Is Indigo's Business Empire CRUMBLING? : Business case study

a few years ago Indigo was making headlines because it was redefining the rules of aviation in india indigo is the only Indian airline that is running profitably in a challenging Aviation environment the Indian budget carrier Indigo has confirmed it is purchasing 300 Airbus planes Indigo has enjoyed near unprecedented growth in less than 20 years India is known as the graveyard of Airlines and that is because in India airline companies keep going bankrupt every now and then the Indian Aviation sector is going through testing time capacity and low fairs may be excellent for users but Aviation companies are bleeding many airlines have gone bankrupt go first became the second airline in 4 years to ground operations while spice jet is also struggling with default on Le rental payments but even in this Firestorm of bankruptcy only one Airline was an exception and that was Indigo Airline just look at this while Jet Airways was drowning under a massive loss of 2019 87 cror SpiceJet was struggling with a loss of 687 cror but Indigo was soaring with an astounding profit of 1,300 crores and indigo wasn't just surviving it was dominating the industry with a 60% market share and 2 years back we made a video on the rise of indigo but on 25th of October 2024 Indigo dropped a bombshell Indigo released its quarterly report and it was absolutely shocking because now indigo is facing a massive loss largest airline Indigo has reported a significant net loss there is a drop in margin this is one of the slowest quarterly growth what you've reported in about 12 quarters what has led to this decline if you look at this graph suddenly their expenses have shot up by 3,000 cres and their profits took a massive hit to go from 189 crores in profits to a painful loss of 987 crores so suddenly the airline that once said the gold standard for profitability in India is now stuck in a financial turbulence just like everybody else so we went through some heavy research reports to understand how is indigo the legendary Airline struggling to make a profit what exactly are the market conditions that are bleeding the greatest airline in Indian history and if Indigo itself is struggling to stain the air what does it mean for the future of Indian Aviation are we headed towards a future without a profitable Airline at all before we move on let me introduce you to Our Kind partners of this episode which is Odum people running a business is tough and managing expenses even tougher but what if there was a way to save time and stay organized here's where Odo expenses can help you out with oo expenses you can submit your expenses from desktop mobile or by emailing receipts all your expenses are grouped into reports for easy approvals you can split the expenses and even add notes for clarity and all these changes and discussions are tracked in the chatter your managers can quickly review and approve expenses and once approved they sync automatically with your accounting and rein voiced items are added to sales orders in real time so there is absolutely no manual effort required at all and you will save a lot of time and headache and guess what you can easily track the status of reimburse ments and generate detailed reports to track expenses by employee category date or Department you can also create reports with multiple filters and groupings and you can also save your favorite reports for quick access these are the Revolutionary features of Odo expenses so if you want to track and manage your company expenses effortlessly try Odo expenses today and the best part is Odo in provides lifetime free access for your first Odo application and this is with unlimited hosting and support So if this sounds useful to you click the link in the description and try Odo expenses today well to understand why indigo is in a loss let's quickly understand some fundamental metrics that Define the business of an airline firstly we have something called r or Revenue per available seat per kilometer Ras is basically the income earned from one seat per kilometer now if you look at Indigo the revenue that Indigo has earned per per seat per kilometer has increased from 4. 25 rupes in September 2023 to 4. 45 rupes in September 24 then we have something called load Factor the load Factor represents the percentage of available seats that are filled by the passengers so it shows how well an airline is utilizing its seat capacity for example if luftansa Airways operates with a flight with 200 available seats and 60 seats are occupied then the load factor is 60 divided 200 into 100 equal to 30 % so 30% of luftansa seats are occupied by passengers and 70% is empty now if you look at the airlines in India and compare them with Indigo while Air India has a load factor of 96.

4% spice jet stands at 93. 4% whereas on the other hand indigo's load factor is 94. 1% now if we talk about Fleet size Indigo has the largest Fleet of 367 aircrafts whereas Air India stands at 300 aircrafts and spice jet only has 50 aircrafts so just think about it in spite of having such a large Fleet indigo is leading in both efficiency and skill and lastly if you look at the revenue in the last 3 years you will see that their revenue has shot up from 26655 cres in fi 22 to 71,2 29 cres in f524 so everything looks good for Indigo right the revenue per seed per kilometer is growing the load factor is very high so it's operating at Peak efficiency and even their revenue is growing very very quickly then the question is what on Earth is wrong with Indigo and how did they suddenly have an expense increase of 3,000 CR and get into a loss of 900 cror well let's understand these reasons one by one the first reason is very common for the aviation industry which is the volatile fuel cost did you know that fuel is one of the biggest expenses for Airlines it makes up anywhere between 35 to 40% of their total expenditure and this is where Indigo fell into a trap let me explain how if you see this chart you will see how volatile the oil prices are in June 2023 the price was around $70 per barrel but in Just 4 months by October the price shot up to $95 a barrel and then it again came down to $70 by January so within just 90 days your prices May shoot up by 30% which then increases your cost for Indigo fuel cost is 37.

1 9% of their revenue and their net margin stand at 11. 5% so if you buy a ticket from ahmadabad to bangaluru for 8,000 rupees 1 month in advance in this 8,000 rupees 3,000 rupes is the fuel cost and 900 rupees as in 11. 5% is the net profit margin but because of the Russia Ukraine war if the oil prices suddenly shoot up from $80 a barrel to $100 a barrel in just one month the fuel cost in your ticket has shot up from 3,000 Rupees to 3,9 900 rupes so this 900 rupes of profit is already gone to zero because now oil costs 900 rupes extra so simply because of a war Indigo will see its profit margins disappear Into Thin Air now you might say bro Airlines can consider this variation and then set their prices can they well yes they can but the oil prices are so volatile that catering to a price sensitive market like India while keeping extra margin for oil prices becomes a very very difficult task because even if you increase a price by 500 rupees the customers will stop opting for your airline in fact Indigo calls itself s a lowcost carrier so passing on the rising cost to the customers is very difficult for Indigo if you look at Indigo in 2024 you will see that indigo's fuel expenses increased by 12.

8% jumping from 5,856 crores in September 2023 to Ed eating into the profit margin of indigo this is the first reason for indigo's loss the second reason is the grounded aeroplanes and operational issues as we saw in our go first episode the entire Aviation Market of India saw some serious issues because of the Pratt and Whitney engine problems Botha says Pratt and Whitney supplied faulty engines so they could not operate the planes and this has led to direct losses the company has been facing issues with its G PR and whing engines that's the engine what they are talking about are grounded because of faulty engines go first grounded just 7% of its Fleet 3 years later this number surged to 50% 5 50% of the planes were not operational unfortunately uh pratton Whitney the engine manufacturer has completely deceived us and at one point in q1 of fi 24 over 70 of indigo's planes were stuck on the ground Indigo Airlines is Fleet is grounded back in the month of February this year aircraft groundings for Indigo almost double to over 70 and do you know how costly this is look at this in fi 24 Indigo generated a revenue of 71231 cror with a fleet of approximately 367 aircrafts which comes down to 194 CR rupees in Revenue per aircraft per year so each aircraft is capable of generating 194 crores a year and 60 aircrafts together could generate a revenue of 11,640 crores a year so indigo's Revenue was bleeding by 11,640 crores because of these grounded aircrafts and you know what to fix this problem Indigo decided to take some planes on a short-term lease so that they could still keep serving their customers and this leasing is called ACMI or aircraft crew maintenance and insurance and all these temporary issues like the emergency lease the maintenance of grounded planes and the high cost of ACMI leases all of them have pushed indigo's lease expenses up by staggering 2 90. 5% so their lease costs have jumped up from 195. 000 crores last year to 7636 crores now marking a staggering increase in their expenses on top of that their additional rentals and repair costs have also gone up by nearly 30% and thirdly even non-fuel operating expenses like Landing fees parking fees terminal navigation charges parking service fees and ground handling fees all of them have also increased substantially in the past one year in fact if you look at the airport charges the airport charges at airports like bangaluru Hyderabad Chennai Kolkata and Kochi have increased anywhere between 2% to 200% this year and in all for Indigo airport charges and fees have increased by 41% from last year these are the reasons why indigo is in a massive loss in fact all airlines in India right now are in losses due to the same reasons so the question is what exactly is indigo doing to fix this problem well indigo is already preparing for recovery and long-term growth look at this for the first time indigo is planning to introduce a business class cabin on the Delhi Mumbai route and this is a huge shift away from their lowcost philosophy secondly because of the increasing domestic competition indigo is focusing on International expansion if you see they're already adding new international Roots like Sri Lanka and Malaysia to increase their overall revenue and lastly they've launched a loyalty program called Blue Chip to increase repeat customers but as of now now unfortunately indigo is bleeding with losses and you know what guys if you keep aside Indigo there is a very important question that we need to ask about the aviation industry of India and this question is that if the greatest and the most efficient airline in our history is bleeding with losses then does it even make sense to run an airline in India because even at 71,000 CR in Revenue you have a razor thin margin of just 11.

5% and this margin could also disappear due to a random War it could disappear due to increasing oil prices it could disappear due to recession and to make matters worse as you achieve scale the risk in your business also keeps on increasing then the question is why are Brands like Tata Indigo and akasa so Keen to enter the Indian Aviation Space well The Optimist say that India is a great Market why because the demand in the airline industry is expected to only increase due to the rising middle class population and the international traffic is also growing very very fast look at this report it says that in fi 24 domestic passenger traffic is growing at 13. 5% and international traffic is also set to increase by 22. 3% to 69.

6 million passengers if you see 69 million as a number it's almost the entire population of Germany in fact India has now surpassed Brazil and Indonesia to become the third largest domestic Aviation market after China and us while we have around 15. 5 million seats China has 67. 8 million and the US stands at 86.