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IndiGo to scale back expansion plans amid A320neo engine troubles

India's biggest carrier says revenue growth also faces challenges

 IndiGo has been facing troubles with the grounding of its Airbus A320neo aircraft fitted with P&W engines.   © Reuters

MUMBAI (NewsRise) -- IndiGo, India's biggest airline, plans to trim its capacity expansion as it grapples with safety concerns on its A320neo aircraft powered by Pratt and Whitney engines, even as travel demand weakens in the south Asian nation amid an economic downturn.

IndiGo, which held about 47% of India's aviation market, has been facing troubles with the grounding of its Airbus A320neo aircraft fitted with P&W engines. After frequent in-flight shutdowns raised a security scare, the country's aviation regulator last month pressed ahead with a stiff Jan. 31 deadline before which the carrier must put modified engines on its 100 A320neo jets.

On Wednesday, the airline said its capacity expansion and revenue growth plans for this fiscal year could be hit due to the engine issues. It now expects the capacity to expand 20% to 23% this fiscal year ending in March, compared with a previous target of 25%.

The company's revenue growth, too, faces challenges from the engine issues, along with increasing pilot shortage and uncertainty around the allocation of landing slots that had previously belonged to bankrupt Jet Airways, it said. The company is competing with a raft of rivals to grab the slots vacated by Jet Airways which collapsed earlier this year.

IndiGo's troubles come at a time when growth in domestic air passenger traffic is cooling, amid weak consumer demand triggered by an economic slowdown. Asia's third-largest economy grew at the slowest pace in six years in the July-September quarter as banks curtailed lending, wary of piling up of bad debts.

Air passenger traffic in India grew 3.1% in October, compared with a 20% jump in the year-earlier period. Rating agency Care Ratings expects annual passenger traffic this fiscal year to grow 5% at best, compared with the 14% growth in the previous year.

Analysts expect the shrinking capacity along with slowing demand to help the industry regain some of the pricing power that has been clouded by stiff competition from discounter carriers such as SpiceJet and GoAir. Considering the sizeable amount of modification and the supply lag from the aircraft manufacturer, IndiGo may not be able to replace all of the required engines in this fiscal year, brokerage Motilal Oswal said in a report last week.

"There is going to be some correction in the inventory of seats being added next year, given the engine issues at IndiGo," said Ashish Nainan, an analyst at Care Ratings. "That augurs well for the industry as demand is growing at a very slow pace" as it will help airlines to regain some pricing power.

In the quarter that ended in September, IndiGo, owned by InterGlobe Aviation, reported its biggest-ever quarterly loss and cut its capacity expansion plans to 25% from 30% citing delay in deliveries of aircraft by Airbus. Its yield, a measure of passenger fares, grew 9.4% in the quarter, down from the 13% reported in the previous three months.

With demand moderating further, analysts are predicting yields to turn flat in the current quarter that ends on Dec. 31.

Shares of InterGlobe Aviation gained 0.1% in Mumbai trading, while the benchmark S&P BSE Sensex lost 0.8%.

--Dhanya Ann Thoppil

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