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With little fanfare, IndiGo starts to grow and head towards profit

With little fanfare, IndiGo starts to grow and head towards profit
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First Published: Fri, Jul 27 2007. 12 34 AM IST
Updated: Fri, Jul 27 2007. 12 34 AM IST
With a puja on Tuesday for a spanking new Airbus A320, IndiGo quietly passed an invisible benchmark—it became India’s second biggest low-cost carrier by fleet size.
But unlike when its biggest competitor, Air Deccan, edged out Indian Airlines and took the overall second place in terms of passengers carried, IndiGo is keeping it low-key.
A quick puja, a short press release about a few new routes, and the plane was off, joining 10 other IndiGo A320s in India’s intensely competitive skies. The understated manner in which IndiGo goes about its business is rare in India’s raucous aviation industry, with its outsized personalities engaging in front-page corporate battles.
But, quietly in the shadow of its much more visible competitors, the Gurgaon-based airline has been the fastest growing airline here and among the fastest growing in the world—in part fuelled by India’s overall growth. It has added a plane a month to its fleet since its launch last August, and will ­continue to keep adding them until all the 100 A320s it has on on order are delivered by Christmas, 2014.
And perhaps the most important: If business keep going as planned, it might just break even in four months.
“If they can pull it off, that’s a pretty profound achievement in a market like India, where everybody is planning on bleeding money for years,” said a London-based analyst for an aviation consulting group, who declined to be named because the group focuses most of its research on publicly traded companies and IndiGo isn’t one.
IndiGo is operated by Interglobe Enterprises Ltd and not much is known about the airline’s finances other than the fact that Rakesh Gangwal, a former CEO of US Airways Group, and Interglobe, the biggest player in India’s travel industry, are the primary investors, with both holding equal voting power on the board.
But what is known about the airline is this: In an aviation market where price wars are intense, IndiGo has stayed away from the kind of free give-aways that its competitors use to pack their planes. In an aviation industry where big players go through public bouts of emergency fund-raising, IndiGo has made it clear that it plans, for the conceivable future, to go it alone. And in an aviation market where smaller airlines are fodder for the big boys, IndiGo has managed to keep at bay peers with an appetite for buyouts.
That’s all part of the plan, says its chief executive officer, Bruce Ashby, who like Gangwal rose through the ranks at major American carriers before coming to India. His last job was with US Airways Inc. as executive vice-president of marketing and CEO of US Airways Express, the roughly 300-fleet conglomerate that focuses on feeder routes for US Airways.
“Our model relies on building a well-balanced airline that ­customers can identify with and come back to, and that doesn’t need any crisis investing,” he said in an interview. “(The ­model) does not rely on being the cheapest airline that everybody loves to hate.”
The not-so-subtle dig at Air Deccan, plagued by financial troubles at its parent company Deccan Aviation Ltd, is not just theatrics. Instead, it illustrates a business model entirely different from its competitors, which also include SpiceJet Ltd and Go Airlines India Pvt Ltd, which operates GoAir.
Deccan and GoAir, and to some extent SpiceJet, follow a low-cost model pioneered by UK-based RyanAir Plc—create a big splash by giving away a large number of tickets at eye-poppingly low prices: Rs99, Re1, or even for free—while selling most of the seats on your flight for far above that, calculating that in the end, you will break even.
So far, it hasn’t worked in India, mostly because RyanAir makes a large part of its money from non-ticket revenues, charging for baggage, food, and window seats, among other “premium offerings”. Deccan is “a few quarters away” from breaking even, its acting chief executive Ramki Sundaram told Mint earlier this month, and SpiceJet, which with 10 operating aircraft (two are off schedule for maintenance) is closest in size to IndiGo, doesn’t discuss its break-even expectations.
In contrast, IndiGo’s model, borrowed and adapted from US-based Southwest Airlines Co., arguably the most financially successful airline in the world (constant profits over 36 years, a fleet of close to 450), is simpler: consistent low prices, relentlessly low costs, and an emphasis on profitability, rather than market share.
“I don’t understand all this emphasis on being the biggest airline. I’d rather be profitable,” Ashby said, adding that IndiGo needs to reach a fleet size of between 20 and 25 before its costs per passenger stabilizes at a profitable level.
In airlines lingo, that cost is measured by a unit called cost per available seat kilometre (ASK)—the cost of flying the plane for one kilometre divided by the number of seats. In going from one A320 in August 2006 to 11 on Tuesday, IndiGo has seen its cost per ASK dip from Rs5 to a shade less than Rs3. Once it dips below Rs2.50, Ashby says he thinks the airline will have its costs under control.
As far as revenues go, it is unclear exactly how much the airline has earned since it launched. Its revenues per passenger, called yields, have been inching up to a break-even point that Ashby says is Rs3,000, including a Rs800 fuel surcharge, but not taxes, if the planes flew 75% full. Already, IndiGo’s passengers have, on average, been paying above Rs2,600 for tickets, and their resistance to price increases is slowly dissolving, he said.
“On most days, if you walked around the airport, you would find that our prices are among the lowest,” said Ashby, not counting the freebies and ridiculously cheap and loss-inducing tickets that Air Deccan floods the market with. “Not always, but most of the time.”
Not really, says a senior executive at Air Deccan.
“Ask anybody what the cheapest airline in the country is, and they will say Air Deccan,” he said. “We track these prices by the hour, and we change our prices to keep them competitive.”
While that may be true for many of the seats booked far in advance on each Air Deccan flight, there are multiple seats on each plane—especially a relatively full one—that will sell for much more than what IndiGo, and sometimes even Jet Airways, a full-service airline, would charge.
Air Deccan, for instance, holds the record for the single most expensive non-business class seat ever sold on a domestic flight—just a shade under Rs40,000 for a roundtrip between Delhi and Bangalore.
Elizabeth Cloutier, a well-travelled American who has lived in India for a number of years, said she had flown IndiGo several times, and preferred it over the other low-cost airlines. “The thing that impressed me is that you could tell that they were putting a lot of effort into making things smooth,” she said. “But you can’t really tell much right now, because they are so new.”
Also impressive, and not just to Cloutier, are the brand new airplanes. Generally, fliers respond well to newer aircraft, much like they would to a brand new taxi, and IndiGo has avoided the image among some of its competition of flying less than perfectly clean planes.
For the next few months, the fleet sizes of IndiGo and SpiceJet will grow neck and neck. SpiceJet will get an additional airplane in August, and IndiGo has another scheduled delivery later that month or early in September. However, at a time labour costs for skilled airline employees are going up, ­IndiGo is running a leaner operation with a little under 1,300 employees, compared with 1,900 at SpiceJet, which plans to hire an additional 300 soon.
And IndiGo has another advantage over its low-cost brethren: on-time performance. Three-fourths of its flights took off within 15 minutes of their scheduled departure time, and 86% within half hour. That’s a pretty decent number, considering that it includes bad weather days like the shutdown of runways in Mumbai last month, or the crippling winter fog at the Delhi airport.
On average, according to an independent analysis of flight departures by the government, flights in India tend to be late by more than 15 minutes almost half the time.
“It’s the model to beat,” said a Mumbai-based analyst who tracks airline stocks for an European brokerage, which does not allow its analysts to be named for news stories.
“As the market matures, customers are going to value things like on-time performance and consistent pricing, instead of free tickets that almost nobody can get their hands on.”
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First Published: Fri, Jul 27 2007. 12 34 AM IST