IndiGo Shares Tumble on Possible A320neo Delays, Fare Wars

  • Planemaker has struggled with model’s engine temperatures
  • Budget carrier also reported profit decline amid competition

A protective cover sits on a wing engine fitting of an undelivered IndiGo Airbus A320neo jet. The Indian carrier is considering slowing deliveries of the single-aisle aircraft to give supplier Pratt & Whitney more time to make improvements to the model’s engines.

Photographer: Balint Porneczi/Bloomberg

IndiGo, the biggest customer for Airbus Group SE’s A320neo jets, plunged the most in more than six months after saying it will consider slowing deliveries of the single-aisle aircraft to give supplier Pratt & Whitney more time to make improvements to the model’s engines.

The Indian carrier was the world’s worst-performing airline stock on Tuesday also after reporting a 7.4 percent decline in net income last quarter amid low fares in a competitive market. IndiGo may seek the slowdown in A320neo deliveries “to allow Pratt & Whitney to catch up on the production of upgraded engines,” InterGlobe Aviation Ltd., which operates the airline, said Monday in its fiscal first-quarter financial statement, without providing details.

IndiGo slumped 11 percent to 866.05 rupees on Tuesday in Mumbai, the biggest drop since Jan. 22. The shares have slid 30 percent this year, compared with a 7 percent gain in the benchmark S&P BSE Sensex. IndiGo released its earnings statement after trading hours on Monday.

The airline’s A320neo order at Airbus totals 430 planes, with the first aircraft handed over last March. The carrier, which has a contract with Pratt to provide power systems for the first 150 planes, said earlier this year it would consider switching to rival CFM International Inc.’s engines for later orders. IndiGo President Aditya Ghosh declined to say whether the airline would shift to the CFM models for the first batch of aircraft.

Fares Drop

“The A320neo operations continue to be a challenge,” Ghosh said on a conference call with analysts. “We are struggling with maintaining our schedule integrity and our technical dispatch reliabilities at the same level” as the plane’s predecessor model, the A320ceo.

Even so, IndiGo -- which currently flies five of the planes -- is sticking to a target of operating 24 A320neos by the end of March 2017, although its average fares fell 10.9 percent to 4,032 rupees in the three months ended in June.

Stefan Schaffrath, an Airbus spokesman, declined to comment, saying IndiGo is still taking deliveries of the planes. Sara Banda, a spokeswoman at Pratt, referred requests for comment to Airbus.

Start-up Delay

The A320neo model, which first went into service with Deutsche Lufthansa AG in January, has been held up due to engine faults. The power plant built by Pratt & Whitney requires a delay to start up so it can reach the right operating temperature. Airbus and the engine maker have said they’ve devised a fix and are working on an upgrade.

Shares of Pratt parent United Technologies Corp. fell 0.7 percent to $106.94 Monday in New York.

The carrier said net income for the three months ended in June fell to 5.9 billion rupees ($88.4 million). India, where passenger numbers climbed 20 percent last year, offers growth opportunity to carriers with an emerging middle class flying for the first time, but base fares as low as 2 cents have been eroding their margins. State taxes of as much as 30 percent also make jet fuel the costliest in Asia.

Stock Downgraded

Morgan Stanley downgraded the stock to underweight from equal weight saying capacity addition while yields are under pressure will put the company’s margins at risk. The premium in valuation that IndiGo has over Ryanair now won’t be maintained because "sustainability of IndiGo’s earnings is in question," the brokerage said. Kotak Institutional Securities also downgraded the stock to add from buy on weakening yields.

IndiGo’s net profit for the year ending March, 2017 could fall 10 percent as yields decline at a faster pace than fuel prices and the company fails to meet expectations in filling seats, Mumbai-based brokerage Ambit Capital Pvt. said in a note to clients.

The company’s “new stance to respond actively to competitor’s pricing could result in sacrificing profitability in the near term,” brokerage Motilal Oswal Financial Services Ltd. said, and downgraded the stock to neutral.

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