing routes?
We've not added any routes under the UDAN scheme. Literally after we started the call and before we've ended it, we've just got the results. That's one. The second is that whatever we implement will be absolutely over and above what we are currently flying.
Sure. Which means that the 20% ASK guidance that you've given for FY 2019, there could be material upside to that, right? For the whole of FY 2019.
It's a capacity guidance.
Yeah.
That has nothing to do with the routes. It has everything to do with the planes we are adding.
Right.
I think when we talk about our overall capacity guidance, it's going to be in that range that we've talked about previously and as I said earlier. In the next quarter, we'll give you an updated guidance for fiscal 2019, which will include all the UDAN routes as well.
Okay. Fulfilling these, how much would be dependent on a function of us getting delivery of new planes? What time frames are we looking at for these new routes?
I think as Aditya mentioned, the new routes, we've not even had time to really analyze what we've actually got as part of the offering. Once we do that, we can give you more commentary. At a high level, we bid for routes based on aircraft that we either have or have in the delivery pipeline. It's all based on aircraft that we either have or are scheduled for delivery.
Okay. The last question before I get back. Adjusted for the lack of income, the lack of other income from the engine suppliers that we see in the quarters to come, how long do you think would it take for yields to adjust and for your margins to normalize at current rates?
I think I've answered this a couple of times on the call already that there's always a lag. As to the period of the lag for prices to adjust, it varies from time to time. We can't really speculate on how quickly that will happen.
Thank you. Mr. Raj, you may be requested to join the question queue for any follow-ups as we have several participants waiting for their turn. Thank you. With the next question from the line of Achal Kumar from HSBC. Please go ahead.
Hi. Thanks for another opportunity. I had two questions. One about the cost. On the fuel cost, and I'm talking about quarter-on-quarter. From Q2, the fuel cost in Q3 is up by 22%. I'm not sure if you can really help us how we can make that. I understand that capacity increased by 8%, and then of course, price increased by about, what, 13%-14%. How do you see that? Similarly, the lease cost. The lease cost has again gone up by almost 22%, and you have added eight aircraft. If you could help us in making those two things out, and of course, we just want to understand how do we model and how it will happen. That is first question on the cost.
On the price war, recently we saw there was a sort of price war, independent offer, and now, of course, IndiGo joined that price war. Do you really see that happening? Given that we are still in the peak season, January is a good season, of course. How do you see that? Do you see another price war, or do you see that's a short-term phenomena? Thanks.
Sure. Achal. First on the cost side, I think you were talking about sequential quarter-over-quarter fuel CASK?
Yeah.
Yeah. Firstly, there is always a danger in looking at our business sequentially. Sequentially, and that's why we always look at it on a year-over-year basis. Sequentially, essentially what happens in fuel is because of the fog season in November and December, the same flight tends to burn more fuel because it circles in the air little longer. To generate the same ASK, you actually fly more block hours, which is what has happened if you look sequentially. Even if you are paying the exact same rate for the fuel, and fly the exact same missions, you will just burn more fuel, and your fuel cost will go up during fog season. That largely will drive almost entirely the cost difference if you try to look at it sequentially. That was on the fuel side. You had a question on lease rentals.
I think I mentioned that there are some credits that are booked that offset lease rentals on the last quarter call, and that would explain some of why there is a sequential difference there. I obviously cannot give you more details, but directionally, I can point to that as a reason. Your question on-
Price war
on pricing. Well, there is always sales and fare sales and things in the market. I would not really call that a price war. Sales are sometimes done just to stimulate demand, and people match them. I would not really call it a price war. Those are very normal things in the industry, and you will see that happening all the time. In this industry, usually, competitors definitely match these fare sales. This is normal demand generative activity that happens.
Okay. Thanks. Again, coming back to the fuel. As you rightly said, yes, because of the fog and all the fuel burn. That was exactly my question. You must have calculated that, okay, fine, due to the volume, we have increased this much fuel cost, but due to the currency, we have got this much of benefit, and due to the capacity. That was exactly what I wanted to understand. How do we make it? I'm not sure if you can elaborate on that.
I think I tried to explain it as best I could. Maybe we can do this offline, and you can talk to Ankur Goel, our Head of Investor Relations, and he can help you model it. Directionally, I think I explained it as best I could.
Thank you.
The next question from the line of Arvind Sharma from Citi. Please go ahead.
Hi. Good evening, sir. Thanks for taking my question.
Hi, Arvind.
Yeah. Hi. I understand that RASK includes some of the credits from the manufacturer. Just want to clarify that the yields, i.e., the passenger revenues per RPK, would that also include the credits, or are the yields clean of those credits received?
I think, Arvind, we clarified this on the last call as well, that the passenger revenue that we report in the press release does not include any of these credits.
Okay. Just as a corollary, understand that the YOY increase would not be sustainable going forward. If you see the sequential increase in the past, i.e., 4Q versus 3Q in the past, could we expect a similar trend to continue this year as well?
There's always the seasonality issues that you'll see. That's why we don't really track sequential changes because there's always seasonality. It's difficult for me to even answer that because we don't track it.
No, I understand the sequential. I'm just saying there is no big change in seasonality as it was in the previous years.
The seasonality aspect should absolutely be. There might be new factors that happen in the fourth quarter relative to the fourth quarter last year, the seasonality element should be no different.
Okay. Thanks, sir. Thanks a lot for taking my question.
Okay. Thanks, Arvind.
Thank you. The next question from the line of Danish Mehta from Tata Mutual Fund. Please go ahead.
Actually, my question has been answered. Thank you.
Okay. Thank you.
Thank you. The next question from the line of Kaustubh Rubna from SKS Capital & Research. Please go ahead.
Yeah. Hi. With crude prices going up, could you give us some indication of yield pressure in quarter four? As we expect 24% capacity growth in quarter four, do we see this translating into robust revenue growth, which should partially offset our yield pressure? Could you give me some sort of indication how quarter four will be?
Firstly, we don't comment on forward-looking results, that has always been our policy. We'll talk about Q4 only at the Q4 call after the quarter. In terms of fuel, I think we've talked about it many times that we've seen historically that fuel price gets passed on only with a lag. Kaustubh, this is Aditya. Just stepping back into the fundamentals of the business, we have 32 neos on our fleet, which burns 15% less fuel than a comparative legacy aircraft. In a strange way, as fuel prices go up, our cost advantage vis-a-vis another competitor who has older airplanes or older generation airplanes, that cost advantage only increases.
Okay. Could you explain how this 24% capacity growth is coming for next quarter? Also, could you shed some light on, let's say we don't get the Air India international business, how do we plan to expand the international business?
On the 24% capacity addition, it's coming from additional aircraft that we're taking, both new neos as well as some used aircraft that we're taking delivery of. Some of it were originally scheduled to be delivered earlier in the year, because of delivery delays that we've talked about, we're getting them in this quarter. That's what you see. We've gotten a fair number of aircraft even at the end of Q3 as well, which will add capacity obviously in Q4, because in Q3 we didn't have them for the full quarter. That's really the capacity addition. It's well in line with our longer-term plan. It's just that it got more lumped into Q4 than the earlier part of the year because of delivery delays.
As far as the Air India piece is concerned, since we do not have any details of the process, I cannot comment on the Air India transaction. Again, I'll just repeat what I've said in the past that we were anyway going to look at long haul with or without Air India, we'll do whatever it needs to do in the right timeframe to, on those lines.
Thank you. Okay, the next question from the line of Garima Mishra from Kotak Securities. Please go ahead.
Hi, thanks for the opportunity. Could you shed some light on the neo addition in this calendar year, what is the latest that you've been hearing from Pratt & Whitney, and what is the latest on the issue of the engines wearing down faster than expected?
This is Aditya. As I've said in the past, the issue is around these components, which I've discussed probably on two calls in the past. I won't go over that again. I think that we have made it very clear that essentially all we were looking for is spare engines so that we quickly swap the engines out and the planes are flying, which is exactly what's happening now. All our neos are flying up in the air.
There was also this talk that Pratt & Whitney is looking for a fix of the engine so that this whole spare engine requirement itself gets curtailed. Is there any update on that?
That's correct. There is a timeframe to it, I think two quarters back, we had said that it'll take about 12-18 months, there's nothing that changes our guidance on that.
Okay. Lastly on, any sort of guidance or indication that you can give on the neo addition for this calendar year?
We've given a ASK capacity guidance, and we've moved away from trying to give number of shells and number of specific aircraft. I think you should just look at that ASK guidance.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Ankur Goel for closing comments. Thank you, and over to you, sir.
Thank you for joining us. Hope to talk to you again in the next quarter.
Thank you very much. Ladies and gentlemen, with that, we conclude today's conference call. Thank you for joining us, you may now disconnect your lines.