BackIndiGo adds 250 planes ahead of its IPO next year
While many of these planes will be to replace the existing aircraft, some will be for expansion
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New Delhi: IndiGo, India’s largest domestic airline by market share, has signed an agreement to buy 250 Airbus aircraft ahead of its plans to launch an initial public offering (IPO) next year.
Washington-based Rakesh Gangwal, who owns just less than half of IndiGo, and directly negotiates big-ticket aircraft deals with Toulouse-based Airbus chief operating officer (customers) John Leahy, has added another record of sorts.
During his career Gangwal, 60, has bought more planes than any other executive. He ordered 100 Boeing aircraft for Air France followed with about 100 Airbus planes during his stint in US Airways, following it up with 280 planes as part owner of IndiGo in the last decade.
With Tuesday’s order valued at $25.5 billion at list prices, Gangwal has ordered 730 aircraft on his own and taken delivery of at least of 300 of these already.
By 2026, all the remaining 431 aircraft will also be delivered, said Aditya Ghosh, president of IndiGo. “The first 180 will be delivered over a period of seven to eight years from 2015 and these 250 between 2018 to 2026," Ghosh said, adding that he does not fear any overcapacity in India. “India is one of the most under-penetrated aircraft markets of the world. There is lot of confidence in the long-term prospects of low-fare air transportation."
IndiGo has a fleet of 83 Airbus aircraft, which are mostly on lease. One more aircraft is scheduled to join the fleet in November.
In the past 10 years, IndiGo has ordered 83 planes at the rate of 8.3 planes every year.
If the airline takes delivery of 431 planes over the next 11 years starting next year, it would mean an addition of about 39 planes a year.
While many of these planes will be to replace the existing aircraft—IndiGo typically leases planes for six years and returns them to keep its fleet young—some will be for expansion.
IndiGo may go in for the long-range A330neo as part of this order at a later point to launch international operations that include a 10-hour flight such as to London, said Kapil Kaul, South Asia chief executive of CAPA, an aviation consultancy.
With so many planes, it may also launch international joint venture airlines “in the near term" much as Malaysia’s AirAsia Berhad has done by launching its brand in different countries, Kaul said.
This order will also help IndiGo gear up for a public offering of stock next year.
The airline recently announced a profit of ₹ 317 crore for the year ended 31 March—its sixth straight annual profit—in a market where many local airlines are struggling to cope with monthly cash.
“I expect an IPO in 2015-16 and this order will help in strengthening IndiGo’s perception of a solid long-term player, but may not play on valuations as expected," Kaul said, adding that the airline ended the last fiscal year with $300 million in cash reserves.
This will come in handy as IndiGo faces competition from new airlines like Tata Sons and Singapore Airlines promoted Vistara and AirAsia India besides other start-ups.
IndiGo enjoys a market share of nearly 33% in the domestic skies with over 500 daily flights. Its nearest competitor Jet Airways, which has been concentrating on international flights to its new hub at Abu Dhabi, has a 20% share.
To be sure, India’s airlines have had a tough time at the stock exchanges. The once profitable Jet Airways (India) Ltd, India’s oldest private airline, has made losses in most of the financial years since it was listed on BSE in 2005. It has also never touched its peak share price of about ₹ 1,300 in 2005. It ended at ₹ 232.70, down 0.41%, on Tuesday while the benchmark Sensex shed 0.13% to 26,349.33 points. The markets were closed on Wednesday.
Kiran Rao, executive vice president of strategy and marketing for Airbus, said it was a confirmed deal. “We start with MOUs (memorandum of understanding) and end with a purchase agreement. It takes few months, but the relationship we have with Indigo means it may take few weeks, as we have done so many deals with these guys," Rao said in a phone interview from Singapore.
Rao confirmed the test flight of Airbus A320neo has already taken place and IndiGo will receive them late next year.
Rao confirmed there are A321s, which are slightly bigger and can seat more than the A320neos, also part of the 250 aircraft order, but not A330neos that can fly continuously for 10 hours.
IndiGo,which has hired bankers to look at an IPO, is also likely to bring in M.D. Mallya, former Bank of Baroda chairman, as an additional director on the board soon, Mint first reported on June 24.
This would be the first time an outsider will join IndiGo’s board, which includes long-time associates of IndiGo’s key promoter Rahul Bhatia.
Besides the board restructuring, Gangwal is in the process of converting his shareholding, now held through a foreign company, Caelum Investment Llc, into non-resident Indian holding, Mint first reported on July 28.
Indian law allows a foreign company to own up to 49% in an airline. It also allows foreign airlines to invest up to 49% in an Indian airline. An NRI is allowed to hold 100% in an airline. Gangwal owns 47.883% in InterGlobe Aviation Ltd that runs IndiGo.
The rest is held by IndiGo’s other promoter Rahul Bhatia’s InterGlobe Enterprises Ltd at 51.2124%. Shobha Gangwal holds 0.473%, Asha Mukherjee 0.488%, Rohini Bhatia 0.003% and Kapil Bhatia 0.016%. Rahul Bhatia, in his individual capacity, also holds 0.013%, according to documents reviewed by Mint.
The restructuring of shareholding will enable IndiGo to sell shares to foreign institutional investors (FIIs).
With this new order, Airbus dominates the skies in India and there are worrying signs for Boeing, said Saj Ahmad, chief analyst at London-based aviation consultancy Strategic Aero Research
“Boeing has failed in India. Boeing messed up with Air India. Boeing won’t be making the same breakneck deals again here," he said, but also cautioned on IndiGo.
“Indigo’s biggest risk is deploying all the jets it has on order. With less than 40 routes to date, they can only add so much frequency and capacity on them and will have to bite the bullet and fly farther afield. This pits them with greater competition and greater risk. But doing nothing isn’t an option," he said. “Compared with flydubai, which has half the fleet of Indigo yet more than double the routes, Indigo has to change its market penetration if it wants to absorb all the jets its ordered."
Boeing declined to comment on the matter.
In the domestic market, besides IndiGo, GoAir and Air India use Airbus A320s and new start-ups Vistara and AirAsia India have both chosen Airbus. SpiceJet, which has sent back about a dozen Boeings this year, and Jet Airways are the only Boeing customers.
Former Jet Airways CEO Steve Forte, too ,said he thought the IndiGo order size was too big.
“Considering the present size of IndiGo and the new start-up carriers in India, I would say that their order seems excessive and unreasonable, reminiscent of the big fanfare order by Kingfisher at the Air Show in the Gulf Area few years ago," Forte said. “For Kingfisher, it was just hot air to capture news headlines by its founder."
IndiGo had earlier indicated that the 180 aircraft it ordered in 2011 will come by 2025, but says they are now “expected to be delivered prior to 2025".
Ghosh said he can’t predict an optimum fleet size for IndiGo but did agree that some of the deliveries are being advanced, indicating aggressive expansion. “It is difficult to determine that at this stage. But given our past history, we seem to grow faster than we plan." Ghosh said there were no plans for A330neos.
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