The top brass of IndiGo didn’t take much of a break to celebrate New Year. After all, it was fog season, when airline schedules go completely haywire, leaving passengers stranded and irate.
But there was another reason that executives of the country’s biggest low-fare carrier were too busy to party. They were putting together one of the largest aircraft purchase deals of all time—buying 180 Airbus SAS A320s, valued at close to $15 billion (Rs 67,800 crore) at list prices.
Only after the pact was signed did celebrations kick off, with a champagne party in the French city of Toulouse, where Airbus is based, late on Tuesday, as the executives unwound after a month and more of hard bargaining. Those attending included IndiGo owners Rahul Bhatia and Rakesh Gangwal, besides Aditya Ghosh, the carrier’s president.
“We are looking at a 20-year kind of relationship with Airbus,” said Ghosh, who led the negotiations that started soon after 1 December, when Airbus announced it would upgrade the best-selling A320 to the A320neo by 2016, with an attendant 15% saving on fuel. IndiGo will be a launch customer for the new version.
The carrier has made such dramatic deal announcements previously. In 2005, IndiGo ordered 100 A320s. Of these, 34 are in service and five have been returned to lessors. With the two deals, 241 aircraft will be delivered to IndiGo by Airbus between now and 2025.
That’s more than half the 420 aircraft currently in service with all Indian carriers, including Air India, Jet Airways (India) Ltd, Kingfisher Airlines Ltd, SpiceJet Ltd, IndiGo and GoAir, put together.
IndiGo may not keep all the aircraft and may continue to follow its model of taking planes on short-term leases of three-six years and returning them to the lessors thereafter, sometimes saving on heavy maintenance costs as well, which kick in after a certain number of years in service, experts said.
As with the five returned earlier, some of the 34 A320 aircraft in IndiGo’s fleet may be returned next year as the airline completes six years. Almost all its aircraft are on lease.
“They’re taking on the aircraft lessors big time!” said a London-based analyst who works closely on aircraft deals and declined to be named. “At most they’ll keep 40-50 in their fleet, so that means placing 130 in the market.”
Another domestic airline official said IndiGo may consider replacing its entire fleet with A320neos in the long term.
“One-hundred-and-eighty aircraft in 10 years amounts to 18 deliveries a year,” he said, asking not to be named. “The question is, where will they deploy them? What kind of sectors? Where will they park?”
Bulk aircraft deals are typically offered at discounts to the list price.
“The discounts and concessions Airbus would have had to give IndiGo will be nothing short of breathtaking,” said Saj Ahmad, a London-based aerospace analyst. “For the airline to assume the risk of being launch customer comes at a high price and one which Airbus clearly sought to pay as it got a customer on board the A320neo programme.”
IndiGo, which surpassed Air India to become the third largest carrier with a domestic passenger market share of 17.3% in November, will have time to raise funds for the deal, which will be firmed up over the next two months after the Tuesday’s memorandum of understanding, which was signed by Bhatia, Gangwal and Airbus chief operating officer John Leahy.
“This order positions IndiGo to take full advantage of the predicted growth in Indian air travel and we’re delighted that they continue to build their future with Airbus,” Leahy said in a statement.
Rival Boeing Co. said it didn’t have any conversations with IndiGo on selling planes.
“It was a known order and was supposed to happen last year,” said Dinesh Keskar, president of Boeing India. “We have a good installed base with Air India, Jet Airways and SpiceJet.”
Another domestic airline chief, who declined to be named, said IndiGo may need anywhere up to Rs 500 crore to start with for the aircraft deal. That’s because of the way aircraft are financed globally—the airline needs to pay 0.5-2% of the total deal amount “based on the relationship” with the manufacturer.
“Then you have to pay up to 15% two years before taking delivery, which you can finance from the bank,” said the official cited above. “On that date, you do a sale and lease back and you put the 15% from that for the next aircraft and keep rolling it.”
Airlines typically sell the aircraft to lessors and, if the market is on the upswing, make a profit of $3-4 million on a plane, since the price would have risen since the order date.
Kiran Rao, Airbus India president, said that with the IndiGo deal he had clinched 18% of the 1,000 aircraft that India is predicted to buy over the next 20 years.
“We will have a lot more interest from carriers in India for the second wave of orders both for replacement and new aircraft,” he said in a phone interview from Toulouse.
Airbus will deliver 20 A320s this year to Indian carriers. Some leased A330s are also expected to join Indian fleets.
Given that the company is focusing on the same aircraft type, IndiGo, which announced a Rs 550 crore profit in 2009-10, is looking at being a regional giant such as Europe’s RyanAir, with a focus on South Asia, West Asia and South-East Asia. The airline will stay out of markets such as Europe and the US, which require medium-range aircraft such as the A330, although the A320neo does offer an additional range of 500 nautical miles over the current version.
“We are focused in this area,” Ghosh said. “A330s are good planes, but from whatever we are looking for, A320 works perfectly for us at the moment. There are no A330 options to change to in the order also.”
The carrier, set to start international operations in August, has shortlisted 15 destinations it wants to connect.
Rao said after Tuesday’s champagne party that the start to the year had been promising.
“The two founders Rakesh and Rahul and president Ghosh were here yesterday (Tuesday). It was a coincidence that we happened to have a big management function with all top Airbus managers. The order was announced and Rakesh gave an interesting speech,” he said, adding, “It was a good to start to the ‘neo’ year.”