24 global destinations: Can IndiGo digest Air India's international operations?

IndiGo doesn't want Air India's debt but yearns for its international operations

After the Cabinet Committee on Economic Affairs (CCEA) gave its in-principle approval for considering the "strategic disinvestment of Air India" and its "five subsidiaries", IndiGo Airlines founder Rahul Bhatia was the first off the block to make an offer. Bhatia’s statement at the airline’s investors' meet had three key takeaways. He wants to buy Air India Express, the national carrier’s low-cost airline that serves both domestic and Gulf destinations. He wants to take over Air India’s global operations after carving the international business out. Additionally, this reverse-engineering of the 2006 merger between Air India and Indian Airlines that fused international and domestic operations should come at minimal cost to IndiGo’s future. Bhatia said, "We simply do not have the ability or for that matter, the desire to take on debts or liabilities that could not be supported by a standalone restructured international operation of Air India."

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At stake is Air India’s impressive array of international destinations, code-sharing agreements, and its Star Alliance membership that would make it a formidable acquisition for anyone looking to balloon with a single deal. IndiGo, which earns fewer revenues but more profits than Air India, operates to only six international destinations, none of them being lucrative European or North American ones.

Air India operates 24 global destinations

Air India, meanwhile, operates to 24 destinations across the world and has a prodigious frequency to certain cities. Air India flew twice daily to New York’s two airports, every day to Chicago, and thrice a week in winters to San Francisco. It operated 28 weekly flights in winters to London and flew daily to Birmingham, Frankfurt, Paris, and Italian cities. It operated 141 flights a week to cities in the Gulf region. IndiGo, meanwhile, is confined to operating in the South East Asian and Gulf region. Air India’s flights to Australia, Russia, and Japan too have very few domestic competitors and could be a shot in the arm for IndiGo’s global ambitions.

In addition to new routes being added to any buyer’s arsenal, an airline like IndiGo also potentially benefits by having one less competitor on other shorter but lucrative routes. For instance, according to Air India, it operated 21 flights a week, or roughly three flights a day, to Singapore. On an average, IndiGo operates 11 flights every day between India and Singapore. Meanwhile, their competitor Jet Airways operates 12 flights a day, on an average, to the city nation. Similarly, Air India and Jet Airways operate two flights a day to Bangkok. IndiGo operates twice those flights on this route. In these routes, where new entrants like Air Asia are making rapid inroads, IndiGo’s inclination towards buying Air India’s international operations certainly looks like it is part of a long-term business strategy.

Air India has 49 free flow and block space code-sharing arrangements with 16 airlines across the world
This allows Air India to sell tickets from other airlines, which helps it reduce its costs and ensure travellers reach less-serviced destinations with ease. For instance, it has 12 of these code-sharing arrangements with Air Canada. In seven of these, Air India is the operating airline and Air Canada is the marketing airline. These arrangements allow travellers to book a single ticket and reach most of the big cities in Canada and some metropolitan airports of India aboard both these airlines. Air India’s code-sharing agreements allow its passengers to fly deep and to under-served airports. Its code-sharing agreement with the Ethiopian Airlines allows its fliers to fly to airports like Kigali, Entebbe, and Dare e Salam on a single ticket via Addis Ababa. Its code-sharing arrangements with the Turkish Airlines allows its passengers from India to fly to other Turkish cities like Antalya, Izmir, Ankara, Adana, and Dalaman the same way. If IndiGo decides to go through with acquiring Air India’s international operations, it would be almost at par with Jet Airways, which claims to have code-sharing agreements with 20 airlines.

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IndiGo’s Bhatia didn’t hold back his excitement for Air India Express while revealing his intentions to be a part of Air India’s divestment process. That’s probably because the Gulf route that is serviced by Air India Express has been the silver lining in the turbulence the national airline has hit. Air India Express clocked a profit of Rs 297 crore in 2016-17, its second consecutive profit year. The turnaround of Air India Express has been rather phenomenal. In 2014-15, it had posted a loss of almost Rs 62 crore. In 2013-14, its losses were almost Rs 345 crore. The low-cost airline that is run by Air India’s subsidiary, Air India Charters Limited (AICL), could add more than 300 flights to the Gulf every year to IndiGo’s kitty. This could help IndiGo match up to the might of state-run Middle Eastern airlines, some of which have strategic tie-ups with its competitors. Even though Air India Express has shown strong profits since 2015-16, the government is in no mood to run it. CCEA’s public announcement calls for a decision to consider the "demerger and strategic disinvestment of three profit making subsidiaries".

While carving out the airline’s international operations may help its divestment, the government may also have to decide how much of Air India’s debt should be taken over by any potential buyer. A look at the financial statements of Air India Limited, which operated only international flights before its merger with the erstwhile Indian Airlines in 2006, shows that its outstanding loans in 2005-06 amounted to Rs 3,622 crore. Certain entries suggest that Air India’s international operations were also putting loan write-offs belonging to the domestic Indian Airlines in its books. In Air India’s present debt, estimated to be above Rs 52,000 crore, this might just be a drop in the ocean. However, for IndiGo, it might be a small price to pay for Air India’s international operations that have been built up steadily and managed profligately over the years.