Interglobe Aviation Ltd
NSE:INDIGO
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Interglobe Aviation Ltd
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Good evening, ladies and gentlemen, and welcome the IndiGo's conference call to discuss fourth quarter and fiscal year 2019 financial results. My name is Amman, and I'll be your coordinator. [Operator Instructions] As a reminder, today's conference call is being recorded.I would now like to turn the call to your moderator, Mr. Ankur Goel, Head of Investor Relations for IndiGo. Thank you, and over to you, sir.
Good evening, everyone, and thank you for joining us for the fourth quarter and fiscal year 2019 earnings call. We have with us our Chief Executive Officer, Ronojoy Dutta; and our Chief Financial Officer, Rohit Philip, to take you through our performance for the quarter. Wolfgang Prock-Schauer, our Chief Operating Officer; and William Boulter, our Chief Commercial Officer, are also with us and are available for the question-and-answer session. Before we begin, please note that today's discussion may contain certain statements on our business or financials, which may be construed as forward-looking, and 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 Ronojoy Dutta.
Thank you, Ankur. Good evening, everyone, and thank you for joining us on this call. We announced our fourth quarter and full year fiscal 2019 financial results today. Our results for the full year were of course not great, in that we essentially had a break-even year. But it is important to note that we made a sharp U-turn during the year with losses in the first 2 quarters, and then a recovery of profit in the last 2 quarters. We had earlier discussed the challenges that the industry faced in the first and second quarters. So it is best now to focus on fourth quarter results and the trends that we see going forward.For the quarter ending March, we delivered a profit before tax of INR 6.2 billion, which equates to a fairly respectable 7.8% profit before tax margin. Our capacity for the quarter increased 29% year-over-year, with the domestic capacity growing at 24% and international capacity growing at 60%. The international capacity now represents close to 20% of our total capacity. We were particularly pleased that our international RASK, or unit revenues, improved at approximately 13.6% year-over-year as against the domestic RASK improvement of 6.2%. In explaining our revenue trends, it will be helpful to break it up into 3 factors: the first factor is what is happening to our unit revenues based on the actions we are taking internally to improve them. We have optimized the network, and 10% of the capacity has been reallocated during this quarter. We have also taken some sales initiatives to improve performance on our distribution channel. And finally, we are ensuring higher connectivity on our international flights.All these factors created a 2% to 3% year-over-year improvement in our unit revenues for the quarter, and on a steady-state basis, we expect a boost of 5% unit revenue improvement for the next financial year.This impact in the Jet Airways situation of service that helped our revenue performance in the last week of February and the whole of March. Overall for the quarter, we think that Jet Airways will effectively increase our unit revenues by 3% to 4%.Looking forward to the first quarter of 2020, our April revenues have been strongly affected by the Jet Airways shutdown, and in that regard, April revenues have actually been stronger than even March. By May, however, as the industry has added capacity into jet markets, the Jet Airways effect has started to dissipate. And by June, I think the effect will pretty much disappear, except in a few international markets where we overlapped with Jet as in the Middle East markets.Now that brings us to our third factor, which is the market behavior of pricing discipline. The downside here is that capacity was added rather late in the game without the full benefit of the 90-day booking window. Therefore, the most painful impact is in June in the metro-to-metro markets where closing fares have come down quite appreciably. Unfortunately, we also had themes of traditionally weak July, August period. And we are hoping that the new capacity establishes [indiscernible] by then.Just to summarize, we have an underlying 5% unit revenue improvement trend because of the actions we have taken internally. We have a Jet Airways bump that is pronounced in March and April and largely dissipates by June. And finally, we have a new capacity in [ high-tier ] markets that is still trying to find its way around.So we are off to a good start for the first quarter, but I have to emphasize that we have no visibility at this time of the seasonally weak second quarter. The shape of the second quarter will depend a lot on whether the new capacity finds traction in the marketplace and that pricing discipline is maintained.For the quarter ending June 2019 and for the full year of fiscal 2020, we expect that our total capacity will be up by 30%. Looking at our on-time performance for the quarter, our OTP was 76.6%. Our OTP has improved from March onwards, and we have reported an OTP of 90% for each of the months in March and April. We are also very proud of the many awards that we have received during the year. And I would like to thank our 22,000 employees for enabling the airline to expand rapidly, ensure profitability and simultaneously win all these customer service awards.I'm also pleased to announce that our Board of Directors has recommended a dividend of INR 5 per share. I would like to share with the investors our internal discussions as it relates to this announcement of dividend. Ever since the IPO, we have been profitable every year, while this year has just been a break-even year. We think this past year was an anomaly, an aberration. And going forward, we're bullish on our financials. Given the profile of our profitability, past, present and expected future, we decided that we want to establish ourselves as a company that gives out dividends every year. We realize that having set such expectations, we will of course have to deliver on them. But this management team is indeed resolved to do exactly that. And with that, I'll turn you over to Rohit.
Thank you, Ronojoy, and good evening, everyone. For the quarter ended March 2019, we reported a profit after tax of INR 5.9 billion, with an after-tax profit margin of 7.5% compared to a profit after tax of INR 1.2 billion, with an after-tax profit margin of 2% during the same period last year. We reported an EBITDAR of INR 22 billion, with an EBITDA margin of 27.8% compared to an EBITDAR of INR 11.3 billion, with an EBITDAR margin of 19.5% during the same period last year. We reported a profit after tax of INR 1.6 billion for the full year. As Ronojoy mentioned, our profitability was better during the quarter compared to the same period last year mainly on account of better revenue performance.Our total capacity for the year was 81 billion ASKs, an increase of 27.6% compared to the same period last year. The total capacity for the fourth quarter was 22.1 billion ASKs, an increase of 29.4% compared to the same period last year. Our revenue from operations in the March quarter was INR 78.8 billion, an increase of 35.9% over the same period last year. Our other income was INR 3.8 billion for the quarter.Our RASK for the quarter was INR 3.63 compared to INR 3.43 during the same quarter last year, up by 5.9%. This improvement in RASK was primarily driven by higher yields partially offset by lower load factors, while our yields were up by 12% to INR 3.7. Our load factors were down by 3 points to 86%.Our CASK for the quarter was INR 3.35 compared to INR 3.33 during the same period last year, up by 0.6%. Our CASK excluding fuel was INR 2.09 in the current quarter, an increase of 6.7% from the same period last year. Excluding the impact of currency depreciation, the increase was 4%, which was primarily driven by an increase in our maintenance cost.Our balance sheet continues to remain strong. Our cash balance at the end of the period was INR 153 billion comprising of INR 61 billion of free cash and INR 92 million of restricted cash. Our debt at the end of the period was INR 24 billion.Before I close my remarks, I would like to mention that we have adopted the new lease accounting standard, Ind AS 116, with effect from 1st April 2019. This standard requires us to capitalize our operating leases, and as a result, we will record a lease liability and a corresponding asset associated with these leases on our balance sheet. In our P&L, there will be a reduction in operating lease expense, offset by an increase in depreciation and interest expense. I would like to emphasize that while you will see some changes in the balance sheet and P&L as a result of this new accounting standard, nothing changes with respect to the fundamentals of our business or the cash flow that we generate.With this, let me hand it back to Ankur.
Thank you, Ronojoy and Rohit. [Operator Instructions] And with that, we're ready for the Q&A.
[Operator Instructions] The first question is from the line of Ansuman Deb from ICICI Securities.
Congratulations for a great set of numbers. My question was regarding the structural improvement measure that you were referring to, which in terms of capacity reallocation and higher international shares and the sales and distribution mix. So the effect of this would be around 5% for the next year in terms of fair growth. And that -- it was not -- was that what you meant when you said that?
It's not in terms of fair growth. It's unit revenue growth.
Unit revenue?
Yes. [indiscernible] of load factor. But yes, 5% year-over-year improvement is what we see going forward.
Okay. And my question was regarding the widebody order which we kind of contemplated for the international expansion. Do we have any color on that? Any further details on that?
So widebody, there's nothing imminent. Are we studying it? Absolutely. But are we about to place an order or do we see something happening in the near future? No.
The next question is from the line of Binay Singh from Morgan Stanley.
My question is basically we've guided for around a 30% expansion in ASK. Could you share what percentage will go in international? And what is the impact of that positive or not being negative to the P&L? Because you are growing quite fast in the international business, so I assume that must be a little bit of a drag on earnings. And similarly, what percentage of that will come going to -- go towards neos?
So we've consistently said that of the capacity coming forward of 30%, half will be domestic, half international. So half of the 30% goes domestic, and the other half goes international. All our new aircraft are coming in the neos. So it's all 100% neos which is helping us reduce our cost. And in terms of the international being a drag, we really haven't escrowed our profits by a market, if you will. And it's got both domestic and international in it. Some of the international traffic is very profitable or higher than some of the domestic profits. So there's no blank statement of one being more profitable than the other and the reallocation price to optimize all that to try and move this escrow to the right, if you will. So what are the average profitability we have? We have a goal of moving the entire basket of the markets to the right. And some of those are domestic. Some of those are international. Did that answer your question?
No. Yes, that's quite helpful. So in the previous presentation, you've talked about when the ASKs growth slows down, the [ pre-rate ] profitability will start to improve. So that sort of lever is still less [indiscernible], probably 2 to 3 years down the line when you see ASKs slowing down and then that will kick in.
That is one of the -- you're right, that is the accepted wisdom in the industry. But hey, slower growth is good, higher growth is bad. Fortunately for us, that's not true. We have so many high profit markets that we're going into, but we're very, very excited about that. And there's always a sort of slot issue or constraint of some kind. And so when we find them, they're actually more profitable than our averages. So I wouldn't assume that growth comes at a price of profitability.
The next question is from the line of Ronil Dalal from AMBIT Capital.
So my -- I have 2 questions. So my first question is on the international strategy. How do you think that -- since you're aggressively growing in international, how do you think that you'll be able to compete with the much stronger balance sheet and experienced players? So what is the strategy there? Because now so far, we've been focusing on domestic, but now the last year or so, we are looking to move in international? My second question is on the domestic front. Being the largest player, how do you think fares will behave, given passenger demand is coming down a little bit and capacities are going up? And on the antitrust, if there's any kind of information you can give, because now your market share is near 50%.
Okay. Yes. So let me take your 2, 3 questions there. I'll take 1 at a time. So the first question is competing internationally with the established players. And I assume you're talking about British Airways, Singapore, Emirates, all of those. They have a very different business model than we do, as you know. They're full service carriers. They have a business class. Their economy is the smallest part of the entire cabin, and their cost structure is much higher than ours. So we are a different animal in the market, if you will. And -- but we don't go head-to-head with them. And we are very successful with the business front. So when we fly to Dubai, and yes, Emirates is well entrenched year-on-year. But we're highly profitable. So -- and we expect that to continue. And if you look at our international expansion when we talked about the 4 corner strategy, we really can fly the shortest flight to get people into our network. So we really are a low cost operator. And frankly, our model has proved to be hugely successful to us.There was a second question I think on...
On domestic. Yes.
Domestic. Yes. So I have to say, part of our business model is affordable fares. So please don't assume that what's happening here is a lot of fare increases. Of course, with Jet, admittedly, March, April, there was a fare increase. But as I said, by June it's back down again. So our profitability is not driven by increasing fares. Our profitability is driven by flying into the right markets with a low cost. And then there was a third one about antitrust or market share or something. Look, we are dedicated to building aircraft efficient system, and here that's second to none. And that's what we're trying to do, and we don't know where that model takes us in terms of market share. What we do know that we'll be connecting all these Tier 2 to -- Tier 2 cities in sort of high-frequency flying so that people can move around more easily. And that's what we're trying to do. Let me give you some examples of that. We know how important tourism is to India. So we are building this Buddhist Circuit now connecting Gaya, Varanasi, and Gorakhpur, which has never been done before. And we're connecting it to both Kolkata and New Delhi. And we expect to really boost tourism into those markets.In the Northeast, we are not waiting for the government to tell us to increase flying, but we are taking the cities there like Dimapur, Silchar, [indiscernible], Agartala, and we're connecting all those cities to both Kolkata and Guwahati. And then again, as I said, we're developing a plan to take Tier 2 to Tier 2 connections without going through the Metros. So these are all things that we're doing to improve the transportation system in India. And I hope the authority, when they see what we're doing, will appreciate that.
Right. And one last thing. So actually, so besides the -- focusing on the passenger revenue and ancillary revenue, what are your view are -- is there any thought over the medium to longer term to enter, say, a light business, say, a little bit on the airport infrastructure or something where you maybe have some sort of tie-ups with the, say, tourism companies, or for example, some booking service companies?
We stick to anything. We know what we are doing, we are good at what we do, and we have no plans to sort of expand to other areas that we know very little about.
The next question is from the line of Achal Kumar from HSBC.
I have 3 questions actually, if I may. So one is around operational carriers. So where are you in terms of your operation challenges on the [ presumably ] on the pilot problem? And the third one, which has not yet started, is like IFRS 16. So when are you planning to incorporate IFRS 16 into your books' account? And what sort of challenges do you see around that? Second, I wanted to understand about your aircraft financing strategy. Are you still looking at completing that or is there any change in your aircraft financing strategy? And the last one, I wanted to understand about what's your view on the low cost business class on the long haul operations? And I understand that it was in the news that you are planning to -- you are thinking about offering low cost business class seats. Is that true? And then what's our strategy you are looking around that?
Yes. Wolfgang here. I'll start with answering the questions on P&W and the pilot questions you've asked. On P&W, we see a strong improving trend for our performance. Technically special liabilities, 99.85, which is actually comparable -- 100% comparable to other engines. A lot of improvements have been achieved in the last 1 year. We look at, for example, the obvious rolling trends of certain parameters of the engine performance, which has, let's say, in terms of [indiscernible] shutdown rates has been reduced to half and is now very, very much below the international standards, required standards. So we're absolutely confident that all these measures which have been initiated by P&W show results. For most of the issues, resolutions have been found and are implemented. And we have, right now, 2 areas where we focus on together with the manufacturers. This is, for one, this is the place at the short stage of the engine phase, and solution implemented for all deliveries in -- starting all deliveries in June, it starts. And another area for the year where we have also expect the solution in -- by September to be implemented. So all these methods are under control. We have no [indiscernible]. It's sufficient expansions, and so we are absolutely confident in how all the engines is operating. On the second point, you mentioned the pilots. And if you recall, we had a sort of [indiscernible] pilot shortage 3, 4 months ago. I have to admit that. But in the meantime, we have at least released about 40 [ cabins ] every month. In the meantime, we called up. We have sufficient pilots. And April, there is enough numbers to execute our expansion program. So we are well on track. And looking forward, we also have some -- something like 285 [indiscernible] pilots, [indiscernible] pilots who already joined us, and they will be online within 3 to 6 months. And I expect this number of 285 to increase further. So looking forward, we will have sufficient pilots to execute and to support our expansion program.
Okay. So this is Rohit. I will address your questions on accounting standard 116 and the sale and leaseback question. So first on 116, I think in my prepared remarks I talked about the fact that we have adopted the new standard as of the 1st April where we're going -- our operating leases will be on balance sheet. I'll give you a little bit more color in terms of rough numbers. So roughly, we will have a lease liability of approximately INR 140 billion. That will be on our balance sheet, and a corresponding asset of about INR 150 billion will also be on our balance sheet. So that will be the balance sheet impact. On the P&L side, for the financial year FY '20, the coming year, we would expect it to be roughly neutral. The reduction in lease rent expense will be almost exactly offset by the increase in depreciation and interest expense. So P&L impact will be neutral, which is kind of what you would expect. The accounting standard is only trying to bring the liability on the balance sheet. The only other issue that I will point out is that we will be marking the liability to market, and that impact will flow through our P&L. So depending on the change in the exchange rate, the mark-to-market of the liability will also affect our P&L. So that's 116.
And on the business stock ratio, as we said repeatedly, I think the airline business really segmented so strongly of less than 6 hours flying and over 6 hours flying. In the less than 6 hours flying, the business model has been tried, tested and is established everywhere around the world. In the long haul, over 6 hours flying, many people have tried. None has come up with a good model yet. And we aren't saying we have any of the answers either. So when people's say, "Are you going to do a business process? Are you going to go widebody? Are you going to go long haul?" This is very preliminary in our thinking. So we're just putting our thoughts together. So all options are open at this point on that regard.
And so this is Rohit. Just to finish up on my -- on 116. There's just 1 more point I wanted to add. I think most of you on the call are very familiar with the fact that the airline industry, for years, have -- analysts and investors have always looked at the off-balance sheet debt and estimated an adjusted debt number using different lease categorization factors. Some people use 5x rent, some people use 7x rent, et cetera. So there's nothing really new with the standard other than it puts it on the balance sheet. I also wanted to address your question on other financing model. So we primarily have been relying on sale and leaseback -- to the sale and leaseback model to finance [ our debt ]. Having said that, over the last 1.5 years, we've signaled that we would like to start having -- owning some things outright with the cash flow that we generate. We have started buying and we own about 12 of our APRs which we bought outright with cash. We have planned to buy some A320s but because of the -- a little bit of an uncertain financial environment over the last year. I think over the last many calls, I had explained that we sort of temporarily slowed down our sort of thoughts to buy planes. But as our cash starts building up, it's certainly something that we will utilize some of our cash balance to buy some planes as well.
Okay. Rohit, but what I understand is that I take this as very positive. Would you say that this a mutual impact on the P&L other than the ForEx impact? Because generally, what I understand your views are -- seem like more in the initial years. And you have all the young leases, which are not appreciated. So in the initial year, that should have more impact on the P&L. I'm not sure if it's untrue, but that's what I get from the international airlines and in the international standards.
Yes. You're absolutely right. We should, but most of our leases are 6-year leases. And so on average, we will have our leases that we are capitalizing which will sort of be sort of on an average life. It's not -- so if that will be true, if we have -- if our leases were like 12-year leases. But they are -- the sort of early part of the lease are first 3 years, and the latter half is the next 3 years. And so because our leases are short-term, that's why the affect. You won't see that big an impact.
The next question is from the line of Sonal Gupta from UBS securities.
Could you give us some more insights on the 5% unit revenue improvement that you talked about? I mean is this going to come because of past and ancillary revenue, cargo growth et cetera? Or do you see a -- I mean because you said this is driven by internal initiatives, right? So just...
Right, right. No, cargo ancillaries, those are also important areas for us. I would also say that, so far, we've been handicapped in cargo a little because we are flying routes that are not cargo rich. As we go internationally, we do get more cargo rich. So I would -- those are add-ons, yes, cargo ships better. Ancillary, the same thing. As you go long haul, people will tend to buy more meals. They will tend to sometimes have 2 meals. And so all that potentials, but I'm not including that in the 5%. We had a project team put together and -- on December, January and we said we need to improve our unit revenue and what can we do. And these are the 3 areas we focused on as low-hanging fruit. That doesn't mean that -- that's all that is going on in the company. Of course not. We've got initiatives to improve our customer service, initiatives to improve cargo, initiative to improve ancillary as you suggested. Those are not included in the 5%.
Okay. And just another question, if I may is just on the international slots, I mean, how does the -- that allocation take place? I mean do you need permission from the -- I mean, like you can say, flying to Middle East or somewhere?
Absolutely, absolutely. So there are 2 issues and they're looked on almost separately. Domestically, it's a whole slot. And it's not just Delhi and Bombay as people seem to think. There's also, like, I -- can you get a slot in Lucknow or Pune and Goa. Everywhere, there's a slot issue. So those are domestic. Then you come to the international flying and they are doubling by bilaterals. So who has somebody bilateral 5 countries [indiscernible]? Who has applied for it? So with the -- Jet is a good example to focus on. But Jet has shut down and a lot of authorities, if you will, that are now available. So several discussions going on with the ministry. Everyone is applying for some of those. But we can't fly them until the ministry approves them. And they'll approve them by saying "Okay. IndiGo, you got this and at Goa area you get that." And after they give us authority, then we have to start the slot process again. Because if they just say that you can fly Mumbai to Hong Kong doesn't mean you can start flying. You still have to go to the Hong Kong airport and get a slot. You still have to go to the Bombay airport and get a slot. So yes, it's -- for international, it's 2-step process. First, get the bilateral authority, then get the slots at both airports.
Then would that require any payment also for international slots, like, to Hong Kong or...
No, no. I mean if you're going to Heathrow, yes. But all these other -- but they're highly slot constrained, let me tell you. And getting a slot from Hong Kong is not easy. We have some rights, but we have not been able to use because we don't have the slots. So these are slots we're negotiating there.
Some of the -- the slots itself, they don't -- the airports don't charge you for, but they charge you landing fees. So that's for the -- that's their model, they charge you landing fees.
Sure. So basically, but given that we have a certain fixed number of bilateral flights, which are there from India and, let's say, now Jet allocation obviously going out, so you can get what other people can get those slots, so then you don't need an approval from the other government to fly, right? So you just need approval from the Indian ministry and then negotiate for the slots to the -- that is to the airport.
That is correct.
The next question is from the line of Deepika Mundra from JPMorgan.
As your stage rent increases with the increasing international mix, is that factored into your 5% unit revenue growth?
The 5% unit revenue growth is a set of actions that's taken on a specific project. So everything else remains the same. As we talk about cargo, our CASK, our RASK, everything remains the same and goes along with the trend. This was a very concerted specific project effort to try and give our unit revenues, so it doesn't affect anything else.
Understood. And could you give us, like, a little bit more color on the slightly longer haul routes? How is the utilization now trending, I mean the newer routes that you've launched? And particularly on the return, are you getting enough demand on the 6-hour, 7-hour routes.
Yes, we're very pleased with that. I mean as the only route that -- as can you imagine with the Delhi, Istanbul because we now have a fuel stop. I mean that one is an issue for us until the Pakistani airspace opens up. But by and large, most routes are doing well. We are happy with the utilization, happy with the profitability. So yes, we have -- and as I just spoken in my prepared remarks, year-over-year, international actually improved sharper than domestic did. And so we know how much of an impact Jet had on the domestic. International overlaps with -- Jet is not that much, except in the Middle East. And yet we are performing very well. So yes, we're pleased with international.
And one last question, if I may. You've mentioned that you plan to dividend -- to give out a dividend each year. Any specific dividend policy in terms of a payout?
You mean in terms of what yields are we targeting? No, it will depend on profitability. What we're saying is we are committed to make sure we are on enough profits to give out dividend. That will all depend on what percentage profits we are making and other cash needs for that matter. And we always say we would also factor in that we would like to own some more airplanes.
Next question is from the line of Santosh from SBICAP Securities.
I had 2 questions. First one on the nonfuel CASK side, you did mention it's gone up in the quarter by about 6.7%. And part of it is due to the movement in ForEx. You did mention that some of it is attributable to the maintenance side, which you've seen an increase. Just wanted to understand, is this more of a one-off or we should expect this to continue going ahead?
Yes. So Santosh, the -- you're absolutely right. So I said, the 6.7% was partially ForEx and partially maintenance. ForEx -- without ForEx, it was 4%. The majority of the 4% is maintenance. This is something that has been there for the last year or 12 to 15 months, as we've had a number of our older aircraft, the CEO aircraft that went through lease extensions go through a second shop with it. And the second shop with it was usually at the eighth-year mark, which was not sort of originally anticipated because, originally, we expected to keep all these aircraft only for 6 years. So I think I've explained on the last couple calls as well that we have this bubble. I think this bubble will continue through the next year or so, but it starts to dissipate over the next year. So we won't see it -- we'll see it come down slightly over the next year, but then this sort of bubble will be behind us 2 years from now.
Yes. So this is mostly linked with the average of the fleet, so to say. That's how once [indiscernible], right?
Yes, that's correct. As those older aircraft exit the fleet and are replaced by neos, well, this bubble will sort of be behind us.
Understood. The second one was around the A321neos that you've started adding now. Just wanted to understand the unit cost structure, how is it different from the A320neo.
It's in the range of 8% to 10% better on a unit cost basis than the A320neo.
This is compared to A320neos.
Yes, neo to neo, 321 versus 320, neo to neo.
The next question is from the line of Suraj Chheda from IIFL.
This is Joseph for IIFL. I had a couple of questions. One was, right now, when we look across the economy, we are seeing a different slowdown in many consumption categories, be it autos, be it S&CC growth or consumer electronics, et cetera. I just wanted to check whether you're seeing a similar trend in your category as well, especially when you hold the fares constant on a like-for-like basis?
Actually, we are not seeing that kind of slowdown that the press is reporting. So the press reports that traffic has gone down. And the fact that the traffic is -- passenger traffic is very closely co-related to capacity. So if capacity goes up, traffic goes up. If capacity goes down, traffic tends to go down with it. And recently, capacity has gone down, of course, led by the MAXs -- the grounding of the MAXs and then, of course, Jet. And so again, the co-relation is very tight. Now going forward to May and June, looking at our load factors, they are bouncing back up nicely. So if you were to say, "So what do you think is happening to airline traffic in the next year in the sort of short term?" We'd say it's going to be up 10% to 12%. That's our best forecast.
Got it. My second question was based on your internal estimates, what do you think industry -- domestic industry capacity will grow in FY '20? Or any rough sense that you'll be able to give us?
That's very hard to say because we know our numbers and everyone has their numbers where, I think, are sort of speculation. So as you know, Spice got a lot of Jet airplanes. [indiscernible] was the same. So no, we don't have a clear sort of sight into other people's growth plan. It's seems very volatile at this point.
The next question is from the line of Vineet Maloo from Birla Sun Life Mutual Fund.
How do you say that your fares have not gone up? It's -- and what about, I mean, your margins have basically increased because of different routes and the cost coming -- being under controlled. So just want to understand, your yields showed a pretty decent increase on a year-on-year basis. So just if you could throw some light on that, [indiscernible] mix.
Sure. Right. So as we said, March and April are strongly affected by Jet and fare did go up. The rest of the [indiscernible], Jet Air has overlapped on that, so about 40% of our routes. And 60% of the routes, there is no Jet effect as such. So what is happening there, we do have strong routes, we do have weaker routes. And to the extent we optimize our network by saying it's almost like a plumbing problem. Where is the chokepoint? Time has capacity there and where are the flights empty and trying to take capacity out of this. When you do that, you get an automatically improvement in yields. Although in each specific market, fares haven't gone up. So it's this mix scheme that we mostly saw this impact, but acknowledging completely that March, April and May are affected by Jet.
Sure. I wanted to understand, let's say your yields show approximately 10% improvement over last year in this quarter, so would it be fair to say that more than 2/3 of this is because of mix and the rest is because of fare because not on -- not all routes would have seen fare increase?
Right. So as we said, a 5.9% improvement for the quarter now, and that is taking into the next quarter. Last quarter, we had a 5.9% unit revenue improvement. And we looked at that and said, "How much is that because of our actions? And how much of that is because of Jet?" And our best guess is that 2.5% of that is [indiscernible] for the quarter and the remaining 3.5% or so is because of Jet. So you can use that ratio as to what's happening in the marketplace.
Okay. So when you say fares have now again come back down, so that means only that part will actually go down. The balance of the [indiscernible] will actually continue to retain going ahead. Is that a fair understanding?
That's why I try to give -- you have to understand 3 different factors. One is what are we doing in terms of this mix. And don't forget, there's sales channel initiatives and there's international connectivity. So don't just focus on the optimization of the network. All 3 had an impact. And you said, "How much is that?" So we gave you that number. That's a 5% steady state will be same for the whole year. We should get it year-over-year. We should get a 5% improvement. Then we said separately there's a Jet impact. And we said the Jet impact was strong in March, stronger in April, coming down in May and disappears in June. That's the bump effect. And then we said, however, there's a third effect which is actually a negative, which is much of this capacity have gone into metro-to-metro markets. And in metro-to-metro market, before we had established players doing their thing and it was a steady -- a pretty steady stable environment. And now we have new players coming into that market. And they're coming in very close and they don't give a 90-day booking window. So the third impact is actually negative in terms of this new capacity coming into high-yield markets. So those are the 3 trends we were trying to delineate one from the other.
Okay. And my last question is now that you mentioned you that you have initial squeeze, which happened and which took place, which is behind us that hump, right? So now, how do you see the situation, especially in that up to 15 days bucket? How do you see fares and competition behaving in that bucket?
So in June, we said that during the 15-day window, the fares are weaker -- appreciably weaker. So after up to May, good. Up to June, it seems to be getting weaker. But again, as they get this 90-day booking window behind them, they could behave differently. I mean clearly, if you're going to put in a flight into Bombay, Bangalore with this sort of 20-day notice, you'll rush to fill those seats, right? And then it's going to bring down fare.
The next question is from the line of Nitin Agarwala from JM Financial.
Sir, like you said, to capitalize the lease in the industry, we have to use somewhere around 5 to 7x. So if in FY '19 we see -- we have over 50 billion of [indiscernible] so if we use 5 to 7x, the capitalized lease should be somewhere in the range of INR 250 billion to INR 350 billion. However, you said the rough [indiscernible] has lease liability, which will be coming in our balance sheet will be around INR 140 billion. So can you explain the difference of what is being missed? And pardon me, can you maybe reconcile this for us?
Yes, it's actually a very simple explanation. Our leases are 6-year leases, while sort of that normal industry-standard of 5 or 7x as assuming more like a 12- or 15-year lease. So because our leases are 6 years, they have sort of an average life of 3 years. So our numbers are going to be more like 3.5x number, which is sort of the usual reconciled more closely with the number, which is -- which we'll reconcile the number with the number I've given.
The next question is from the line of Mayur Milak from IndiaNivesh.
So 2 questions from my side. One, just trying to analyze, so the EC recently reported the April numbers. Now what we see is that IndiGo has gained significantly. We see a 20% Y-o-Y growth in passenger traffic for IndiGo versus the minus 5% for the industry. And we see 0 market share improvement for SpiceJet. Now what I don't understand is, while there are the media reports that the SpiceJet has picked up a lot of Jet Airways aircraft, have you seen any benefit really coming there? So just wanted to understand that do we see that impact coming now. And will it hit both in terms of competition and the yield benefit?
So you have to remember that, first of all, the capacity went down because of the MAX grounding. And then they're trying to bring in this Jet Aircraft. And the Jet Aircraft, they're coming in at a certain pace, if you will. So the -- they're all in there and all flying and all climate utilization. So they had a bump down because of MAX building up. And that's why I said it's kind of volatile when you say what is the domestic capacity going to do next year, especially in the next 3, 4 months. It will all depend how quickly Spice will be able to get these planes up in the air.
Right. And secondly, continuing on the same thing, so while we've seen your personal traffic growth really going up by 20%, you are also mentioning that you're going to see addition of about 20% in your ASK for the quarter and for the year as well. So even if that growth rate continues, my sense is that your fixed cost will be up for about 20% of the capacity where you'll be generating revenue for about, let's say, 20%, but that is -- and I'm assuming that you continue with the same kind of growth. You also, sir, were mentioning that you are now seeing a kind of -- the 0 to diminishing impact of the Jet really going forward. So I'm just trying to understand that how will we plan our cost when the fixed cost and it looks to be going up because of higher capacity addition for the company.
Let's see if I can decipher that. So you're saying our cost will grow faster than the revenue. Is that your concern?
Yes. So my sense is that most of the aviation cost is kind of fixed in nature. When you add 30% capacity, you are definitely adding a cost of 30% addition. And as we rightly know that SpiceJet has become aggressive, the other guys will start coming into the metro routes. The yield might again go back and build pressure. So just trying to understand, is there any other lever left for us other than the extended yield where we could still continue the kind of performance that we've generated?
Look, I mean, I'll have to say that I look at this at a market-by-market basis. And I say, are we gaining or are we losing? And I'm very comfortable that we're gaining ground. I mean so our system -- remember, I talked about chokepoints. Our biggest chokepoint was Mumbai. So I will look at each market, we say, "Okay, it's Patnem, Coimbatore, Lucknow. I want to do this. This is where we're going." And in fact, okay, we're doing well in every direction. But in the direction of Mumbai, we choke. Now -- probably, now, Mumbai has opened up. That clearly makes a big impact to all our markets where the traffic was getting choked before. Then we look at the Middle East market. The Middle East market also, long term, there has been a reduction in capacity because of Jet. And I'm saying, "Hey, that looks pretty good, too." So then I can go Eastward. And we are quite optimistic about the markets we're going to fly into Asia where, actually, no one is flying today. So as we said we'll go to Hanoi and China. We have -- we'll be the only Indian carrier flying into those routes. Metro to metro, we used to have some gas in our schedule. And I mean, just to make this more light, if you will, and we'll [indiscernible]. If we only had a Mumbai and Chennai in the morning, we're missing that. So now we have Mumbai and Chennai in the morning, which we didn't have before. So if I look at every market, it's like, there's a lot of room to be positive there.
Just on the cost structure, Wolfgang here, I mean, a quite a big amount of our costs are fixed costs. And that should have been expensed, this deal like this. We only decrease much below the increase of our capacity. And the way we plan our expansion is the most efficient way because we bring in our own aircraft, which we have ordered in the same configuration. The big -- bringing also big aircraft, like the A321. So all of these tends to lead to much lower unit cost going forward. And so I didn't fully understand your question that fixed costs were, more or less, the same rate as the capacity induction. In our experience, not the case. And CapEx [indiscernible] let's say, very homogeneous growth zone aircraft coming in [indiscernible] sudden introduction of business class, which, as I said, brings up unit cost. So we don't need to bring in other aircraft. All that coming together, I think, your calculation show that it has a very positive effect compared to the industry.
The next question is from the line of Manish Ostwal from Nirmal Bang.
Most of my questions already answered.
[Operator Instructions]
Sure. Most of the questions have been answered. Only one question I have. As per the media reports, there is some difference of -- difference between the mortgage. So can you update on the same, sir?
Well, like we said in the press release, well, we want to confirm that there are absolutely no differences on the strategy and no differences in international expansion, no differences on management selection. There's one issue that they're debating right now. And we hope to resolve that in the next -- in the very near future. That's our only one issue remaining. It is being debated, and we're very optimistic it will be resolved shortly.
The next question is from the line of Chockalingam Narayanan from BNP Paribas.
No, the last question was what I wanted to ask.
The next question is from the line of Chintan Sheth from Sameeksha Capital.
This is Bhavin. Could you comment on what sort of -- you talked about the unit revenue improvement from the initiatives. Could you comment based on the fleet improvement and the 30% ASK growth? What sort of improvement can we expect for fuel cost where the pricing assuming the same price? And also because of the total economies of scale, what sort of improvement can we expect in your CASK?
Yes. So in terms of fuel -- this is Rohit. In terms of fuel CASK, as we continue to take on more neos, we will see a 15% improvement in fuel. So if you look at our CASK -- if you look at our fuel CASK for this quarter and compare it to the same quarter a year ago, our CASK was -- fuel CASK was 8% better. Even though fuel prices coincidentally were actually roughly the same a year ago and this quarter. So that is primarily driven by the improvement in neos as well as some improvement in the fact that we've had increased international presence, which -- international capacity, which, because of a [indiscernible] less fuel on ASK -- on core ASK basis and lower fuel taxes in international as well. So those are the 2 points. But the neo has definitely contributed a portion of that, and that you'll see going forward. And as we get more and more neos and some of the older planes exit, you'll see that increase. As far as the overall CASK goes -- with the sort of the nonfuel CASK goes, as you see, A320 is coming in. I think I mentioned earlier to another question that we see about an 8% to 10% improvement on unit cost from A321s versus the A320s, neos to neos, so that we'll see improvements from that as well.
Sir, if I may just ask one follow-up on that. So if I take Q4 next year FY '20 versus Q4 that you just completed, and all is being saying the prices of fuel and everything, what sort of improvement can we expect on a 12-month basis on those 2 parameters?
So I think I've given you sort of the information that I could give you. I think the -- on what such. Okay?
So understood. About -- on your other income hasn't come down. One thought that with the -- lot of money moving into foreign currency, it would come down. So what is the reason? I mean can we expect it to continue at these current levels?
It will start as our interest income, which is based on the interest on the deposits with foreign currency will stop coming down with an adoption and with the foreign currency deposits. So you'll start to see that coming down.
The next question is from the line of Sonal Gupta from UBS Securities.
Just on the international, I mean, one is do we see this expansion largely to be 321 led in that sense? And the second thing was also in terms of -- I mean, just taking your numbers on 50% of capacity going into international routes seems to imply like an 80%, 90% growth in international ASK for the year. And like, you were hinting at -- that it's not easy to get slots, et cetera. So are we -- I mean, this already pre-model build out or, I mean, given that in the walls opened with Jet, we called that, I mean, this is including that benefit. Just some color a little bit.
So the growth between now and December of this year is pretty much signed, sealed and done in terms of we've got the slots, we've got the bilaterals, et cetera. Going forward, from December to the rest of the year, we are still applying for slots, applying for bilateral routes and so on. So most of it is done. And I would also say that the international, really, people seem to think that, as you grow, you're growing into less profitable areas. And that really is not true. Many of these international markets, we're quite excited about that they're highly profitable. And don't forget, for every international passenger, you really get a bump of about 0.3 passengers domestically because every international passenger tends to do a domestic connect or does a domestic route. And so all of that makes us quite optimistic about our route network going forward with international being a major add.
And let me add here that the good thing about the A320 family is that we can use the aircraft in a very flexible way. There are certain routes, which might require only A320 size. And a lot of route will require A321. So actually, we can deploy our family from all parts of the country on our international routes today. That's a heterogeneous network we have in international. So that's -- A320 will play a very important role post A320 and A321 for us. And A321 has the added benefit that we can also use the aircraft on high-density domestic routes that the airports are not slot-constrained -- that's not constrained. It will also give us an additional advantage with A321 forward.
Okay. Would you be able to indicate a number for how many A321s we expect this year?
Do you want to take that?
I can tell you total aircraft that we're -- the total number of deliveries we expect [indiscernible] is 53 narrowbodies, meaning A320 and A321 combined, and 11 ATRs. This is through the next financial year. Now this is not all growth because, this time, there are some aircraft we're doing this as well. Sorry?
Will be in a mix into those 15 A321s for this financial year.
Ladies and gentlemen, that would be 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 all for joining us. I hope you found the call useful.
Ladies and gentlemen, on behalf of IndiGo, that concludes today's conference. Thank you all for joining us, and you may now disconnect your lines.