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Company Outsider: IndiGo’s soaring valuation shows the power of privatization, liberalization’s unfinished agenda
Summary
Boeing has forecast that India and South Asia’s commercial aviation market, with airlines like IndiGo, will see a nearly four-fold increase in its fleet over the next 20 years.
With a market cap of $23.45 billion, Indigo just became the world’s most valuable airline. Let that sink in. This is a company that didn’t exist 20 years ago, in a sector that was thrown open to the private sector just 10 years before that. Sure, it is a beneficiary of the changing dynamics of the global travel industry in which South Asia and India are the world’s fastest-growing commercial aviation markets. Aircraft maker Boeing has forecast that India and South Asia’s commercial airplane fleet will grow nearly four-fold over the next 20 years, with the region’s air traffic set to expand more than 7% annually through 2043.
That figures. Two years ago, IndiGo and Air India placed orders for hundreds of jets in what were the two largest-ever plane deals by number of aircraft.
As a bet on the future then, it is no surprise that investors are bullish on IndiGo, sending its stock price soaring 40% over the past one year.
Also read: IndiGo targets 200 mn fliers by 2030, but faces plane shortage
Not surprisingly, the usual caveats are being carted out to dilute the achievement. IndiGo is reaping the benefits of the near-duopoly in the sector and with its nearest rival an unlisted Air India, investors are making a beeline for the company’s stock. That’s evident in how institutional investors, including FIIs, have steadily raised their stake in the company over the past two years. Critics have also pointed to the irony of IndiGo’s falling service standards even as its market cap keeps rising.
None of these deflect from the magnitude of an Indian airline, largely focussed so far on the domestic market, being valued higher than the mighty Delta or American Airlines or Lufthansa. IndiGo’s valuation high stems from its near-impreganble market share of over 60%, which it has maintained for a sustained period despite regular bouts of competition. That’s unlike the US where the biggest airlines, Delta, American Airlines, Southwest and United Airlines, have similar market shares ranging between 16% and 17.8%, the near equivalent of an oligopoly. The four companies that control roughly 80% of the US market between them, have been hit hard by the tariffs-driven instability. In the past few weeks, they have shed billions in market cap as fears of additional levies on steel and aluminum, key components of aircraft manufacturing, along with concerns of a downturn in discretionary spending and travel, send investors scurrying.
The thing is all of these factors have the potential to impact IndiGo as well, though its model of leasing aircraft rather than buying them, gives it some immunity. In addition, its orders for airplanes happened early, before the current demand-supply mismatch hit. That means it is more assured of plane supplies than other airlines. But what makes IndiGo most attractive to investors is its proven resilience over the past 20 years in a market where airlines have come and gone. Since it began operations in August 2006, erstwhile heavyweights like Kingfisher, Jet Airways and GoAir have gone bankrupt while the state-owned behemoth Air India had to be jettisoned in a fire sale. It had to cope with other crippling slowdowns - the post-financial crisis period when Indian carriers posted a combined ₹10,000 crore in losses, as well as the Covid years when air travel ground to a virtual halt. These setbacks bruised IndiGo but its operational efficiencies and cost management ensured that it emerged from them stronger than its rivals and better equipped to capitalize on the bounce-back in business that followed.
Also read: IndiGo’s steep valuation premium to global peers could clip the stock’s wings
The crown of the most valuable global airline, even if it’s temporary, also proves how important it’s for governments in emerging markets to get out of businesses like airlines and leave them to private players. Admittedly, there are flaws in that system - IndiGo and Air India have both been negligent of fliers’ interests. But those are issues strong regulators are supposed to handle. The fall of the much-vaunted Air India through the years that IndiGo was taking shape is all the proof that’s needed for kickstarting the moribund disinvestment process in the country.
That 31 of the 100 largest companies in India, as per the Fortune 500 listing for 2024, are still owned by the government, is a sureshot sign of the liberalization process having stalled in recent years. The administrative and financial resources that go into running banks, insurance, power and steel companies would be better deployed in creating better infrastructure for national champions in the private sector.
