Low-cost IndiGo's business class foray signals K-shaped growth here to stay

Indigo is reportedly looking to enter the business class segment by the end of 2024.
Indigo is reportedly looking to enter the business class segment by the end of 2024.

Summary

  • The strategy reflects a broader economic pattern in India, where there is a noticeable shift towards premium products and services

Founded in 2006 by the father-son duo of Kapil and Rahul Bhatia, both seasoned travel industry players, and Rakesh Gangwal, a former CEO and chairman of US Airways, IndiGo Airlines swiftly made headlines with a striking order of 100 aircraft at the 2005 Paris Airshow. The airline's innovative approach to financing these planes through sale-and-leaseback transactions proved to be financially beneficial.

Taking a cue from Southwest Airlines’ low-cost carrier (LCC) model in the US, IndiGo embraced this framework and adapted it to the Indian market, capturing a commanding market share of over 60%. Its daily operations exceed a hundred flights from each major city, showcasing the viability of the LCC model in a large country like India with tremendous scope for bottom-of-the-pyramid volumes.

In the last couple of years, however, India's air travel market, the hottest in the world right now, growing the fastest, has seen some airlines fold up, and is now effectively a duopoly, with only two dominant players. Soon it is likely to see another significant change: the market leader and most successful low-cost carrier, IndiGo, is looking to introduce business class seats.

The Economic Times reports that the celebrated no-frills carrier is looking to enter the business flyers segment by the end of 2024. These seats will offer extra legroom, hot meals in flight, priority boarding and de-boarding and all the standard business class services.

The LCC business model is built on punishing discipline and being lean as the core USP. It can offer affordable fares because it shuns complexities, uses its assets, mainly aircraft, to the hilt by flying point-to-point, turning around planes quickly without having to load and unload the paraphilia full-fares-all-frills airlines bother with. Fleets comprising a single type aircraft and engines is an important element of this scheme. The mantra is simple: the less an airline’s planes are on the ground, the more it earns. That it has perfected this formula like an art explains IndiGo’s unparalleled success in India. IndiGo has a dogged focus on its costs and returns from assets. As its largest buyer of planes, IndiGo bargains hard with Airbus, securing discounts that make a sizeable difference to its costs.

IndiGo's formula for success in the price-sensitive Indian market is straightforward: deliver reliability and punctuality, translating into cost savings for passengers and profit for the airline. Its financial health has been robust, marked by consistent profitability and a balance sheet resilient even through the pandemic's challenges.

Its IPO in 2015 was highly successful. It introduced international flights in 2019, quickly capturing the low-end market for leisure and work. It has a strong regional presence in the tier 2 and 3 cities, a market its competitors have found difficult to crack.

Looking ahead, the mass market, including in smaller towns, is expected to drive the Indian aviation sector's growth. 

The question arises: why is IndiGo, a successful LCC, venturing into the business class segment?

This strategy reflects a broader economic pattern in India, where there is a noticeable shift towards premium products and services. Entry level car sales are slowing, affordable housing sales are not growing as fast as luxe apartments, and rural consumption is yet to show signs of a pick-up. All the same high-end products are flying off the shelves, as Mint SnapView has been highlighting.

What this shows is that ‘K-shaped economic recovery’, as economists call the phenomenon, is at risk of becoming a continuing trend in the absence of policy steps to correct the imbalances. Policy steps that can prevent the economy from falling into a lopsided growth pattern urgently needed include a massive push for labour-intensive manufacturing and exports, as Mint SnapView has been pointing out. That will spread the benefits of economic growth to vast swathes of the population and help them become a part of the consumption base. 

The ‘India Growth Story’ was never about the rich prospering, companies making profits by catering to their consumption needs. India’s growth story ought to be about the average Indian earning and consuming more.

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