IndiGoAirlines – Alone Profit Maker among India’s Big Airlines

In many countries average consumers couldn’t afford to fly anywhere. But now thanks to low Cost carrier (LCC), every middle class person can experience the class and facility of travelling through airline, which saves their considerable time. Aviation has always been a thorny industry, as one has said only half inject that makes millionaires out of billionaires. And Indian aviation has stood out as notoriously brutal owing to high taxes and costly airport charges. In spite of this industry being thorny, IndiGo, the Low Cost budget airline has successfully set an excellent example about how to keep cost low and still make profits out of it. It is theworld‘sfastest growinglow-cost carrier in the world and India‘s youngest airline, havingflown over 21 million passengersin less than five years.

IndiGo has been very successful with its low-fare, short-haul strategy. The low cost carrier means that the airline provides a very basis facility of air transport with no add-on or luxurious facilities. For each luxurious facility passenger are charged extra, for example: meal charges, lounge charges, internet facility etc. The airline is India’s largest with a 31.6% domestic share. Indigo is expected to be the only profitable airline in FY15, according to a report by Centre for Asia Pacific Aviation. The airline has made profits for five successive years as compared to their competitors Jet and Spicejet who have lost money in these years. Indigo had started making money from its third year of operation. Indigo borrowing is much lower than rivals.

Company BackgroundThe airlinecommenced operations in August 2006 with a service from Delhi to Imphal via Guwahati. Today,IndiGo is India‘s largest low-cost carrier, with 3,400employees. Its main base isDelhi'sIndira GandhiInternational Airport.The two, Rahul Bhatia and RakeshGangwal, own 50%each of InterGlobe Aviation, the company that runs IndiGo. Rahul Bhatia was a travel entrepreneur and RakeshGangwal was ex-U.S. Airways chief executive. They both have increased the airline share of India's overall domestic air travel market to a third. Its success story could make it an attractive investment, company watchers say.

DestinationsIndiGo operates to 38 destinations in India including 33 domestic destinations within India and 5 international destinations within the extended neighborhood in Asia.

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IndiGo rolled out its international operations in September 2011.IndiGo's first international service was launched between New Delhi and Dubai on 1 September 2011. Byend 2011, IndiGo had 15-18% capacity deployed for internationalroutes.They are point-to-point operator connecting multiple destinations in Asia-Pacific and the Middle East. The serves selected international destinations, namely Dubai, Muscat, Kathmandu, Singapore and Bangkok.

Key Strategy

Homogeneous medium-sized fleetIndigo's whole fleet consists of one family fleet of Airbus A320-232 aircraft. This results is in greater flexibility by making use of the same crew from pilots to flight attendants to the ground force thereby cutting hiring, training and upgradation costs.

Single ClassHaving only Economy class means that Indigo does not have to spend time, money and crew on privilege passengers.

On-time PerformanceIndiGo‘s On-Time Performance is one ofthe best in India. IndiGo‘s TechnicalDispatch Reliability is 99.91% making it the airline with the least number ofcancellations in India.

Point-to-Point Flying

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They are focused on point-to-point flying against hub-and-spoke model. Through this they saves their cost of providing services for connecting passengers, including baggage transfer and transit passenger’s assistance costs etc.

Online BookingThey focus more on sale of ticket through their own website inspite of agent’s site. This saves their agent commission cost. For this in May 2011, low-cost carrier IndiGo upgraded its mobile phone booking solution enabling passengers to check in and get weather updates.

Focusing on short/medium haul distancesOn the network, IndiGo is sticking to routes with an average stage length of 1 hour, 30 minutes.

Quick Turnaround TimesThe average turnaround time is 30 minutes. This reduces the flight delays and reduced the operating cost of the aircraft.

No free MealsAs we have discussed that like any other low carrier, IndiGo to charge extra for each add-on services like meal, baggage handling, internet connectivity etc.

Opting Fuel Efficient TechniquesIndiGo was among the first airlines to have the aircraft taxi to the terminal with one engine, shutting down the second engine to save fuel. Flying at high speed burns more fuel and also if the aircraft reaches airport early and finds no space, the craft needs to encircle the airport till the aircraft finds the space. So this was curtailed to save more fuel and hence to decrease the operating cost.

Indigo's aircraft try to save fuel by using software to optimize flight planning for minimum fuel burning routes and altitudes and also by making use of latest fuel saving technology.

Sale & lease-back of FleetSale andlease back is a process where airlines sell aircraft to a leasing firm at a highervalue which then leases aircraft back on monthly rentals to the original owner, thereby helping the airline save on capex*.In this process, Airlines typically sell the aircraft to lessors and, if the market is on the upswing, make a minimum profit of $3-4million on a plane, since the price would have risen since the order date. Through this smart leasing technique the airline always freshen their fleet; this in result lowers its maintenance cost too.

IndiGo has six-year sale and lease back agreements for most of its planes. The lessor takes the planes back after this and the airline can induct a brand new one in its place. Taking their fleet on lease saves their huge amount of money for the future maintenance and repair.

To structure the lease and financing structures, IndiGo hired CFO RiyazPeermohammed, an old Emirates hand who handled treasury and corporate finance at his earlier job.

Low Cost means no low quality

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*Capital expenditures (CAPEX or capex) are expenditures altering the future of the business.

With the introduction of step less stairs and Q-busters, IndiGo is the only Indian airline with a boarding ramp‘, resonating theairline‘s uncompromising character on customer comfort where low-cost nevermeans low quality.Step less stairs allows passengers to board into the aircraft effortlessly, and Q-buster helps in providing the boarding pass to passengers anywhere within the airport premises.

Delivery of planes at the place of operatingIndiGo prefers to have the planes delivered in Delhi. This comes at a marginally higher cost, the advantage is that two sets of pilots and crew are not out of the system for 10-15 days required to fetch a plane from Toulouse (the place of manufacturing in France).

Operating Aircraft for Maximum Hours Per DayIndiGo operate its each Aircraft for 12 hours per day against Air India which Operate only for 9 hours per day.

Low Spent on Marketing They spend very low on marketing and advertising. The airline rely more on mouth-to-mouth publicity for the company.

Lounge FacilityThe IndiGo even have luxurious lounge facilities to cater to their premium customers, the facility allow them to escape from the crowd and work & relax in peace and quietness. Services include hot buffet meals/snacks & non-alcoholic beverages, internet workstations, wi-fi and a variety of newspapers and magazines which is chargeable.

Ticketless TravelIndiGo also offers ticketless travel; that means you don’t need to carry a ticket while boarding, you just need to carry the confirmation page printout and your credit/debit card from which you have booked your ticket.

Tightly framed maintenance CostIndigo has a Power by the Hour contract with International Aero Engines (IAE), which provides the engines, that put the onus of performance delivery on the manufacturer. IndiGo has similar agreements with Airbus, as well as with the vendors for other critical components. These contracts probably come at a premium but it means that Indigo does not have to pull out planes from service for repairs and also does not have to maintain a large inventory of spares.

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Profit StatisticsIn comparison to other airlines Indigo has been able to fly large number of seat capacity per week. While other airlines are bleeding into losses, during financial year 2012-13 Indigo Airlines reported a Total Revenue of Rs. 94.5 billion, Operating Income of Rs. 9.93 billion and Net Income of Rs. 7.8 billion. This, however, is only half the story. An analysis by ET Magazine of the airline's books reveals that it is indeed sale-and-leaseback transactions that helped Indigo record higher profits. In some cases, these transactions turned losses into profits as it happened in fiscal 2011.

Sales of IndiGo grew 17.5% to Rs.11,117 crore for fiscal 2014 against Rs.9,458 crore in the previous year. Net profit was recorded Rs. 317 crore in fiscal year 2014.

Financial documents that InterGlobe filed with the Ministry of Company Affairs (MCA) also show that the seven-year old airline consistently reported profits from its third year of operations. Of course, it's not as simple as that. Three accounting experts that ET Magazine approached say the transactions done by Indigo adhere to Accounting Standards, and one of them called these accounting entries as financial engineering to drive more value out of investment. The combination of operational performance and financial engineering has amplified Indigo’s valuation. Indeed, analysts linked Indigo’s decision to finally publicize its annual results as a gamble to attract investor interest and list on bourses.

Fleet Size & Structure of Indigo

IndiGo uses all Airbus A320 family fleet. The A320 Family (A318, A319, A320 and A321) is the world‘s best-sellingsingle-aisle aircraft family. With 99.7% reliability and extended servicingperiods, the A320 Family has the lowest operating costs of any single aisleaircraft.

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Aircraft In service Orders Passengers CapacityAirbus 320-200 94 2 180Airbus A320neo -- 180 189Total 94 182

Purchase of Airbus A320neoThe A320neo, available from 2016, incorporates new more efficient enginesand large wing tip devices called Sharklets delivering significant fuel savings ofup to 15%, which represents savings of over 400,000 USgal of fuel and up to3,600 tons of CO2 annually per aircraft. In addition, the A320neo provides adouble-digit reduction in NOx emissions and reduced engine noise.Thisorder for industry-leading, fuel-efficient aircraft will allow IndiGo to continueto offer low fare.

IndiGo CarGo ServiceIndiGo today carry more than 12000 tons of cargo in their aircraft, on monthly basis.They are into General cargo, Perishable cargo, Postal mail, Dry ice (DG),Courier etc.

IndiGo Travel InsuranceTo protect the IndiGo travelers, airlines has a tie up with TATA AIG. The Insurance provides coverage for accidental, accidental medical reimbursement, trip cancellation, baggage loss, flight delay, and common carrier delay and trip interruption.

IndiGo Travel SolutionsApart from their on-time flight service, IndiGo also provides facilities like Cab rental, hotel booking, and holiday packages on the prescribed rates. These additional facilities provide travelers one-stop solutions for their travel to the destination country. They had a tie-up with number of hotels and cab services to avail these facilities.

IPO OfferingOn 2 November,2015, IPO was announced with the aim to collect cash in on a boom in budget air travel. According to the article published in Reuter, IndiGo has picked Citigroup (C.N), Kotak Investment Banking, Morgan Stanley (MS.N) and JP Morgan Chase (JPM.N) as lead managers for the listing, as well as UBS (UBSG.VX) and Barclays. InterGlobe Aviation Ltd raised $459 million in an intial public offering after setting the pricing at 756 Indian Rupees/ share. This is India’s biggest since the listing of the listing of around $750 million by Bharti Infratel Ltd (BHRI.NS) in December 2012. It will make its market debut later this month.

Awards & Recognitions

Best LCC (low-cost carrier) by the Airline Passengers Association of India (2007) Best LCC at the Galileo Express Travel Awards (2008). CNBC Awaaz's Travel Award for best low cost airline (2009, 2013 Skytrax Awards – Best low cost carrier (2010, 2011, 2012, 2013, and 2014). The Airline of the Year (India) at GMR GroupIndira Gandhi International Airport Award. Most Valuable Brand 2014 in Aviation byLogistics by WCRC 100 Most Valuable brands of the

year (2014) Second Best Budget Airline in Asia bySmartTravelAsia.com readers (2014) and many more

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IndiGo stands out as one of the India’s very big LCCs earning world recognition, without relying on a political connection, government concessions, protected market. The airline has proved itself that it is possible to grow and keep the margins high inspite of keeping the prices low. With its fetish for punctuality, new planes and affordable fares, IndiGo is steadily ascending.One of the reasons why IndiGo increased is also because of the factor of India’s Open Sky Policy, wherein there are no restrictions on flying between India and SAARC countries.

IndiGo's profits have being abnormally high relative to its revenue. With rising fuel costs straining the entire industry, questionsare being raised about IndiGo'sability to sustain its position andcan be able to face the stiff competition by both stand-aloneand low-cost subsidiaries of full-service carriers.Customers switching to other LCC because of low product differentiation in basic services and availability of other option can become another threat for the airlines.

Ref:http://www.icmrindia.org/Short%20Case%20Studies/Business%20Strategy/CLBS120.htmhttps://www.academia.edu/3704611/73257560_Indi_Go_Airlines_Kavita_Lakhanihttp://in.reuters.com/article/2015/03/27/indigo-airlines-ipo-idINKBN0MN0LN20150327https:// book.goindigo.in / http://www.livemint.com/Companies/rKfs8hlRDeHB7jDFpUQ5oL/IndiGo-reports-sixth-straight-annual-profit.html?utm_source=copyhttp://in.reuters.com/article/2015/11/02/indigo-ipo-idINKCN0SR1AK20151102

Keywords:LCC, low cost carrier, budget airlines, IndiGo, indigo, airlines, point-to-point flying, hub-and-spoke model, profits, meals, lounge, fare, price, destinations, travel, business, class, fleet, airbus, A320, cargo, lease-back, sale, turnaround

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