IndiGo may junk sale-and-leaseback model, opt for outright buys
The adoption of the new model, according to senior executives at the country’s largest carrier, would help IndiGo lower overall costs of fleet ownership.
The adoption of the new business model, according to senior executives at the country’s largest carrier, would help IndiGo lower overall costs of fleet ownership. ET had reported six days ago that an imminent change in global accounting standards will, among other things, impact IndiGo's aircraft lease rental strategy the most, and said that the new norms may prompt carriers to making outright purchases.
Chief financial officer Rohit Philip said IndiGo will shift to a model of outright purchase. Aircraft kept in the fleet for long are better owned than leased as direct ownership leads to cost optimisation, he said.
IndiGo on Monday announced a net profit of Rs 812 crore for April-June, up 37% from Rs 592 crore a year earlier, aided by lower finance costs and increased yields. Sydney-based consultant CAPA Centre for Aviation called it the highest quarterly profit by any airline in India and said reported profit beat its estimates of Rs 700 crore.
Sales in the June quarter soared 25% to Rs 5,956 crore. The airline's yields increased 2.2%. In a conference call with analysts, chief financial officer Rohit Philip said IndiGo’s yields in the April-June quarter last year were hit as it didn't go for aggressive price cuts.
IndiGo's revenue per available seat kilometre (RASK) increased by 5.5%. The airline's cost per available seat kilometre (CASK) increased by 1.3% but the costs excluding fuel decreased 2.5%, primarily due to a 34% fall in finance costs.
RASK and CASK, best-known measures of an airline’s operational efficiency, are calculated by dividing total operating income or cost by a number of available seat kilometres or ASKs. ASKs are calculated by multiplying available seats for a plane by number of miles it will be flying for a given flight. IndiGo has been expanding capacity at a 25% annual rate and will grow at 20% by 2020, said Philip.
Analysts have typically attributed IndiGo's robust earnings and cash-flow also to smartly crafted aircraft orders and sale and leaseback deals.
Voluminous orders have given it heavy discounts on asset prices and maintenance rates. Conversely, short sale and leaseback agreements have ensured that aircraft are phased out before they get too old.