Interglobe Aviation Ltd
NSE:INDIGO
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Interglobe Aviation Ltd
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Good evening, ladies and gentlemen, and welcome to IndiGo's Conference Call to discuss the First Quarter of Fiscal Year 2021 Financial Results. My name is Aman, and I'll be your coordinator. [Operator Instructions] As a remainder, today's conference call is being recorded. I now hand the conference over to your moderator, Mr. Ankur Goel, Head of Investor Relations for IndiGo. Thank you, and over to you, sir.
Good evening, everyone, and thank you for joining us for the First Quarter Fiscal Year 2021 Earnings Call. In light of the developments regarding COVID-19, we hope that you and your families are safe. Also, our thoughts are with those affected by the virus. We have with us our Chief Executive Officer, Rono Dutta; and our Chief Financial Officer, Aditya Pande, to take you through our performance for the quarter. Wolfgang Prock-Schauer, our Chief Operating Officer; and Sanjay Kumar, our Chief Strategy and Revenue Officer, are also with us and are available for the Q&A session. Before we begin, please note that today's discussion may contain certain statements on our business or financials, which may be construed as forward-looking. Our actual results may be materially different from these forward-looking statements. The information provided on this call is as of today's date and we undertake no obligation to update the information subsequently. A transcript of today's call will also be archived on our website. We will upload the transcript of today's prepared remarks within an hour. The transcript of the Q&A session will be uploaded subsequently. With this, let me hand over the call to Rono Dutta.
Thank you, Ankur. Good evening, everyone, and thank you for joining us on this call. The last few months have been very difficult for the aviation industry. As you all know, our operations were pretty much grounded from March 25 to May 24, 2020, except for charter and cargo flights. As the government allowed partial resumption of flights starting May 25, we resumed operations with much fewer flights than our pre-COVID capacity. We ended the quarter at about 1/4 of our original capacity, and we hope to slowly build this up in a phased manner in the coming months. Due to these ongoing COVID-19 related disruptions, we reported a net loss of INR 28 billion during the quarter. I think it will be helpful if we structure our discussions around 4 topical areas. First, health and safety of our customers; second, the revenue situation in these difficult times; third, our liquidity position; and finally, the cost reduction measures. Let me first talk about health and safety. Ensuring the health and safety of our customers is of paramount importance to us. Our teams have worked together with planning and discipline to ensure the highest level of hygiene in our aircraft, our airports and our offices. In this context, we believe that the risk of transmission of COVID-19 from 1 passenger to another onboard is very low because the use of HEPA filters in Airbus aircraft cabin and the direction of the airflow on board from ceiling to floor ensures that the virus is not recirculated. The customers sit facing forward and not towards each other with seatbacks providing a barrier. Frequent deep cleaning procedures are executed at all touch points. There is limited movement on-board our aircraft once passengers are seated. And finally, safety gears for customers and crew is mandatory on board. We have seen a very positive response from our customers with respect to the procedures which we have adopted. We are very pleased that despite the complex new procedures, our operations are proceeding very smoothly with industry-leading on-time performance. The customer confidence as captured by our Net Promoter Score is at an all-time high, and the customer feedback is also very encouraging. Now let me take you through the revenue situation and the various changes that we have done operationally to adapt to the current environment. We maintained a low-scale operation in the form of some cargo flights in domestic passenger charters on May 24. Post-resumption of operations, we have also started international charters and Vande Bharat flights. The contribution of our charter flights after covering for variable costs has been quite encouraging. We intend to continue with charter flights, even as we ramp up our capacity for scheduled flights. As the largest airline in the country, we take our national responsibility very seriously. We undertook more than 290 repatriation flights evacuating around 44,000 passengers. We transported 395 tonnes of medical cargo, and we will continue to help in times of distress. We have witnessed a great deal of potential in our cargo business. To explore this opportunity further, we have converted 10 aircraft to all cargo airplanes. We continuously reworked domestic routes, keeping in mind the guidelines issued by state authorities. We maintained our aircraft in flight-ready conditions at all times that allowed us to resume operations seamlessly with 1,582 scheduled flights operated within the first week of operations. We have kept our crews current in this new environment and reworked the standard protocols. We started our scheduled passenger service from 25th May, and we are encouraged by the early signs. Our unit revenues are reasonably strong, although at very low capacity levels. Some of the specifics that I'd like to share are: our average load factor was more than 60% for the month of June, with a peak load factor of around 70% during the period. Our unit revenue RASK has outperformed during the quarter at INR 4.19, an improvement of 2.2% year-over-year. This was driven both by the initial surge in demand in passenger and cargo charters. We have seen a 11.1% improvement in yield during the quarter as compared to the same period last year, which, as you know, was also the Jet Airways shutdown period. On the flights we operated, we remain significantly contribution positive, which has helped us offset part of our fixed costs. On the basis of current trends and the pool of resources available to us in the form of aircraft, crews, operating staff and infrastructure, we aim to deploy around 60% to 70% of our capacity in the third quarter of 2021, on a year-over-year basis. This is, of course, subject to the government lifting the capacity restrictions currently in place. Now to the all-important question of liquidity. We ended the quarter with a total cash of INR 184 billion and a free cash of INR 75 billion, which is a reduction of INR 14 billion of free cash from March-end. Through all our efforts of cost reduction and revenue generation, we have managed to reduce our fixed cash burn. Aditya will talk about this in great detail. We are focusing on strengthening our liquidity by optimal working capital management, obtaining additional liquidity through various sources and most importantly, by adding capacity. We are working on our cost structure and taking various initiatives to reduce our fixed costs. The major components of our fixed costs can be categorized into following 3 areas: number one, our leasing costs. As we have mentioned previously, we view our relationship with our lessors as one of our key success factors. We are, therefore, managing our leasing costs from a long-term perspective and honoring all our commitments. This second important bucket relates to the payroll costs. Here, we have 2 objectives to consider. We, of course, have no choice, but to reduce our payroll cost, given the current situation, but at the same time, we know how important it is to enhance our employee motivation and engagement. We are a customer service company, and we know how critical it is to have an enthusiastic and motivated workforce in order to deliver high levels of service. Under these circumstances, this is clearly a difficult balancing act. But our long-term employee culture is very important for us. And therefore, we are going about this exercise in a very thoughtful and prudent manner. Number three, other costs make up 20% to 25% of our fixed cost. We are reducing our cost in areas such as maintenance costs, nonaircraft rentals and IT costs. In summary, we are clearly in unchartered territory. However, we also recognize that the industry is going through a very disruptive phase, which presents us with a unique opportunity to strengthen our airline in the key areas of customer preference, cost reduction, employee motivation and network optimization. Our business fundamentals remain strong. Our optimism in the future is undiminished. And we are fully confident that we'll emerge from this crisis in a stronger position. As you can see, we are using this opportunity to focus and strengthen each one of our business fundamental. And with that, let me hand over the call to Aditya to discuss the financial performance in further detail.
Thank you, Rono, and good evening, everyone. For the quarter ended June 2020, we reported a net loss of INR 28.4 billion compared to a profit after tax of INR 12 billion on a year-over-year basis. We reported an EBITDAR of negative INR 14.2 billion compared to an EBITDAR of INR 27.8 billion during the same period last year. As a result of the government-imposed lockdown, we did not operate our flights till 24th May. We resumed the flights from 25th May with roughly 200 flights a day and we have since doubled that number to over 400 flights a day. While the load factors have been understandably low, we have seen better yields in the quarter. We had load factors of 61.3% during the quarter. Our yields increased by 11% to INR 4.53 and RASK increased from INR 4.10 in the same period last year to INR 4.19 in the quarter, an increase of 2.2%. Our passenger and cargo charter flights have contributed to our performance. Looking at the current booking trend, most of July was strong, but the trend has weakened somewhat in the last few days. We attribute this weakening to the spike in COVID-19 cases, sporadic lockdowns in various states and the seasonality in demand. This volatility in the numbers is what is making our future revenue trends hard to predict. The flights that we have been operating have been contribution positive and are, therefore, helping us partly cover our fixed costs. Given that we are not operational for almost 2/3 of the quarter, our unit costs have been inflated as we did not see -- as we did not have enough ASKs to offset our fixed cost. We reported a CASK of INR 17.7 in the quarter and CASK excluding fuel of INR 17.1. Since the unit cost comparisons will not be relevant in the quarter, let me talk about some specific line items in the P&L. Employee costs. Compared to the March quarter, our employee costs have reduced by 17.5% in the quarter. We have taken various cost reduction measures such as salary reduction, leave without pay, et cetera. Unfortunately, given the volatile revenue environment, we also have had to take the painful decision of employee separation. This is all the actions that we have taken, we expect to end the current fiscal year with about 30% lower employee cost than the pre-COVID levels. Supplementary rentals and maintenance costs. Compared to the March quarter, this cost is lower by about 56%. Supplementary rentals are largely variable in nature. And given that we operated very limited capacity during the quarter, our supplementary rentals have correspondingly been lower. Going forward, as our capacity is fully redeployed, supplementary rentals would increase, and this overall cost line item should reach back to the number that we have been seeing in the past. In March '20, our cash -- fixed cash burn was roughly INR 400 million a day. In June '20, this has been reduced to around INR 300 million a day because of the various cost reduction initiatives and cash contribution from our limited operations. As our operations scale up, we expect the cash contribution to further -- increase further helping our liquidity position. Managing cash continues to remain our primary focus, and we continue to work with all our stakeholders to raise liquidity. We spoke about these initiatives in the last quarter, which were expected to provide us further liquidity of INR 30 billion to INR 40 billion. In addition to these initiatives, we are working on sale and leaseback of our unencumbered assets, which are in the advanced stages of discussion. We are also in discussion with export credit agencies for obtaining moratorium towards principal repayment for aircraft and finance leases. We expect that these actions will help us raise additional liquidity of approximately INR 20 billion. So in summary, the following is our cash position. Our free cash reduced by INR 14 billion during the quarter and we ended with a free cash balance of INR 75.3 billion in the quarter. If you recall, we had a free cash balance of INR 89.3 billion in the previous quarter. This is despite the fact that we were shut down for a large part of the quarter. We have started phase-wise operations of flights and we are currently running over 400 flights a day. These flights are contribution positive and will help us set up our fixed cost partially. We have taken a number of actions to reduce our fixed costs and a number of additional measures are underway. As stated before, our daily fixed cash burn has reduced from INR 400 million to INR 300 million. We have capitalized on new business opportunities and are profitably pursuing repatriation flights, charter flights and cargo flights. We spoke about certain initiatives in the last call, such as taking deliveries of new aircraft, freezing of supplementary rentals and negotiating favorable terms with our suppliers, which is expected to help us generate liquidity of INR 30 billion to INR 40 billion. As explained earlier, we are further working on raising additional INR 20 billion of liquidity. We have a strong balance sheet and we remain laser-focused on reducing costs and shoring up liquidity. Our cash balance remains healthy and our debt levels remain manageable. We ended the quarter with capitalized operating lease liability of INR 211.8 billion and total debt, including the capitalized operating lease liability of INR 235.5 billion. Before I close my remarks, let me give you our broad capacity guidance for the coming 2 quarters. Subject to the government lifting the capacity restrictions, we expect our second quarter fiscal year 2021 capacity to be at around 40% and our third quarter fiscal year 2021 capacity to be 60% to 70% on a year-over-year basis. However, the external environment is very -- is highly volatile, and therefore, our planning horizons are short and we are continuously making cost corrections as we navigate through this uncertainty. With this, let me hand it back to Ankur.
Thank you, Ronan and Aditya. [Operator Instructions] And with that, we're ready for the Q&A.
[Operator Instructions] The first question is from the line of Manish Ostwal from Nirmal Bang Securities.
I have only one question on the capital base. So how much we are looking to raise? And secondly, how long this will be sufficient for our set of operations?
So this is a matter that we are discussing at the Board meeting tomorrow. So the Board needs to deliberate on that matter. And as soon as we are -- as soon as we know what our next steps around that, everybody would get to know.
The next question is from the line of Deepika Mundra from JPMorgan.
Just on the liquidity bit, you mentioned some numbers, actually, you mentioned INR 30 billion to INR 40 billion which was similar to last quarter's call and additional INR 20 billion. So could you just clarify on the same? INR 20 billion a subset of that INR 30 billion to INR 40 billion mentioned earlier? And how much of that was already packed into in the previous quarter?
Right. So the INR 30 billion to INR 40 billion that we mentioned continues and the INR 20 billion is in addition to the INR 30 billion to INR 40 billion. So overall, you can read that as INR 50 billion to INR 60 billion from our perspective from a liquidity perspective.
Sorry, if I may follow-up on that. So the 32 -- so the INR 20 billion in sale -- sale in leaseback of the owned aircraft and some moratorium more needs vendor. So could you tell us what the INR 30 billion to INR 40 billion is then?
INR 30 billion to INR 40 billion, as we mentioned earlier, was our supplementary rental benefits that we're getting, our sale and leaseback that we continue to do on our assets and all other vendor payments that we are negotiating with them. So that's the breakup of the INR 30 billion to INR 40 billion. The INR 20 billion are the assets that we own that we are putting onto our sale and leaseback structure.
Got it. And just lastly, was any of this packed into in the quarter?
Yes. Out of the INR 30 billion to INR 40 billion, we've packed about 35% of that in the quarter.
The next question is from the line of Sonal Gupta from UBS.
Yes. Just on the fixed cash burn number that you gave. So just to clarify, so this is the absolute fixed cash burn in terms of when you have no revenues? Or I mean, how do you read this?
So the $400 million that we mentioned was our fixed cash burn at the time of the pandemic. With the contribution that we are making so far on the flights that we are operating and the cost actions that we've taken, as of 30th June, that fixed burn was down to INR 30 billion -- INR 300 million a day.
So -- but if you were to sort of look at fixed versus fixed, then how much reduction is there?
So as we mentioned, I mean, most of our reduction is coming out of employee costs. And our employee costs on a year-over-year basis. Earlier, we had mentioned, from a pre-COVID levels, we've mentioned the number would be down about 25%.We expect from a pre-COVID level, now the number to be down 30%. So that's on the employee side. On lease rentals that we've mentioned, we are continuing to honor all the lease rentals to continue to pay them. And all other fixed costs, we are seeing about a 15% to 20% reduction on all of the fixed costs.
The other fixed cost we should define as 20% to 25% of overall fixed?
Yes.
The next question is from the line of Binay Singh from Morgan Stanley.
Just for clarification. Is my understanding correct? Continuing with the earlier question, the cash burn per day was around INR 300 million in end of June and that number incrementally will go down as you -- as the recent staff cost cut comes in and you also further cut down on fixed costs on the maintenance and IT side. So could you give us the cash burn per day that you see at a similar capacity level like 2 quarters down the line? And linked to that, what will be the cash -- where do you see the cash burn breaking even? I know it depends a lot on yields and also, but if yields were to remain at current level, then at what percentage capacity would you see cash burn breaking even?
So the $300 million that we mentioned, as we continue to deploy flights and those continue giving us contribution, that fixed burn is expected to go down. You're right, as the employees actions come into play, that fixed burn will go down further. Given the fact that the market is very volatile, it's very tough to give an estimate return as to how much will it go down by. But we are confident as we put more flights out there, and they all are contribution positive, that number will keep on improving month-over-month.
And then just a clarification, you said 25% to 30% of your costs are fixed, with which you are targeting a 15% to 20%. But how much of that is already built into the June number that you're talking about?
So most of that is already built in, but we are continuing to work on incremental measures.
The next question is from the line of Varun Ginodia from AMBIT Capital.
So my first question is on the maintenance cost provisions on your older aircraft. So as I see, 1Q, there was no return of those aircraft to the lessors. So how do you see that from 2Q onwards? And is it fair to assume the INR 400 crores per quarter charge that you were taking on these older aircraft, they won't continue from 2Q onwards? So that is my first question. And my second question is, from the lessors in U.S. and Europe, we are hearing that the spreads between older generation and newer generation regrades on narrow-body aircraft has gone down significantly in the recent months. So are you hearing the same from your own counterparties? And have you seen your leasing rates go down on 321neos that are coming into the service? These are my 2 questions.
So our supplementary rentals, as I mentioned, I mean, we expect all our returns to go on as per track. We've got 106 planes to return between now and December 22. Yes, there was a little bit of a disruption because of pandemic in 1Q, but we expect all that to come on track as we go ahead and those will continue to be on schedule. So therefore, those will remain the way we've mentioned earlier. Those costs will remain the way we mentioned earlier. On your second point...
Sorry. So the maintenance cost provisions that you booked per quarter of INR 400 crores, that will continue on those aircraft because we're not flying them right now. So I thought you won't need to book those provisions in a post-pandemic world.
No. It doesn't work that way. We have certain return conditions under which we need to return those aircraft. And those return conditions will warrant us to maintain those aircrafts. And therefore, those provisions will continue. So we don't expect any significant savings coming out of that. Quarter-on-quarter, those numbers will obviously keep going down as we keep returning the aircraft. But it's not as if we'll have a write-back associated with them.
And that number is there in your June quarter as well and this number INR 400 crore number is there in this INR 740-odd crore number as well, right?
It's not INR 400 crores. For this quarter, that number is about INR 230 crores. So number keeps on going down. But that -- but the number is definitely there.
Okay. Okay. And the second question, yes, you were answering to that, yes.
Yes. So from whatever we see in the marketplace, what you're mentioning on the lease spreads changing is largely on the wide-body aircraft. The NEO family of aircraft, just because of where the market is in terms of no other similar kind of aircraft available in the market, we're not seeing any major changes in these rates over there. Also, we have a long-term contract with Airbus, which is something that we like, and we continue to work with Airbus on that contract.
Okay. So there is no significant reduction in the lease rates for the new aircraft coming in. We are not seeing that on that. Okay.
And that is the market as well, yes, as we understand.
The next question is from the line of [ Vipul Garg from Kotak ].
Sir, first part, first question is that you told that cash burn is INR 300 million per day. So if we take out this 90-day quarter, then the cash burn itself would be INR 2,700-odd crores, but sale is not reflected in the cash depletion from March numbers to June numbers?
Right. And as I mentioned, beyond the cash burn that we're talking about, we're also working on the -- the INR 30 billion to INR 40 billion of all items that I mentioned that we're generating cash on and the INR 20 million additional items that we're generating cash on. So beyond what you see, those items are also throwing cash back to us. So you won't see that burn at the same rate. And that's the reason why you don't see that depletion.
Pardon, for how the gap has been reached?
So if you recall, I'd mentioned that we have INR 30 billion to INR 40 billion of additional financing that we are getting, and there's another INR 20 billion that we're working on. So that quarter-on-quarter also accretes on our cash results. So therefore, when we're talking about the INR billion, just to clarify, is clearly the -- it's only our fixed costs. On top of that, we have liquidity measures that will help us get more cash in. So the net cash burn that you see on the numbers will be smaller than that.
The next question is from the line of Pulkit Patni from Goldman Sachs.
So my first question is, you mentioned about, about 30% expected reduction in employee cost. If you look at the first quarter, this is about 17%. So when you said 30%, should we assume that the FY '20 number would go down by 30%? Or this is incrementally for the other 3 quarters, we should assume a 30% lower employee cost?
So it will be 30% lower cost from the pre-COVID level. So if you look at your March number, from that level, it will be 30% lower. Why you see it's only down 15%, if you recall, you started taking those employee cost actions only from the month of May. So there is only a partial impact of that for the quarter. And then incrementally, we've taken more actions as we go into July, including the separation that we've talked about earlier. So therefore, you'll see that playing out over the next 3 quarters.
Sure. Fair point. My second question is just on yields, given that right now, we are operating in an environment where there are caps and floors, and the fact that it seems it's continued till November. Does it work well for us in yields in the current scenario? And what would you -- would be your comments on that particular front?
We would like the fair caps to be removed as quickly as possible. The markets are very dynamic, directional. It's seasonal. It's impossible for anyone to predict and decide what the right level of fare should be. So we would like to see this removed quickly, and we think we can do a better job in managing the revenues with the fair caps. And that will work to the advantage of the customer as well.
The next question is from the line of Achal Kumar from HSBC.
So I had a couple of questions. One was about the forward bookings. So previously, you mentioned that the bookings are taking place now, we cautioned you in advance a month beyond that. And that is creating problems for you to manage fares and capacity. So how the situation looks like? I mean has that -- has that changed or that remains same? What sort of challenges are you facing because of that? And similar to that, just on the previous point, you said that you wanted the fare capping to go away. But really, if I see, I mean the fares are anyway low. So how the fare capping has been impacting your fare levels?
Okay. So regarding this volatility in demand, how is it shaping up? So the first 20, 22 days of July were, in our mind, quite strong. And then it becomes very news dependent. So if people say, "Oh, the virus is spiking, Calcutta is closed for few days. Mumbai may not open its cap, Lucknow shutdown per day, Patna shut down for a few days. The forward bookings reacted very strongly to that. Mostly, I would think because of the uncertainty. So I won't be able to fly. And obviously, as they keep making these changes, the cancellation will also go up. So all that I believe is affecting the last 7, 8 days because in the last 7, 8 days, as you know, there have been all this for sporadic lockdown in different cities. Once that stabilizes, I do believe it will improve. Now as to the fare cap ratio, the question, clearly, it's a measure of capacity, fares, direction, time of day, so many things are affected by it, right? As you know, our morning fare should be so different from an afternoon fare. One way fare, out of Ranchi is very different from an incoming fare to Ranchi. All those factors are playing up. And we -- I mean, no one knows, as I said, what the right level should be. But we'd like to be able to leverage those changes and say, okay, in the afternoon let me put a real low fare; in the morning, let me put a real high fare and use that both to our advantage. And as I said, to the customer's advantage, too. If we can have some lower fares, we can also have some fares as a result. So it's a very -- I mean it's a very flexible environment, as you well know, in pricing. And I think in opening it up, let people get creative with it, let people experiment with it and let's give us the right answer. But let's not have dictate by someone by saying this is what the fare should be.
Right. Right. That's very year. My second question was around the cost. I mean you have cut down your cost by 52% and your other expenses are down by 65%. Going ahead, as you increase your capacity, don't you think some of these costs would come back. So rather than just 1 way going down. Don't you think there will be a pressure on the cost, and that could have an impact on the profitability given that revenues are anyway uncertain. So that is my second question, if could help.
Well, the pressure on cost. As we know, many of our employee costs are fixed. Now we have reduced them both through pay cuts and through some leave without pay. But clearly, our employee utilization is not high. Most important thing is the aircraft utilization. We've got all these leasing costs. And if the planes are sitting on the ground, our leasing costs are absorbed by 30% of our capacity. If we can improve that capacity to 50%, then the leasing cost, which, as you know, is the most important cost gets spread out over bigger bay. So no, our costs don't go up. Our unit costs, for sure, go down a lot.
Even the other costs, even the other costs, which is 25% of the total cost you said?
Well, other costs are what, the IT cost, maintenance cost, so IT costs are not going down just because we are flying less. I mean most of the network costs are also truly fixed. So basically -- the most important dynamic is this, not in the denominator in terms of the capacity, right? You know how important the denominator in setting unit costs. Our denominator is very small now. And that's why you see this big spike in unit costs. If you could make our denominator bigger with more capacity, our unit cost should go down significantly. Ultimately, it's a game of unit revenue management cost, right? That's only math that matters. And right now, our unit revenues are good and our unit costs are pathetic, terrible, they are obnoxious. So we need to get our unit costs down.
Absolutely. Absolutely. No, the last question I had about -- so even the A320neos and A321neos, I could see that the prices are down by 10% to 15%. So just want to understand whether do you have possibility or do you have opportunity to renegotiate your prices within? Or that's all fixed?
Kumar, nothing is fixed. But we -- I think we've stressed this many times. We take a long-term view of this whole equation. We can get some short-term gains with some long-term pain, or we can reverse that and get some short-term gain with long-term gain, et cetera, et cetera. So we are continuously in discussions with the OEMS. And we look at a full long-term horizon and say, what's happening in each year? And how do we manage the overall net present value, if you will, of that whole relationship? So yes, you could say, okay, today, you can get a lower use cost, maybe. But I have this fleet of plane order that's coming, and I need to place them with the lessors at the right. So if we look at the whole long-term horizon and do the best net present value of that.
[Operator Instructions] The next question is from the line of Atul Mehra from Motilal Oswal Portfolio Management.
Sir, if you could broadly split up the travel between leisure and business prior to COVID in terms of how is the split like?
I'll ask Sanjay Kumar to answer that.
The travel between leisure and corporate, our business traveler used to be almost 50%, 50% prior to the COVID situation. But post-COVID of course, we are seeing travel from the corporations coming back right now. They are taking much longer time than what we would otherwise expect. So it is basically the travelers who are kind of traveling for aid or urgency or medical or shifting, whatever reasons they have, they are fine for that reason. So it is not -- the post-COVID, still we have to see the business channel coming back.
Right. And sir, I have a follow-up on this point. Just want to understand, at the company level, how are we thinking about longer-term implications on travel, both business as well as leisure given that nowadays, like -- especially like post-COVID, a lot of us have been at business also being accustomed to digital means of communication and so on and so forth. So as you think about the long term and also as you plan your fleet going forward, how do you think about longer-term implications for this? And at the same time, I just want to check on whether we have any exit clauses for our contracted for fleet, it's a for example, if you are not seeing demand to improve quite materially and coming back to normalcy, do we have an exit clause with whatever penalty, but to actually modulate our fleet to the extent of our demand expectation?
Okay. I love the first part of your question because it is something very near and dear to my heart. What is the long-term view of the airline? Well, the long-term view of IndiGo, in particular, is highly bullish. And again, I say long term. So people say, are you pessimistic? Are you optimistic? Near term, meaning in the next 10 months, things obviously tough. But going further out, 18 months out, very bullish about IndiGo. And I'll tell you why. Yes, corporate travel is going down. So we're going to lose customers at the top end. However, we think we'll gain a whole lot of customers at the bottom end. India has about 140 million passengers a year by air. It has 1.6 billion passengers by train, and I'm counting the top 2 classes of train. And given the issue of safety, you can fly somewhere in 3 hours or you can fly or you can travel by train somewhere in 2 nights. I think there'll be a lot of substitution into airlines from trains, particularly with our safety and also because the cost of line is coming down with lower fuel, our cost structure is going down, et cetera, et cetera. So very bullish about growth at the bottom end, despite the fact that we lose corporate travel. I understand that. Secondly, I think the competitive structure will change in favor of us. We've had too much capacity, taking too little demand, especially internationally, when there have been a lot of overbuilt hubs all around us in the Southeast Asia and the Middle East. And I think a lot of that capacity will come down. And as someone mentioned earlier, wide-body prices are a reflection of that. All this connecting people from Amsterdam to somewhere to Calicut, people will be sort of cautious about 1 stops. They'd rather take nonstops or they'll take a one-stop through an Indian hub. Because they'll say I have an aunt in Delhi and I would rather connect in Delhi than go to some other destination where I don't know if I had to stuck for 14 days for coronavirus. All that helps narrowbody, it helps Indian carriers. And therefore, overall, I am very bullish about our prospects long term. What was the second question again?
Second question has to do with -- if at all, do you have any exit, if like how are you planning your fleet accordingly and your upcoming fleet? And if at all, you would like to in terms of restructure or push like maybe delay some of the incoming fleet and so on and so forth.
So look, we really see this as long-term process [ at most ] of, let's say, Airbus manufacturing airplanes, us buying them, the lessors getting -- doing a sale-leaseback in between. And we want this whole pipeline to work and work well. If one of us upsets this, then the other 2 guys also don't gain, they lose. So we are in a very close relationship with our lessors, with Airbus and ourselves, saying how does this whole pipeline work effectively? So is the negotiations, of course, the negotiation. But again, I'm trying to tell you, it's not a transaction-based negotiation. It's a relationship-based negotiations.
Right. Right. And maybe one final question, if I may. In the competitive environment domestically, how are you seeing that? Because we've always seen IndiGo as the largest player and the most efficient player and the current times are such that even the efficient player is having issues given the way the scenario is at this point in time. So how do you see the competitive environment after the dust settles down and also in the middle as we are in -- at this point in time. So how do you see that angle as well?
Really to the largest thing we focus on what makes sense for us and how do we maximize our revenue up, our profitability and so forth. So very much IndiGo focus. And the rest of it is news that I read in the paper just like you do. So I don't really know what's going to happen to anyone else. But the competitive situation is such that we feel the best thing we can do is to grow fast and get some of our capacity back. That's what we'd like to do. And that's what we're focused on.
The next question is from the line of Abhinav Bhandari from Nippon India.
Just 2 questions. So one is on this INR 20 billion additional liquidity, which you said would be arranged by selling the own aircraft and shutting them on leaseback model. Just to understand how much of gross block goes out of this exercise? And how much would be the increase in rentals and capitalized lease liability because of it.
I don't have the number of what gross block goes down by. But economically, this sale and leaseback has now got cost us anything materially. And we've done that analysis, we don't see those numbers are not material from a materiality perspective, but it's important from an equity perspective, and therefore, we're going forward with it.
Sure. Any ballpark number on the number of planes that would help us to do the reverse calculation?
Well, we have 12 ATRs that we own, and we have 3 A320neos that we own.
Okay. Okay. Okay. Sure. The second one was on, how are we progressing on that engine replacement issue that we had.
Wolfgang is going to take that question.
Right now, we are coming close to finish this whole exercise. We -- and we have all units, all the airway bills from the replacement engines already visible. So by end of August, we'll have everything -- everything will be done and the whole fleet will be refurbished. Right now, we have still 14 aircraft as we speak, which need to be refurbished, and we can see from the pipeline of incoming engines. It's finished by end of August.
The next question is from the line of Prashant Kothari from Pictet.
I have 2 questions. One is, do we have any undrawn working capital lines from the banks which can share the amount there? And the second question is, again, on the competition side. Are we kind of think, we're expecting that during this pandemic, because mostly our competitors who don't have enough balance sheet [ to spend ] might actually fall down, but we haven't seen anything of -- that's what happening in the domestic space. Do you have any insights you can provide it is the case?
On your second question, we definitely do not have any insight. You should call them. We have no idea. And what was the first question?
On undrawn working. So we do not have any undrawn working capital lines. In fact, we do not have a working capital line. We are working on building those right now, but there's nothing undrawn right now.
The next question is from the line of Arvind Sharma from Citi.
What do you mean [indiscernible]
Sorry, Arvind, you're not audible, sir. Can you please be a bit loud and closer to the microphone?
Am I audible now?
No, still. Can you turn off the speaker phone, please.
Am I audible now?
Much better.
Yes.
Great. Apologies for this. Just quick on the capacity front, the guidance that you've given that hopefully the regulations permitting [indiscernible] in 2Q and 60% to 70% in 3Q. Is that the guidance for only the domestic part or does that include international ASKs as well because that would then include that you are hoping some improvement or some relaxation in industrial traffic as well? So just wanted or [indiscernible].
The answer is it does include some international. Now the fact is we are doing a fair amount of international with all these charters between Kuwait, Saudi Arabia and now UAE is opening up. We're doing a fair amount of charters. So yes, we're expecting that some of these charter flights get converted into schedule and that's some amount of international does happen in that period.
Is 42 -- [indiscernible] is the ASK guidance that you're giving for the entire operation?
Yes, for the whole network, yes.
And sir, just on capacity. Will you be in a position to give any guidance on your sweet strength over FY '21/'22? Or is it just too early to surmise that as -- at the moment?
I think it is too early to go there. I mean we continue to work on our fleet plan. And as we get towards the latter half of the year, we can talk about it.
The next question is from the line of Ashish Shah from Centrum Broking.
Just wanted to check, there had been news around IndiGo participating in the long-haul flights under these arrangements made by the government. So any clarity that you could provide on this?
As we said before, we continuously look at this whole wide-body equation. And I think almost a year ago, there was plenty of news items about our IndiGo looking at wide-body, and that was true. And we continue to look at it. The trouble is wide-body has always been a sort of touch and go issue for us. The numbers are sort of okay, but we know there's a risk to it. So we keep saying, okay, let's wait and see, wait and see. And frankly, to some extent, the wide-body equation might be working in our favor now. And again, I'm not making any kind of decision yet. But I'm just telling you what's changing. First of all, as we know, wide-body prices are down, that helps a lot. Secondly, fuel costs are down. And part of the problem with going long-haul is that your fuel burn rate is so high as you go further away, you're carrying more weight, et cetera, et cetera. So the fuel burn rate goes up. So lower fuel costs also help. And the third is this issue of one stop versus nonstop. Between India and London, last time I accounted in the height of the sort of expansive phase a year ago. There are almost 20 different ways you could book from Delhi to London through Oman Air and Saudi Air and God knows who else is there. So as this one-stop becomes less competitive to nonstop, I think that's an advantage. So these are all factors to be studied. We're in the same situation we were a year ago. We are still studying it. We don't have an answer.
Sure. Just second one. Sir, basically, I know it seems a little -- a lot of [indiscernible] right now to think about Air India. But hypothetically, if the government wanted to going ahead, are we still interested in the international operations of Air India? Or given where we are in terms of the whole pandemic will just like, not given?
At this point, we're not interested in Air India.
The next question is from the line of Paarth Gala from Prabhudas Lilladher.
Sir, if you could just help us better understand the supplementary rental and aircraft maintenance cost item. So if you look at the pre-COVID levels, it has come off quite sharply. So do the maintenance costs also have a high degree of variable nature embedded into them?
Right. Absolutely, they do. So supplementary rentals or a large part of the supplementary rentals overall in this last quarter, this number was INR 1,600 crores, this quarter it is INR 739 crores. More than half of this is variable in nature. Based on how much we fly, we put up those supplementary rentals. So obviously, as we are flying lesser, this amount is much lesser. The fixed element of that, we obviously continue to incur. Therefore, you've seen from last quarter, this cost going down from INR 1,680 crores to INR 739 crores in this quarter.
Sir, any understanding on what the fixed number could be because if -- even if I assume that your supplementary rentals are anywhere around 50%, the number that we've reported for this quarter is on the higher side of pre-COVID levels?
So pre-COVID levels, this number was INR 1,680 crores. Today, we are reporting INR 740 crores, so less than 50% of pre-COVID levels. So I don't understand why you said it is high.
No, no. So if 50% is fixed in terms of contract, I mean the costs that we're incurring, like for the CEO is also that you're doing INR 230-odd crores. So if that number stays intact, then this number is a bit on the lower side. That what I was pointing out. So is there a variability involved in your fixed maintenance cost, also or there is a reduction there?
Yes. I mean, so it really depends on how much are we flying and what capacity are we deploying. So a lot of that is dependent on that as well. So that's what drives it overall.
The next question is from the line of Ashutosh Somani from JM Financial.
So this is regarding one of the notes of accounts. So if you look at one of the notes, it says that the OEM supply from new engines, there is an invoice rate to the tune of, I believe, this is million, INR 2,278 million, which is around INR 227 crores, which as per legal counsel, we have decided not to pay. So can you elaborate on the nature of this cost? And whether it has been provided for in the accounts or not provided and not paid?
So there are -- so it is not provided and it is not paid. I must also add that we also have a counterclaim for -- if you read the entire note, we also have a counterclaim from the OEM, this is much larger than this. And that is something that we are in negotiations with them. And as those negations in progress, we will let you know where they head. So that's what we want to share at this stage on those negotiations.
This unit is rupees million, I believe. So this is INR 227 crores, is that correct?
It's INR 227 crores. You're right.
And this generally reflects in which line item in the P&L?
It is not reflected in the P&L.
If it was provided, it would have been in which line item?
It will be part of our supplementary rentals and those costs. And it's a buildup. It's not a one quarter item, by the way.
The next question is from the line of Chintan Sheth from Sameeksha Capital.
One question was on the airport charges. I believe it was fixing nature, but we see sharp drop in fee charges as well. So I just wanted to clarify whether it's a variable in nature or fixed in nature?
No, it is mostly fixed in nature, but largely fixed in nature. It's our parking and landing charges. There's a route navigation fees. It's totally dependent on how much we fly. So since the fact that we have flown less. So therefore, it's a variable expense, and therefore, it's down about 82% for the quarter.
Okay. Okay. So as you feel far much more, this cost will continue to increase.
Yes. Yes. Based on how much the capacity we deploy.
Sure. And if you can give some indication on the right use asset when do you as of June and the forward sales looking sitting under the liability as on June.
So our ROU assets as of 30th June are INR 142 billion, that's the number.
Okay. And on forward sales?
Forward booking number.
Forward booking number?
As of -- you're saying end of June?
Correct. Yes.
No, we don't give that number.
The next question is a follow-up question from the line of Deepika Mundra from JPMorgan.
I have a follow-up. I just wanted to get a sense on the ancillary revenue. I would have thought it would have been slightly better within the push on cargo. As the capacity normalizes, how do you see that panning out through the year? And secondly, I just wanted to check on the maintenance expenses. So I understand that the supplementary rental and maintenance expense is down quite significantly. Could you like, of the regular maintenance, I'm not talking about the extra provisions for the CEO aircraft. But obviously, on the maintenance, how much of it is discretionary and how much of it could be fixed?
Yes. So I can talk about the ancillary revenue. Of course, ancillary revenue is up primarily because of 2 reasons. One is, of course, cargo. Cargo has done pretty well for us. And the second part is that we have been able to push through the seat assignment bags and other kind of fees, despite the lower number of passengers which we are flying right now, we have been able to kind of increase our ancillary revenue per passenger quite significantly compared to pre-COVID levels.
And just because of customers are more conscious about which seats they sit in. So that's been a factor.
Okay. The second question on maintenance, please, how much is discretionary and how much is fixed.
So it's -- I mean, it's variable. So our supplementary rentals are variable, but we put up this based on how much we fly. Our FHA agreements are variable, it is depending on how much we fly. So those 2 elements are variable. Obviously, reassessment of future maintenance, cost that we have for general maintenance. I mean those continue to be fixed in nature.
Next question, a follow-up question from the line of Sonal Gupta from UBS.
Yes. So just wanted to understand, I mean, like, I mean, you've given the capacity guidance and just also you -- I believe, previously, you had sale and leaseback agreement already for 13neos for the first and first half of the year. So I mean, so just wanted to understand like if what happens, I mean, if the capacity is not ramping up as the way you are hoping for it. Do we see a pushback? I mean incrementally beyond this? I mean how do you -- I mean, just if there is a much more negative scenario, so you might be really able to get beyond 40, 50 and even in Q3. So how will your strategy change here, I just wanted to understand, what's the fallback option?
So I think this is an internal debate that we are having of what should our planning horizon be and many people say why don't we plan for 2022 and see what it looks like and so forth, And as such -- it is such a volatile environment that I think any kind of long-term planning at this point for a while, at least is almost futile because we don't really know. So we can put some numbers together and say we think this, we think that. We know revenue is going to go down. But we also know there will be capacity shifts all across the globe, which may hurt us, which might help us. And we think, given the uncertainty on both industry revenue, industry capacity, where it's coming from, where it's shrinking? We think let's just plan for now on a 3-, 4-month basis. Let's get through till the end of the year, and then pause, take a deep breath, and we'll do this long-term plan all over again. So unfortunately, right now, we are not doing long-term planning. We are doing 3-month planning, and we are willing to wait a while and then get back into long-term planning.
Sure. No, what I'm trying to understand is that in that case, I mean, do we see a pause here? I mean, clearly, if you don't see that your capacity is going to be more than 70% utilized, say, in FY '22? I mean do we stop taking new aircraft and that the existing fleet sort of run down. I'm just trying to understand, I mean, like...
Wolfgang is going to jump in at this point.
Yes. So all of you see naturally the new deliveries, this is more prominent, naturally, but many of you don't see the lease returns, the planned lease returns. And actually, the planned lease returns for this year are higher than the planned deliveries. So that in itself assures us that the capacity is balanced. And so that's 1 thing where we can, let's say, moderate the fleet growth or even keep it at balance. And another element which you -- which is not so seen very much in the actual figures in the fleet numbers is that we can use, for example, to lesser degree CEO aircraft, which enables us to optimize engine shop visits and bring the engine costs down. So there are many ways in, let's say, in adapting the fleet, size and capacity applies, size, which we are actively using. And now one of our top project is to get all this aircraft out, the lease returns in the phased manner and at the time that as we have planned for.
Ladies and gentlemen, that would be the last question for today. I now hand the conference over to Mr. Ankur Goel for closing comments. Thank you, and over to you, sir.
Thank you all for joining the call. I hope you found the call useful.
Thanks, everyone.
Thank you very much. Ladies and gentlemen, on behalf of IndiGo, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.