Why the challenge to IndiGo hasn't taken off

IndiGo reported an On Time Performance (OTP) of 80.8% that month from the four large metro airports, lagging every other scheduled domestic airline except Alliance Air, according to data from aviation regulator Directorate General of Civil Aviation (DGCA). In the same month, AirAsia managed to operate over 95% of its flights on time while Vistara was at 89%, GoFirst at 84% and Air India at 83%. Not surprisingly, angry flyers took to social media to complain about missed connections and delays. In the last four months, Vistara has consistently beaten IndiGo on this metric.

That’s not the only hiccup for the airline. In July, again, a few of its aircraft maintenance engineers went on mass leave, demanding higher pay. A few weeks before, its cabin crew had proceeded on leave, allegedly to attend interviews at a rival airline, throwing IndiGo’s schedule haywire.

The question was inevitable: Are these glitches a sign that IndiGo is slipping up, just when the airlines sector is revving up for more competition?

Two new airlines are on the horizon. Akasa Air, started by airline veterans Vinay Dube, Aditya Ghosh and others, launched on 12 August. A renewed Jet Airways is also expected to take to the skies soon, with a fleet of brand new aircraft and only domestic operations to begin with. Meanwhile, SpiceJet—one of IndiGo’s primary competitors—has shrunk capacity after the regulator asked it to.

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Vistara, on the other hand, is slowly improving its game. The airline has just crossed the 10% mark in domestic passenger share due to better fleet utilization and some capacity addition. Along with Air India and AirAsia, the three airlines of the Tata Group are widely expected to become significant players in the domestic market.

So, does IndiGo need to start worrying? How does it intend to take on existing and future challenges? What are its plans to defend its position as Airline No. 1?

Time is money

Since it took to the skies in 2006, IndiGo has showcased ‘on time performance’ as one of its USPs. So, its current showing ought to be reason for worry. But the airline’s officials say they are not worried. “IndiGo has been an excellent performer consecutively for the past 12 months, with the highest average OTP of 97.06% across four key metro cities—Bangalore, Delhi, Hyderabad, and Mumbai. July was an exception," Sanjay Kumar, chief strategy and revenue officer at IndiGo, told Mint. The airline management pointed out that it has gone full throttle on digitization and technology, from check-in to boarding and beyond, to reduce waiting time at the airports. “We have recently announced the three- point disembarkation system. This will further reduce waiting time for passengers during de-boarding and cut down on delays," Kumar said.

For a while now, the airline management has also grappled with the inability to fill up more seats on its aircraft. In the last earnings call on 3 August, outgoing CEO Ronojoy Dutta admitted that there was a gap between where the airline is and where it wants to be in terms of passenger load factor (PLF), which is the percentage of occupied seats on an aircraft. “In terms of load factor, we still have about a 7% factor gap from where we should be," admitted Kumar. In July, IndiGo’s PLF was 77.7%—that is to say, almost every fifth seat was empty. SpiceJet and Vistara had only about 15% empty seats each in the same period. Air India saw nearly 3 out of 10 seats going empty.

The airline is banking on more railway passengers to start flying. “We are noticing a shift (in traffic) from rail into airlines. We believe if the government keeps working towards reducing the state tax component on aviation turbine fuel—which has provided us some respite—we should perform well in terms of revenue and load factor in the third quarter," Kumar said.

The airline has been struggling with capacity issues too lately, as a fleet of 20 aircraft has been grounded due to global supply chain disruption of engines. But Kumar expects that to be resolved as it inducts bigger Airbus A321 aircraft (232-seaters)by 2024-25. “We are definitely expecting numbers to go up," said Kumar.

Analysts at brokerage firm IIFL seem to concur with that reading. They say that the airline is looking at 70-80% growth in passenger carrying capacity in the current September quarter even though fleet size may remain “flattish" in the fiscal year.

According to Satyendra Pandey, managing partner at aviation advisory firm AT-TV, IndiGo doesn’t really face any meaningful competition right now. “IndiGo’s market share is strong. It has nearly 280 aircraft versus 5-6 of Akasa by the yearend. So competitive intensity increasing is merely a good narrative as of now," he said.

The leader by far

What explains the analysts’ confidence in the airline?

To answer the question, let’s look at the last two years. The pandemic has been incredibly hard on the aviation sector. Airlines in India, and indeed around the world, have weathered many storms. Some have begun to wobble. In India, one domestic airline has had to halve capacity as cash crunch led to multiple safety-related incidents; at least two other airlines have also reduced capacity. DGCA data suggest that between January and July, Air India, SpiceJet and GoAir have ceded market share.

But through it all, IndiGo has gained ground. It has wrenched share from competitors. It has more aircraft than all the other Indian airlines put together. Industry watchers say that even the entry of new players is unlikely to stop it. To comprehend the size of IndiGo, consider this: In July, nearly six in 10 passengers taking a flight anywhere in India flew IndiGo. This meant close to six million passengers flew the airline, averaging about 185,000 every day. Since the start of the calendar year, IndiGo has carried more than 37 million people (till July). It operates over 1,600 daily flights to 74 domestic and 26 international destinations. As of March this year, it was the sixth largest airline by passenger volumes and also the fastest growing airline anywhere in the world, according to the Official Aviation Guide.

An analyst who did not want to be named pointed out that IndiGo can well compete against a handful of aircraft of Akasa or any other competitor; it can afford to lower prices on common routes to remain a worthy foe.

Another analyst, however, said Akasa’s advantage is that it has a clean slate, with no liabilities. If the airline can keep a tight grip on costs, it should be able to hold its own after fleet expansion. Akasa has plans to induct 72 Boeing 737 MAX aircraft in five years.

IIFL analysts have said that IndiGo’s market share will expand beyond the current 58.8% in FY23, as competitive intensity remains weak. A senior industry analyst said that IndiGo was “very strongly placed among all Indian carriers—it has a brand, product, cash and technology. So (there is) no immediate challenge to its dominance." He expected the airline to retain a market share of 50-55%. Other analysts also dismissed any immediate challenges to the airline, citing lack of scale and enough appetite in the market to accommodate smaller players.

Meanwhile, IndiGo continues to have a robust appetite for further growth. It reported a net loss of ₹1,064.3 crore in Q1 FY23, (down from ₹3,174.2 crore in Q1FY22). Depreciating rupee and higher fuel prices were primary reasons for posting a net loss even as revenue from operations was the highest ever at ₹12,855.3 crore (as compared to ₹3,006.9 crore in Q1FY22).

A common complaint about IndiGo from competitors has been its ability to quickly saturate a route by adding a large number of seats, if a rival starts on that route. But Nripendra Singh, global director at Frost & Sullivan, says the airline doesn’t start routes on a whim. “Other airlines tend to close routes and deploy capacity elsewhere if operating costs zoom. But IndiGo’s stickiness assures passengers about service on its routes," he said. The airline is known for meticulous planning before going ahead. “It assesses whether another airline is already flying on it; if not, it will assess if it wants a first-mover advantage on this route. The airline also takes into account feedback from travel agents besides evaluating airport and ground handling infrastructure at the destination before taking the plunge," Singh said.

Beyond borders

But there is limited growth potential left in domestic skies. Mark Martin, CEO of Martin Consulting, says that IndiGo has already saturated the domestic market, with 30-40 aircraft parked in major cities. “The smart thing to do now is to expand overseas. Earnings in forex will offset INR (rupee) losses. But what they have been doing so far on international operations is a disaster," Martin said.

For instance, he cited IndiGo’s decision to deploy an Airbus 321 to Istanbul, which meant stopping for fuel at Sharjah/Dubai. “This raises operational costs by about a third since additional landing/parking charges, aircraft taxi time and ground handling time is needed. IndiGo needs a wide-body fleet to effectively start services to dense markets like Sydney, Brisbane, Canberra, Christchurch, Bucharest, Bulgaria, Slovakia, Frankfurt and Dusseldorf," he said.

In an email interaction, Kumar of IndiGo neither answered a question about the airline’s current share of international operations nor about a market share target in future. “We have been expanding to new domestic and international destinations both in the last year and this. We have recently announced flights to Bahrain and Ras Al Khaima and expect to add more destinations. We continue to see robust growth across the network and our expansion is being accompanied by high growth in connecting traffic. Additionally, the A321s, which are expected in 2024-2025, will allow us to capture non-stop international traffic, which is now only served through one-stop competing hubs."

One of the analysts quoted earlier says that within two years, nearly half of the airline’s revenue will come from international. He says that while Air India will still remain the undisputed leader in international travel—specially medium to long haul—IndiGo would become a significant player in regional international travel (sectors which involve less than five hours of flying, for example, Thailand and Malaysia).

The plane truth

One of the strongest spokes in the IndiGo wheel is its tight grip on costs. CASK, which is cost per available seat-kilometre, is where IndiGo continues to outperform peers. Pandey of AT-TV says, “Let us assume ₹3 is IndiGo’s CASK, then pricing can be ₹3.50 and the airline will still make a profit of 50 paise. But for other airlines, if cost itself is ₹4, pricing of ₹3.50 gets them a per seat loss."

Analysts at brokerage Edelweiss point out other advantages. One, IndiGo yields (which is revenue per passenger) surged 44% in the quarter over the corresponding quarter of FY22 and by 20% compared to the immediately previous quarter led by pent-up demand, especially in the international market. “We anticipate yields to remain subdued in the near term on a seasonally weak quarter; however they should remain strong in the long run."

What might throw IndiGo off course are internal challenges, like promoter skirmishes—Rahul Bhatia and co-founder Rakesh Gangwal had a long running feud over controlling the airline till Gangwal stepped back earlier this year.

One of the analysts quoted above said that the new management (under the new CEO) should now have “shared goals and aspirations" and get the international strategy right.

Employee unrest continues to be a sore point, especially with pilots unhappy about covid pay cuts being restored only now. But IndiGo’s iron grip on domestic passenger numbers, ambitious overseas plans, and ability to keep costs low make it difficult to dislodge it from the position of market leader.

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