IndiGo plans low-cost, long-haul international flights
New Delhi: InterGlobe Aviation Ltd’s IndiGo will expand internationally, following the same low-cost business model that has worked for it in India, irrespective of whether it succeeds in its bid for Air India or not, the company’s co-founder said in an analyst call, explaining the logic behind the company’s articulated intent to bid for the state-run airline.
Co-founder Rakesh Gangwal, a former CEO of US Airways, said that IndiGo will make a serious bid for Air India’s international operations. That and the airline’s low-cost arm Air India Express are the main attractions, he, and the other co-founder Rahul Bhatia, indicated. IndiGo expressed its interest in bidding for Air India in a letter to the aviation ministry sent hours after a cabinet meeting cleared the disinvestment of the state-owned company.
“IndiGo is not looking to acquire all of Air India,” Bhatia said in the call.
IndiGo controls about 40% of the domestic market and about 3% of the international market, with 136 planes. Air India has the largest domestic and long-haul fleet of 140 planes in the country and flies to nearly 41 international and 72 domestic destinations. It has a domestic market share of 14% and a share of 17% on international routes out of India.
Its interest in Air India has not exactly been received well by investors.
“Even if the contours of the deal take care of balance-sheet stress, operational inefficiencies may be difficult to iron out,” Joseph George, an analyst at brokerage firm IIFL, said in a note published last week, alluding to the different types of aircraft Air India operates, related high maintenance costs and staff costs.
“We continue to like Indigo for its efficient cost structure and balance sheet strength. However, potential acquisition of Air India may create an overhang on the stock,” he added.
Since news of IndiGo’s interest went public, on 29 June, the airline’s shares have fallen 3.5%, although the shares have gained in the last four sessions. Air India has around Rs52,000 crore in debt and over Rs 50,000 crore of accumulated losses on its books.
IndiGo’s huge domestic operations give it an edge in international operations as well, Gangwal suggested.
“It’s about time that IndiGo enters the long-haul international market and take advantage of this opportunity... we would not attempt the long-haul market but for this large domestic feed network,” he said in the call. “Irrespective of how the Air India story plays out and based on all our internal work, we are generally of the view that it makes fundamental economic sense to enter the international long-haul market.”
IndiGo expects the disinvestment process, which is yet to begin, to take about a year.
IndiGo will not “go down the path” of having a joint venture with the government over Air India or even look at minority government holding, Gangwal said.
“There are certain things Air India does very well, there are certain things we can improve upon,” Gangwal added. He admitted that it would take his airline a “long, long time” to do what Air India has done. He also listed some of the things that make Air India so attractive: rights to fly to other countries gained “over a 70-year period”; slots in airports such as Heathrow and JFK, gained when “aviation was at its infancy” and these airports were not as busy as they now are.
Gangwal said “the biggest asset (Air India has) are these negotiated route structures” and its employees.
He said he believes that long-haul operations are ready for the right type of low-cost airline. “We will take passengers from connecting international hubs and also from high-cost non-stop operators and fly them on our non-stop low-cost flights,” Gangwal said.
Reuters contributed to this story.
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