IndiGo profits from cost cuts

IndiGo profits from cost cuts
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First Published: Mon, Oct 19 2009. 03 19 AM IST

Updated: Mon, Oct 19 2009. 10 20 AM IST
New Delhi: Everytime an IndiGo aircraft takes off in daylight, the pilot switches off the navigation lights located on its wing and tail tips. The reason: savings on the cost of changing bulbs. It’s such a minor detail and the saving so small that most airlines wouldn’t bother, but it’s taken seriously at IndiGo.
Leaving the lights on in daytime when they weren’t needed led to frequent bulb changes, explained one executive at InterGlobe Aviation Pvt. Ltd, which runs IndiGo, the country’s largest low-cost airline by passengers carried.
“You turn them off, their life goes up,” said the executive, who didn’t want to be named because he isn’t authorized to speak to the media. The idea is to cut avoidable expenditure even if the saving was minuscule. “If I can save Rs2, why not.”
Also See Effecting A Turnaround (Graphics)
IndiGo seems to be doing something right. In an airline industry stricken by high costs, excess capacity and competition that led to combined losses estimated at $2 billion (Rs9,260 crore today) in the last fiscal year, IndiGo posted a small profit, helped by cost reductions, capacity cuts and aircraft sales and leasebacks.
In the fiscal, considered to be the worst for the industry, the unlisted carrier earned a profit of of Rs82.16 crore, the first since its launch three years ago, according to its annual submission to the Directorate General of Civil Aviation (DGCA). The profit, on revenue of Rs1,876.35 crore, compared with a loss of Rs212.28 crore in 2007-08 and Rs174.13 crore in 2006-07. IndiGo declined to comment on its financials for this story.
Click here for a slideshow about Indigo’s cost-cutting measures
To be sure, the Gurgaon-based airline will need to maintain its profitability in a money-bleeding industry that’s trying to weather the impact of the economic downturn that curbed air travel. Operating profit in the last fiscal was just Rs18.10 crore, meaning that the bulk of the profit came from items such as aircraft or engine sales and leasebacks.
A tight control on costs is helping the airline, which made world headlines with a $6 billion order for 100 Airbus A320 aircraft at the 2005 Paris air show, the year before it launched operations.
For instance, savings on fuel, the biggest expense for airlines. At other carriers, pilots decide what quantity of extra fuel to take on a flight. At IndiGo, the amount of fuel is determined by computer-generated data based on the three-monthly average of fuel expended by flights on a particular sector and possible contingencies such as weather-related delays.
High fuel costs forced it to increase fares by 30% and reduce capacity by 26% in the last fiscal. IndiGo returned five older planes it had taken on short leases, according to a presentation made by the carrier to aircraft financiers earlier this year and previewed by Mint. In its first year of operations, the carrier had a fleet of eight A320s to which it added nine and seven in the following two years.
Modelled somewhat on US-based low-cost carrier JetBlue, IndiGo started in 2006 with a flight between New Delhi and Imphal. It took on low-cost carriers such as Air Deccan (now Kingfisher Red), SpiceJet and GoAir in skies that were already crowded.
“We were the last to start up,” said Aditya Ghosh, president of IndiGo, who has been with the airline since it was conceived in 2005 by InterGlobe’s Rahul Bhatia and ex-US Airways CEO Rakesh Gangwal.
“By that time the slots were gone, the engineers were gone, the pilots were gone, the bays were gone—everything was gone,” Ghosh said.
Consumer perception was loaded against low-cost airlines, which were thought to be unreliable, operating shabby planes, known for chaotic check-in procedures and clubbing of flights, Ghosh said. “We tried to change all that.”
Unlike JetBlue, IndiGo—and its low-cost rivals—didn’t have the advantage of lower operating costs. “While they model after JetBlue, there are no LCC (low-cost carrier) terminals, secondary airports or lower charges (in India), thus their operating costs are exactly the same as the full-service players,” says Shankar Devarajan, head of Su-mitra.com, a Toronto-based consulting firm for start-up airlines.
Air travel in India grew at an average annual pace of 22% in 2004-2008, from 17.7 million passengers to 40.7 million. Passenger traffic touched 42.6 million in 2007 though it shrank 5% in 2008 as economic growth slowed. There’s still vast potential for the growth of air travel in a country where the state-run railway carried 6.2 billion passengers in 2007.
“We are not even at half time. It’s the opening chapter of the industry,” says Sadeesh Raghavan, who retired recently as managing director, India domestic businesses, at consultancy Accenture.
IndiGo flies 500,000 passengers a month today, operating 150 flights a day between metros and between tier-II cities and metros.
In saving costs, it helps that IndiGo is backed by travel group InterGlobe Enterprises which pretty much does everything in the travel trade including operating call centres, offering travel distribution services and hotel development and management services, and runs the Ibis chain of economy hotels where crew members stay during halts. Ghosh says Ibis bids for IndiGo business like any other entity.
Much like Europe’s Ryanair and Air Asia in Southeast Asia that offer no reading material and have taken out window shades, seat-back pockets, and stapled safety instructions, IndiGo does not serve tea and coffee on its flights to avoid liquids spilling and staining seats.
The carrier also uses ramps instead of boarding ladders to allow more people to run up and down the aircraft in a shorter time.
“Given only a handful of Indian airports are equipped with aerobridges, it’s a real inconvenience for the flight crew to board passengers incapable/unwilling to climb the stairs, hence the ramps. In general boarding by ramp is faster than by stairs as old people and children may struggle to walk at speed. A wide ramp allows a higher volume of passengers to board in a shorter time,” says a London-based aviation analyst who cannot be named as he is not authorized to speak with the media.
Some passengers complain that cost controls are being taken too far.
Sanjay Chakrabarti, general manager, finance, at KEC International Ltd, a power transmission company run by RPG Enterprises, uses IndiGo when he flies on personal trips. Chakrabarti does not like the idea of paying for water on board or not being able to have a cup of tea on a 2-hour flight.
“When I am paying less I am not asking for the sky but maybe two small bottles of water,” he says.
Raghavan, the former Accenture executive, says low-cost carriers by the nature of their business are not interested in building relationships.
“The focus is to keep your operating cost down to bare bones. So you are basically running a taxi from point to point,” he said. “These guys don’t want a relationship with the customer. These guys want a customer who is very very price-sensitive and wants to be dropped from point A to point B,” he says.
The cost controls start with hard bargaining for aircraft.
“Indigo purchased 100 aircraft at a terrific discount. It was never their intention to keep all of the aircraft,” said the London-based analyst quoted above. “They decided to...sell some of the orders pre-delivery.”
The sale of aircraft yields a profit that could be used to subsidize operations, the analyst said. Sales and leaseback—a market practice of selling an aircraft and leasing it back immediately—could fetch $5-7 million as a premium on an A320 aircraft, which commands a monthly lease rental of $400,000 a month. The airline added seven aircraft last year through sales and leaseback.
Ghosh wouldn’t give details on how much the earnings were from the sale of aircraft last year except for saying: “We didn’t make a loss.”
“They have basically taken a punt that the price of aircraft will increase as the demand for aircraft increases. You also have to factor in the fact that it takes two years from order to delivery. IndiGo is able to offer new Airbus aircraft to willing purchasers at a premium over the manufacturer’s best price by virtue of the fact that the waiting time for delivery is shorter,” said the analyst cited above.
IndiGo has a 22-aircraft fleet currently. Six planes will be added next year and eight the following year.
With 20 Indian cities already covered, the airline is likely to face the challenge of expanding domestically as it increases the fleet.
IndiGo’s fleet of A320s can fly to destinations such as Singapore and Dubai, but under Indian rules that can only be allowed after five years of continuous domestic operations, which it completes in 2011.
“We will be looking at making the network more busy by adding more frequencies from cities we operate in and also maybe look at three to five new markets over the next 12-18 months,” says Ghosh.
The airline will also face the challenge of complexity in its operations as it expands its fleet.
“Rapid growth needs to be managed very cautiously,” said Vikram Krishnan, associate partner at San Francisco-based international aviation consultancy firm Oliver Wyman. “Sometimes the highest value markets have already been picked off, so the consequent expansion opportunities focus more on ‘deepening’ rather than ‘broadening’ the network. Besides, there is significant operational complexity associated with adding several aircraft, and carriers can run the expensive risk of keeping aircraft on the ground if the fleet introduction is not appropriately planned (for example: pilot training, inventory positioning, fleet certification).”
In a letter to DGCA in January, IndiGo sought to expand code-share agreements with overseas airlines operating flights to India, starting with US-based carriers. A copy of the letter was seen by Mint.
Next year, its arch rival SpiceJet plans to go international, joining Air India, Jet Airways and Kingfisher Airlines.
By 2011, when IndiGo becomes eligible to fly overseas, it may face the same situation that it did when it started, with the bilateral rights to fly abroad, airport slots and parking bays having been taken up.
Graphics by Ahmed Raza Khan / Mint
tarun.s@livemint.com
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First Published: Mon, Oct 19 2009. 03 19 AM IST