Home / Companies / News /  IPO papers reveal IndiGo’s success formula

Mumbai: InterGlobe Aviation Ltd, owner of India’s biggest airline IndiGo, has been consistently profitable since 2009, a feat unrivalled by any other domestic airline.

The secret sauce behind IndiGo’s stunning success over the past few years is low maintenance cost, the company’s initial share sale documents revealed.

In fact, the nation’s second largest airline by passengers carried, Jet Airways (India) Ltd, spent more than 10 times what IndiGo did in the nine months ended 31 December 2014, according to data from the share sale documents filed by InterGlobe Aviation.

IndiGo, which plans to raise around 2,500 crore in an initial public offering (IPO), is a rare success in India’s aviation industry that has seen at least one major airline go bankrupt—Vijay Mallya’s Kingfisher Airlines Ltd was grounded in 2012—and has lost more than $10 billion since 2009. High fuel costs, taxes, steep airport fees and fierce competition have led to spiralling losses for most Indian airlines, with only IndiGo managing to overcome these problems to report consistent profitability.

Since starting operations in 2006, IndiGo has ousted Jet Airways to claim the top spot among Indian airlines by sticking to a single-aircraft model—it uses single-aisle Airbus planes—and offering no frills to customers.

But how does IndiGo compare with publicly traded Jet Airways, now that the former has released information about its operations and financials. IndiGo’s share sale documents have revealed some rather startling facts.

The airline has kept its maintenance cost low at just 3% compared with 8-12% at its peers. For the nine months ended 31 December 2014, IndiGo has reported a maintenance cost of 291.45 crore, or just 3.1% of the airline’s total expenses. In contrast, the maintenance cost for Jet Airways was 3,100 crore, or 14.5% of the airline’s total costs.

Also, IndiGo spent only 0.11 per available seat km (ASKM) on maintenance of its fleet compared with 0.74 by Jet Airways. IndiGo operated 96 aircraft as of 30 April and has the second youngest average fleet age of 3.1 years among Indian airlines. That compares with Jet Airways’ 6.01 year average. Jet has a fleet of 116 aircraft.

But given that it has a younger fleet, IndiGo’s operations are surprisingly less fuel-efficient than Jet Airways.

Fuel cost as a percentage of revenue for IndiGo is 48.4% for the nine months ended 31 December 2014. That figure is just 31.3% for Jet Airways. IndiGo is also less fuel-efficient than Jet Airways when compared using rupees per ASKM. While IndiGo spent 1.76 per ASKM in fuel for the nine months of the last fiscal year, Jet Airways spent 1.6 for the full year.

To be sure, IndiGo’s fuel efficiency has only deteriorated in the last fiscal.

A 4% reduction in fuel costs can add around 2% to airlines’ operating margin, according to India Rating and Research Pvt. Ltd.

What makes IndiGo’s higher fuel costs more intriguing, when measured in rupees per block hours, is that from the year ended 31 March 2014 to the nine months ended 31 December 2014, fuel prices have dropped by more than 20%.

Block hours refer to the moment the aircraft pushes back from the departure gate for a revenue flight until the moment the aircraft arrives at the arrival gate following its landing or till its engines are working.

In the past four years, on an average, Jet Airways was able to realise 0.9 per km more than the more-profitable IndiGo purely because of its full-service focus. Full-service airlines, however, also incur higher employee and selling and distribution costs.

IndiGo may have grown to become India’s largest airline by passengers carried, but it is certainly not so in terms of revenue and ASKM compared with its closest rival Jet Airways, said Mahantesh Sabarad, deputy head of research at SBICap Securities Ltd.

“IndiGo has managed to stay profitable largely on account of lower maintenance cost. But it will be challenging to maintain the same in the future," Sabarad said.

Sabarad said that IndiGo, which has a 37.8% market share in the domestic market, may have to focus on international markets for the next level of growth, which can create a lot of stress on operations and balance sheet.

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