Interglobe Aviation Ltd
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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 third quarter financial results for fiscal year 2018. My name is Aman, and I'll be your coordinator. [Operator Instructions] As a reminder, today's conference call is being recorded. I now 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 Full-Time 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 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 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 we are ranked #1 with an average OTP of 81.8% for the quarter. In fact, recently we have been ranked as one of the top 5 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, and while we're thrilled with this achievement, we take even greater pride in seeing India out 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 200th million customer. These achievements have come within a period of just 11 years of our operations, and we are 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 recently introduced 90 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. And 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 8 international destinations.We added 12 aircraft during the quarter, of which 8 were A320neos and 3 were ATRs, taking our total fleet count to 153 and our A320neo fleet count to 32. In addition, we are also operating 4 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, and these 4 aircraft will be operated until the end of April 2018.Now talking about neos. We are now receiving the required spare engines from Pratt & Whitney, and 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 international operations of Air India, but as we have said previously, we will explore the long-haul opportunity with or without Air India. In that context, we would start seeking route rights and other necessary regulatory approvals as will be required to operate long-haul flights. With this, let me hand over the call to Rohit for an overview of our financials.
Thank you, Aditya, and 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 EBITDAR of INR 20 billion with an EBITDAR margin of 32.4% compared to an EBITDAR of INR 14.6 billion with an EBITDAR margin of 29.3% during the same period last year. Our year-over-year profitability was better, primarily because of an [often] 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. In addition, 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 neos 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 U.S. dollar. Now 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 reimport of repair 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 have total debt of INR 24.3 billion at the end of the quarter. We purchased 3 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 the 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. [Operator Instructions] And with that, we're ready for the Q&A.
[Operator Instructions] The first question is from the line of Ashutosh Somani from JM Financial.
Aditya, just wanted to gather your thoughts around the pass-through of crude oil prices. What are the dynamics that influence it? So if you look at period of FY '10 to '14 when the crude prices actually shot up significantly, how has IndiGo fared then? And vis-à-vis, that particular point in time, how is the industry changed now and made the fare hikes sort of unfavorable to take right now given the competition intensity or the capacity addition or the route mix? If you can comment just directionally or just a structured thought process around how pass-throughs happened in terms of crude oil processes [to date].
So Ashutosh, it's Rohit. I'll start, and then Aditya can chime in. The -- essentially, you've seen in the past that, effectively, what happens is there's usually a lag before fuel prices, fuel price increases get passed through in the ticket prices. I think the market typically waits to see how dominant the price increases and then it takes a little time for it to actually get passed through. And it doesn't usually get passed through 100%. So there's usually a lag and not 100% passed through. So that what has happened historically. We cannot really predict what's going to happen in the future, but that's what we've seen historically. Aditya?
Yes, I think it's in line with what has been happening in the past, so nothing new and such.
So Aditya, if you look at FY '10 to '14, the pass-through was a significant number. We had upwards of 80% of costs being be able to pass it on to customers via fare hikes, but I think the competition intensity today is a lot different from what it was in FY '10 to '14 or the capacity addition. So do you think that there'll be some of the variables that would influence the fare hikes in the next [12 month] performance?
So while I cannot predict what's going to happen in the future, again if you look at -- if you're looking such a long period of 4 years from FY '10 to '14, 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. So there are a lot of other market dynamics that come into play. But again, we -- what we're probably trying to say is that we're not seeing anything different in behavior than what we've seen in the past several years.
We have the next question from the line of Sonal Gupta from UBS Securities.
Rohit, could you just tell us on the -- how much was the FX gain for the quarter. And if you could shed some light on the higher other income in this quarter as well?
Sure. So the FX gain for the quarter was INR 803 million. Now it is booked into 2 line items, INR 408 million is booked in other income and INR 394 million is booked as an offset in other expenses. And just for the reason for that is for the -- between the first and second quarter, we have booked a cumulative loss for the year of INR 394 million. So the INR 803 million for the quarter is firstly a reversal of the INR 394 million and then the net gain of INR 408 million is booked into other income. So that's what is in other income. The remainder of some of other income is finance is interest earnings on our cash flows.
We have the next question from the line of Ambar Taneja from Griffin Asset Management.
My question, how are the plans progressing for the plane purchase that you had outlined in previous calls? Because you are saying it's going to be cheaper than leasing, and that's something that you had talked about. And the second question is, is there any movement on direct fuel import versus buying from the national oil companies?
Sure. So on the first question, we have I think as I said in my prepared remarks, we have acquired 3 ATRs outright out of cash rather than doing a sale leaseback. We expect that will save us money. We have not yet started buying A320s with cash, but we fully expect to do that over the coming periods. In terms of -- sorry, your second question?
I mean, is there any direct fuel import or still buying from the -- mostly from the national oil companies?
I think as I said previously, we do a combination of buying from national oil companies. There are private oil companies as well as reliances in this thing as well. So there's local operators, the national oil companies plus reliance as well as -- selectively, we look at opportunities on import selectively, and we do import some fuel when we see the opportunities are favorable. So we -- that strategy continues today.
I'm sorry, would there be a cost saving if you kind of buildup on infrastructure for direct fuel import? I mean, just wondering if there's more efficiency to be gained out of importing directly or still getting from a supplier.
There are efficiencies, but there are logistical constraints as well. It's not that straightforward, and you have to commit to purchase a fairly large quantity for it to be economical to ship the fuel across. That's why it's not -- not everyone does it all the time. But we look at the opportunities, and we try to take advantage of the opportunities that are in our interest.
We have the next question from the line of Pulkit Singhal from Motilal Oswal Asset Management.
Just 2 questions. One is do the financials contain benefits from Pratt & Whitney?
So Pulkit, it's Rohit. I think as I -- as we said in the prepared remarks, we do have credits that are from our manufacturers that are in our results.
Okay. And then if I understand correctly, you mentioned the RASK performance will not be depleted going there? Or I mean...
Yes, I mean, I think just to repeat what I said, I think there was -- there were a few things that helped our RASK performance. One was better revenue management. And when we talked about that in the last couple of quarters, now when we look at fourth quarter last year, when we had the systems in place last year, so that better revenue management from our new systems and processes, that -- which take effect of our rebate then going forward. And then the quarter, the similar quarter last year, Q3 had the demonetization effect, which obviously you want to have that on a year-over-year basis, there was -- that helps. And then there was the compensation as well. So those are the 3 factors that helped RASK that won't be there going forward.
Okay, the compensation goes up as well there?
Well, compensation we don't know, and we say it will all depend on the nature of what happens. Clearly, we had some groundings in the early part of this quarter, which is why you still see some compensation. We can't predict what that will be going forward.
Okay. Just a quick second question on -- I mean, cumulatively, over the 3 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? So 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 not 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 total amount of cash that the company should maintain, and of course, now that the cash needs of the business also include use of cash to purchase aircraft. And so after all, capturing all that and 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. But beyond that, we can't give you more guidance, and we'll give you more guidance on the next call.
We have the next question from the line of Srinath Krishnan from Sundaram Mutual Fund.
I understand this is a seasonal business, so -- and there's a demonetization impact during Q3 last year. If I look at the last 3 years' numbers, you know the spreads, that is revenue RASK minus fuel cost, this quarter seems to be [indiscernible] despite an increase in load -- in load factors over the last 4 years. Similarly, your EBITDAR per ASK is also on the lower end. Why -- I mean, going ahead along with the increasing [indiscernible] increasing fuel costs, even if we have a higher load factor, does this mean that we would sacrifice on our profitability to gain share?
Yes, so it's Rohit. The -- yes, 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. So there will be some effects of that on margins as fuel prices go up in the short term.
Absolutely.
The splits have been declining despite lower fuel costs and higher sort of load factors.
I'm not sure I fully understood the question.
Your -- if I look at 3Q FY '15, your fuel cost per ASK was much lower what it is today and your spreads were something like 2.66 that is RASK minus fuel cost. That is -- now it is about 2.54. And your load factor was around 81%, and now it's around 88%. Does it -- the trend has been -- the spreads has 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 3 years back?
You're talking about a longer-term trend. I think there's -- clearly, when you look at FY '17, and we talked about it through our call in FY '17, that's on a year-over-year basis. The revenue environment was weaker than FY '15, where there was an effect of clearly lower fuel prices and there was obviously a point in time where the revenue per -- fares were very high. The competition had reduced a significant amount of capacity. So there was a situation in FY '16 that -- where it was a very favorable environment. FY '17 was a little bit more challenging. FY '18 so far is somewhere in the middle from -- of FY '15 and FY '16 and FY '17. So it's not a declining trend. It's sort of FY '18 is the recovery, it was FY '17, but not quite at the FY '16 margin levels. Does that answer your question?
Yes.
You have the next question from the line of Achal Kumar from HSBC.
I have 2 questions. One, if you could please talk about your ATR business. I understand that you said that ATR business will be separate, of course, except the top line you mean. So how that has been structured? How is it performing? If you can share something on that side. And secondly, about -- if you could talk about your plan on the international versus domestic. So you said that your capacities in Q4 will be increased by about 24%. How you see that diverting into international and domestic profit, domestic capacity? And given that in December, you increased your international capacity by a lot, I think more than 60%. So how you are -- how that is structuring, so if you could please share some light on your international operations versus domestic.
This is Aditya. So first on the ATR. I mean, it's still very early days. So we're just flying 3 airplanes and between -- not even been a -- barely been a month since our first flight. So it's too early to try and kind of either declare victory or just say -- give a judgment call on how the operation is running. Now operationally, it's doing well. Flights are running on time. We haven't had any cancellations, it seems like people like the product. But 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, they're set -- for ATRs, they're separated out from our narrow-body operations. So that's an ecosystem by itself, which is not intertwined with the ecosystem that exists for the narrow-bodies.
And as we've also said -- this is Rohit, so yes, we've said also previously that we also -- 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. So we're largely sticking to what we've talked about previously, which is we think the most efficient way to manage these 2 fleets.
Now being back to it, this is Aditya, coming to international and how we would expand there. Well, as we said in the past, we just look at our international flights pretty much accidentally crossing an international border. It's the same flight and it's the same airplane, similar product. So yes, you see some more international, but you'd see a lot more domestic. We just go chase where the opportunity is, so it's not that we have either tied down to one or the other. So I think -- so 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%. So yes, directionally, we have definitely increased our international capacity. But as we added capacity, we still have more capacity domestically, but the percentage has inched up a little bit and it will probably continue to do so.
We have the next question from the line of Ansuman Deb from ICICI Securities.
I had a question regarding the nonfuel CASK. Now some of the -- one of your competitors have said they're going to reduce nonfuel CASK going ahead. I want to understand whether we do have some -- we do have similar opportunities to reduce nonfuel CASK. And the short-term leases that we have taken, would there be any material increase in rentals, significant increase than on fuel CASK?
So this is Rohit. Absolutely. So we have -- we definitely have some issues -- sorry, so we definitely have to deal with the fact that we have shorter-term leases as well as we have 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 we originally planned, and 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. So we'll -- actually, we'll see that improvement. We also see improvements 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. So our A321s will have 234 seats versus 186 in our A320s. So significantly lower unit cost then that will help our CASK as well. So all of these factors, we'll do that. We also will continue to look for productivity and efficiency improvements. We -- while I think we've done a fairly good job so far, we see a lot of opportunities to continue to create efficiency. So we will continue to push the envelope on the cost side.
One follow-up question -- one another question I had is regarding the UDAN scheme. So the routes that they'll receive, I guess 20 RCS routes. So are those which we wanted in the sense what -- if you could give some color on the route that we have won.
Well, I mean the results are coming on literally as we are on the call. You are right, so what I've also just preliminary heard that we've been allocated 20 routes. So we'll examine it. So -- I mean it's only in the last few minutes that this news has come in.
We have the next question from the line of Binay Singh from Morgan Stanley.
Looking at the ancillary revenues, we've seen a pretty good traction from around 1% to 2% -- 3%, 2% 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. So how do you see ancillary revenues moving ahead?
Binay, it's Rohit. So ancillary revenue this quarter, as we said, has been pretty strong. Baggage fees, cancellation fees, the two certainly drivers of that, but we also had good performance in cargo as well, and we see some continued opportunities there. We -- going forward, we see some opportunities for this -- for continued improvement. But largely, there are -- but largely in line with capacity is what we would say.
Okay, okay. And in terms of capacity, you maintained 20% ASK growth outlook for '19 and '20, right? There is no update on that.
There is no update on that, Binay, we will give more detailed guidance on that in the next quarter's earnings call, obviously for the fiscal year '19. Directionally, we will say that we expect it to be much higher than the 20%. So you recall we said a CAGR of 20% over the next 3 years, which 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 you more detailed guidance on the next call.
We have the next question from the line of [ Charles Cartilage ] from [indiscernible] Robinson.
I just wanted to make sure I'm sort of understanding the messaging here. For a couple of years now, you unfortunately suffered from price competition from your competitors, as will always be the case, but it was quite aggressive. And your competitors have higher cost structures than you do. So -- and picking up on a question made earlier, so the expectation I think is that because jet fuel prices have risen so much over the last couple of years then your competitors will find it harder to compete on price because of that high cost structure, and so 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. And 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.
Charles, it's Rohit. So I think as we said earlier, the -- and what you just said, it takes a while for it to go, for the market to sort of embrace the fact that there is higher fuel prices and then for it to get passed through. So that's just what normally happens. We can speculate about the -- what would drive the competition to -- ability to absorb higher fuel prices and make that a catalyst to raise prices. I think your speculation is probably as good as ours. So we'll wait and see and really not put out a comment on that. But certainly, as we said, historically, we've seen certain behavior and we would expect that to continue.
And forgive me if I've missed some policy statements on the subject. But part of 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.
We have the next question from the line of Himanshu Varia from Motilal Oswal Securities.
I just had a one small query regarding the credits received. I wanted to just clarify, does both revenue and cost per ASK both individually affected positively by credits received from manufacturers as it says on Page 4 of the presentation?
Yes, it does.
The next question from the line of Ashish Shah from IDFC Securities.
Sir, first question is in terms of your international long-haul business as we spoke about. Could you elaborate a bit on what would be your fleet acquisition plans and what sort of rules would you look at? And what sort of a product offering you have in mind? Would it be a low-cost or a regular international service?
Yes. So I mean, it's too early for me to comment on the exact nature of the product and which routes we'll be flying to, so we'll update you as we get closer to those plan.
Sure. But would that be in like 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, so a lot depends on what happens after that.
Sure. Secondly is on the load factors, we already had about 88.5%. In terms of the, what, mix we have, do you think that is the scope for load factors to rise further? Or you think in terms of practical feasibility, this is where we could be?
So the answer to that question is practically you can have higher load factors, absolutely. But the -- but 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. And so really all our revenue management systems are basically geared to optimize RASK and sometimes it means higher yield at a slightly lower load factor or sometimes it's the reverse. But practically, load factors, there's no reason why it can't be had.
Sure, and just last question. Since we have plans to add assets, aircraft on the balance sheet, could you indicate a broad CapEx plan? Or what would be the gross block addition in FY '18 or FY '19 vis-à-vis the previous year?
So 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. But essentially, we'll look to use some of the cash that we raised -- we'll look to use the cash that we raised through this IPP offering to acquire aircraft. So that's in the range of around $400 million. So that gets -- 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. So directionally, that's what I can tell you.
We have the next question from the line of Prithvi Raj from Unifi Capital.
Could you give us a sense of what the cash potential is from the new 20 routes that you've added under UDAN scheme? And importantly, are they incremental to the existing routes? Or would this assume part of our existing routes?
So we have not added any routes under the UDAN scheme. Literally, after we started the call and before we've ended it, we have just got the results. So that's one. The second is that this will -- whatever we implement will be absolutely over and above of what we currently plan.
So which means that the 20% CASK guidance that you gave for FY '19, there could be material upside to that, right, for the whole of FY '19?
Capacity guidance, it's a capacity guidance. That has nothing to do with the routes, it has everything to do with the planes we're running.
Right. So 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 '19, which will include or it will include all UDAN routes as well.
Okay. So fulfilling these, how much would be dependent on a functional RASK getting delivery of new planes? And what time frames are we looking at for these new routes?
So I think as the -- I think as Aditya mentioned, the new routes, we've not even had a time -- have time to really analyze what we've actually got as part of the offering. So once we do that, we can give you more commentary. But at a high level, we bid for routes based on aircraft that we know we're going grow that we either have or have in the delivery pipeline. So it's all based on aircraft that we have -- that we either have or are scheduled for delivery.
Okay. So last question before I get back. Adjusted for the lack of income, the lack of other income from engine suppliers that we've seen the quarters to come. How long do you think will it take for [prices] to adjust and for your margins to normalize at current rates?
So I think I answered this a couple of times on the call already that there's always a lag. And as to the period of the lag for prices to adjust, it varies from time to time. So we can't really speculate on how quickly that will happen.
We have the next question from the line of Achal Kumar from HSBC.
I had 2 questions. One about the costs. So on the fuel costs, and I'm talking about quarter-on-quarter, so from Q2 the fuel cost in Q3 is up by 22%. So I'm not sure if you can really help us how we can make that. I mean, so I understand that capacity increased by 8% and then, of course, price increased by about, what, 13%, 14%. So how do you see that? And similarly the lease cost. The lease cost has again gone up by almost 22%, and you have added 8 aircraft. So if you could help us in meeting those 2 things out. And of course, we just want to understand how to model, how it will happen. That's just the first question on the cost. And on the price war, I mean recently we saw there was a sort of price war in India between [indiscernible], and of course, IndiGo joined that price war. So do you see that happening, I mean given that we are still in the peak season. I mean January is a good season, of course. So how do you see that? Do you see an end to the price war? Or do you see that's a short-term phenom?
Sure, Achal. First on the cost side, I think you were talking about sequential quarter-over-quarter of fuel CASK?
Yes, yes, yes.
Yes. So firstly, there's always a danger in looking at our business sequentially. So sequentially and that's why we always look at it on a year-over-year basis. So -- but 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's put in the air longer. So the same ASKs -- to generate the same ASKs, you actually fly more block hours, which is what would -- what has happened if you look sequentially. So even if you are paying the exact same rate for the fuel and fly the exact same missions, you'll just burn more fuel and our fuel cost will go up during fog season. So that largely will drive almost entirely the cost difference if you try to look at it sequentially. So 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 the -- why there's a sequential difference there. I obviously can't give you more details, but directionally, I can point to that as a reason. Your question on...
Price war.
On pricing. Well, I mean, there's always sales and fare sales and things in the market. That's not -- I wouldn't really call them -- that a price war. Our sales are sometimes done just to stimulate demand and people match them. I wouldn't really call it a price war. So those are very normal things in the industry, and you'll see that happening all the time. And in this industry, usually competitors definitely match these fare sales. So this is normal demand-generated activity that happens.
Okay. Again, coming back to the fuel. I mean, as you rightly said, yes, because of the fog and all, the fuel burn, that was exactly my question. I mean, you must have calculated that, ok fine. Due to the volume, we have increased as much fuel cost. But due to the currency, we have got this much of benefit and [indiscernible] capacity. So that was exactly what I wanted to understand, how do we make it? And I'm not if sure if you can elaborate on that.
I think I tried to explain it as best I could. Maybe we can do this offline, you can talk to Ankur Goel, our Investor Relations Head, and he can help you model it. But directionally, I think I explained it as best I could.
We have the next question from the line of Arvind Sharma from Citi.
So I understand that RASK [given] some of the credit from the manufacturer. Just want to clarify that the yields, i.e., the passenger revenues for our ticket, 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 and that the passenger revenue that we report in the press release does not include any of these credits.
So just as a corollary, understand that the Y-o-Y increase would not be sustainable going forward. But 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?
I mean, there's always the seasonality issues that you'll see, but that's why we don't really track sequential changes because there's always seasonality. So it's difficult for me to even answer that because we don't track it.
So I understand the sequential. I'm just saying there is no big change in seasonality, it's as it was in the previous years.
Seasonality aspect should absolutely be. There might be new factors that happen in the fourth quarter relative to the fourth quarter last year, but the seasonality element should be no different.
We have the next question from the line of [indiscernible] from Tata Mutual Fund.
Actually, my question has been answered.
We have the next question from the line of [indiscernible] SKS Capital and Research.
So with crude prices going up, could you give us some indication of yield pressure in quarter 4? And as we expect 24% capacity growth in quarter 4, do we see this, I mean, translating into a robust revenue growth, which should partially offset our yield pressure. Could you like give me some sort of indication how quarter 4 will be?
So firstly, we don't comment on forward-looking results, and that's just our -- has always been our policy. So 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 expect that -- we've seen historically that fuel price gets passed on only with a lag in terms -- I think that...
And [indiscernible], 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. So in a strange way, as fuel prices go up, our cost advantage vis-à-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 has come in for next quarter? And 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?
So 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 scheduled -- originally scheduled to be delivered earlier in the year. But because of delivery delays that we've talked about, we're getting them in this quarter. So that's what you see. And 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. So 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 -- because of delivery delays.
As far as the Air India piece is concerned, since we do not have any detailed process, I cannot comment on the Air India transaction. But 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, and we do whatever it needs to do in the right time frame too on those lines.
We have the next question from the line of Garima Mishra from Kotak Securities.
Could you shed some light on the neos addition in this calendar year? And 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?
So as -- this is Aditya. As I said in the past, the issue is around these components, which I've discussed probably on 2 calls in the past, I won't go over that again. But I think I've -- we have made it very clear that, essentially, all we were looking for is spare engines so that we quickly solve the engine valve and the planes are flying, which is exactly what's happening now. So all our neos are flying up in the air.
But there was also this talk that Pratt & Whitney is looking for 6 of the engines so that this whole spare engine requirement itself gets curtailed. Is there any update on that?
That's correct, and there is a time frame to it. And I think 2 quarters back, we had said that it'll take about 12 to 18 months and there's nothing that changes our guidance on that.
Okay. And lastly, on -- I mean, any sort of guidance or indication that you can give on the neo addition for this calendar year?
So we've given an ASK capacity guidance, and we've kind of moved away from trying to give number of [shells] and number of specific aircraft. But I think we should just look at that ASK guidance.
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, and you may now disconnect your lines.