IndiGo is not like other Indian airlines. Its flight attendants dress in retro uniforms, including wigs. It is obsessed with taking off and arriving on time.
It has more than 400 aircraft on order from Airbus. And it has made money every year since 2009.
While rivals have been in the headlines for all the wrong reasons — being buffeted by India’s punitive taxes on jet fuel, its price-sensitive consumers and vicious fare wars led by the state-owned and loss-making Air India — the nine-year-old no-frills carrier has proved a bastion of efficiency and growth.
In the past financial year, it made a record net profit of Rs13 billion ($198.86 million, or Dh730.37 million).
Now Indigo’s operating company InterGlobe Aviation is about to launch an initial public offering of shares, to raise $400 million.
Aditya Ghosh, the carrier’s chief executive, says the IPO represents an opportunity to buy in to the carrier best placed to profit from air travel growth in India.
He is convinced that IndiGo, which carries 35 per cent of India’s domestic flyers, has cracked the notoriously difficult aviation market, by sticking to the basics of a low-cost model: use one aircraft type, offer a no-frills service, have quick turnrounds, and keep planes flying as much as possible.
“Nobody has stuck to the model... except us,” Ghosh argues. “When you take that into account, you see it’s no surprise that we are so supremely successful. In every market around the world, the low-cost carrier always wins.”
But, in a market fraught with regulatory and political risks and operational challenges such as pilot shortages and competition from subsidised state carrier Air India, turning rising passenger numbers into shareholder returns is not a given.
India currently has more than 400 commercial aircraft in its combined fleet, up from 100 a decade ago, but still tiny compared to the 2,600 operating in China. And the industry’s growth in India has come at a heavy price to the airlines and their owners.
Kingfisher Airlines, once the country’s second-largest carrier, collapsed in 2012, owing $2.5 billion to banks, suppliers and employees.
SpiceJet was forced to suspend flights for a day last December after running out of cash, taking off again only after an emergency rescue by its former owner. Jet Airways, the oldest private Indian airline, has not had a profitable year since 2007, and is now in the midst of a three-year turnaround plan, supervised by Etihad, which bought a 24 per cent stake in November 2013.
Strategic Mistakes
Carriers suffered from their own strategic mistakes, such as diversifying their fleets, or trying to offer both premium and no-frills services. But their woes were compounded by policymakers who have viewed flying as a “luxury” for the rich, rather than an enabler of economic growth, and subjected airlines to punishing taxes - particularly on jet fuel.
New Delhi is now preparing a new aviation policy to facilitate growth but details are yet to materialise.
IndiGo is also hoping for changes to what Ghosh calls “exorbitantly high airport charges” the removal of some of the obstacles to hiring expatriate pilots.
It remains a fraught relationship, though, and government officials recently even warned private carriers of a possible cap on “excessive fares”, following complaints to prime minister Narendra Modi from Indians living abroad.
Despite this challenging backdrop IndiGo, which currently flies 97 aircraft and expects to operate 111 by March, has been profitable since its third year of flying, success it attributes to a disciplined approach to costs and the bottom line.
“This is an airline owned by airline people, and run by airline people,” says Ghosh. “We understand this business. It’s easy to bring in capacity, but our focus was not just growth. Our focus has been profitable growth.”
Indigo’s founders Rahul Bhatia, who began in the travel industry in 1989 as general sales agent, and Rakesh Gangwal, an international airline veteran who served as president and chief executive of US Airways, were thinking big from the start.
At the 2005 Paris Air Show, they raised eyebrows by ordering 100 Airbus A320s, worth $6.5 billion, before Indigo’s maiden flight. It was the largest single order Airbus had received.
IndiGo followed up in 2011, with another record order for 180 Airbus jets, including 150 fuel-efficient A320 Neos, due to arrive between now and November 2023. Then, in October last year, IndiGo placed another order for 250 short-haul A320neo jets worth $26 billion at list price — once again the single biggest order in Airbus history.
Many of the new aircraft — financed through sale and leaseback arrangements — will be used not just to expand capacity but also to refresh the IndiGo fleet, allowing the carrier to return less efficient jets that have operated for six years or more to their lessor.
Ghosh argues that the carrier’s fleet strategy, which was chalked out by the co-founders from the start, gives IndiGo a long-term “structural advantage” over rivals, as newer planes have lower fuel and maintenance costs.
“We do fairly short-term leases,” he said. “We are constantly getting new aeroplanes which have new technology, better fuel burn.”
A320neo engines will burn 12 to 15 per cent less fuel than the current aircraft, Ghosh claims, boosting Indigo’s margins even further from December, when the first new aircraft will arrive.
In its IPO, IndiGo will issue $200 million worth of new shares, and some existing shareholders will sell a similar amount of equity. But Ghosh says Bhatia and Gangwal — the drivers of Indigo’s strategy — are selling relatively few of their shares, and will still hold more than 80 per cent of Indigo’s equity after the IPO.
“The focus and the objectives of the founders are completely aligned with that of the new investors,” says Ghosh. “These folks who have started the airline and built up the airline over the past nine to 10 years, will take decisions that will obviously generate wealth for them, and equally should be generating wealth for new investors.”
— Financial Times
