Posted in Marketing & Strategy Articles, Total Reads: 1652
, Published on 24 October 2014
When Richard Branson famously quoted that the quickest way for a billionaire to become a millionaire is to own and run an airline, he might not have had to look around since his own high profile Virgin Atlantic reported a pretax loss of £51 million last financial year. A look at the airline industry around the globe will present a case so disturbing that even the most hardened of the optimists will quiver. Consider this, in the decade from 2002 to 2011, the 3 of the largest legacy airlines of USA – American Airlines, United Airlines and Delta Airlines – each filed for bankruptcy.
Can the story back in India be any different? With one airline gone bust, sales tax on ATF hovering around 35%, rapidly falling rupee, poor flight occupancy and the entire sector facing a combined loss of $1 billion, there stands a lone warrior from InterGlobe Aviation – the company that owns IndiGo.
It made the entire aviation industry look at IndiGo with shock and awe when it reported its numbers for the FY – 13. Not only it had become India’s largest airline in terms of passengers by then but also reported a profit of 787 crores. It was almost 6 times more than the profit reported a year ago. In the mean while Naresh Goyal’s Jet Airways, IndiGo's closest rival in terms of passengers carried, reported a loss of Rs 355 crore in the three months ended June. Government-run Air India's total losses increased to around Rs 20,000 crore. Wadia owned GoAir reported a Rs 60-80 crore loss in 2012-13, according to an estimate in May by aviation consultancy CAPA.
Figure 1: Comparison of performance of various airlines in FY 13 ( crore)
How was IndiGo able to achieve such a windfall amidst such testing business environment when its competitors had been bleeding cash all the way round? What keeps IndiGo going on?
Many a people and analysts believe that IndiGo is able to outdo its peers by focusing on efficient operations, time bound flights and enhanced customer experience which has created a formidable brand and aura around IndiGo. One can feel the urgency and dedication amongst the crew members during the flight itself and all and bits of this has resulted in IndiGo scoring high on customer ratings and operational and financial efficiencies worthy of being vied for. In fact, the confidence of their brand and service at IndiGo is so high that on certain routes it’s more expensive than its competitors but still has higher occupancy rates.
Another thing that IndiGo has always believed and delivered is on the part that low cost and no frills, doesn’t mean shoddy and cheap service. There is a method to this madness at IndiGo and it begins with paid on board meals, a single flying class with no frills service, timing the flights on the most lucrative routes, higher aircraft utilization (an average of 11.5 hours per plane everyday) and quicker turnaround time (about 30 minutes). It carries no heavy equipment and cutlery since it doesn’t serve hot meals on board which reduces the load of the aircraft and saves precious fuel. Besides, it maintains one of the leanest workforces in the industry. All this has allowed IndiGo to be at the top of their game for 5 years on the trot and at times among the few airlines to remain profitable in the world.
The Plane game
A look at the planes in the fleet of the airline will further highlight the beauty of simplicity in idea and execution. All the planes in service at IndiGo are Airbus A320 family which allows it to streamline its MRO (Maintenance & Repair Operations) costs. This move also allows the pilots to be trained only on one type of aircraft and they effortlessly switch between routes in case required. The A320 family is one of the most fuel efficient aircrafts in the industry and IndiGo has ordered planes fitted with ‘sharklets’ which help increase the fuel costs by 15% which is a humongous saving because ATF (Aviation Turbine Fuel) comprises of more than 33% percent of the cost for an airline. Even while taxing it uses single engine instead of two to save fuel. Come 2016 and IndiGo will start getting the delivery of A320 Neo which has even better fuel efficiency.
New ‘Lease’ of life
While an airline can try squeezing as much it can from the existing cost structure but there are certain areas where it has no control beyond a point, for instance airport parking fee, ATF cost and other miscellaneous charges by the government are non-negotiable. Trying to cut corners in such constraints can only yield returns up to a point and having realized this IndiGo pulled out probably the best trick up its sleeves by ordering single largest aircraft deal in global aviation history, 180 A-320s worth an estimated $15.6 billion.
One might wonder how this can make an airline profitable; well here is the math behind it.
Figure 3: Leaseback Model of Indigo
This sales and leaseback model works wonders for the balance sheet of IndiGo and keeps it light, moreover, the arbitrage it gets while selling the planes to Leasing Companies at higher prices than what it negotiates with Airbus gives it much needed financial muscle. The other benefit of leasing back the planes from Leasing Companies is the benefit of reduced taxation which further saves money and enables better cash flow. Experts believe that this operation alone adds $4 - $5 million to its coffers. IndiGo in this case also has access to newer and more fuel efficient aircrafts since the operating lease typically works for 5 years after which the planes are returned to the lessor.
Men in the cockpit
The final piece in the story of IndiGo’s meteoric rise and sustenance is its team at the helm of affairs. Founded by Rahul Bhatia and Rakesh Gangwal, IndiGo excels from the experience and vision from them. Rakesh Gangwal to begin with comes with a tremendous reputation in the airline industry. With more than 35 years of experience in this industry, Gangwal, an Engineer from IIT Kanpur and has worked with bug names in the aviation industry like Air France, United Airlines and US Airways and was the driving force in clinching the mammoth deal of purchasing 180 Airbus A320s. Rahul Bhatia an Engineer from Canada took the figments of the small airline representation firm started by his father and cofounded InterGlobe Enterprises. He understood the importance of technology in this business and has used it to the hilt in each and every aspect possible.
He even met every individual hired in the early years before they were given final offers. It is the vision shared by both the partners as well as sticking to the basics of the business which has resulted in IndiGo taking innovative steps like using one engine while taxing instead of two to save on precious fuel. Despite managing a spectacular show in hostile economic environment, both the co-founders remain reclusive and never interfere in the internal affairs until and unless needed.
Go Go Indigo
IndiGo seems to tick all the boxes to reach excellence in the ultra-competitive and unforgiving airline industry and has managed to pull it off with some deft strategic decisions at both planning and execution levels however, the real test lies when it matures and becomes a full-fledged international carrier flying against the big, established eagles of the sky.
This article has been authored by Itisha Singh from Department of Management Studies,IIT Delhi
1. PR Sanjay, Indigo continues profit run as rival airlines grapple with losses, Live mint & The Wall Street Journal, Sep 24,2013
2. John Samuel Raja & Binoy Prabhakar, The secret of Indigo’s consistent profits, ET Bureau, Dec 22, 2013
3. Surajeet Das Gupta & Aneesh Phadnis, What keeps Indigo’s profits flying high, Business Standard, October 9, 2013
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