Obsessive focus on cost, efficiency made IndiGo BS Company of the Year 2016

IndiGo Airlines has proved that it is possible to run a profitable airline and delight the customer

InterGlobe Aviation, the company that operates IndiGo, India’s most profitable airline, has redefined aviation in the country. The airline, which started operations in 2006, has become the largest in the country and has proved that it is possible to consistently make profits in the highly competitive domestic aviation industry.
 
IndiGo has run a tight ship with an obsessive focus on cost. It brought in efficiency to reduce turnaround time, getting more out of each aircraft, without losing focus on quality, cleanliness and customer service. IndiGo was the first airline to tell customers that it respected their time and made “on-time performance” a key metric, and continuously reinforced the message. It also made flying a pleasurable experience with responsive attendants, innovative food and beverages, and quirky merchandise.

 
The company had announced its arrival with a bang in the 2005 Paris Air Show through a surprise $6 billion order of 100 planes, when very few had even heard about it. Naturally, people were sceptical. Teal Group, a US-based aerospace consulting firm, even said that the order would never convert into final deliveries. In 2016, the airline completed a decade of operations and is currently valued at around Rs 35,000 crore, many times more than the $80 million that promoters Rakesh Gangwal and Rahul Bhatia had initially invested.
 

The year 2015-16 was also a landmark one for the company, as it came out with its initial public offering (IPO) in October 2015. For the aviation industry, 2015-16 was a relatively comfortable year with soft crude prices, allowing airlines to add capacity in a mad rush for market share, but at the cost of losing pricing power. IndiGo, however, ended the year with a Rs 1,990-crore net profit, the highest in the airline’s history.

 
IndiGo’s main strengths over the years have been fast capacity addition and religiously following a low-cost operation model. The airline’s performance has been heavily attributed to its obsession of running a tight ship through a single-aircraft model, a single-cabin configuration, keeping its planes in the air for as long as possible and capacity addition at a pace that cannot be matched by rivals. “IndiGo multiplies faster than a rabbit and saves like a miser,” a senior airline executive joked.
 
The airline outpaced industry growth in the year, comfortably reporting a 28 per cent year-on-year growth in its passenger volumes, and outperforming rivals. IndiGo is expected to see a net addition of 29 aircraft to its fleet in 2016-17. This implies growth of 27 per cent in its fleet size, indicating that the management is aiming for further gains in market share, which at present hovers around 40 per cent. In 2015-16 IndiGo’s total number of flights increased by 22.5 per cent, leading to a seat capacity increase of 24.2 per cent.

 
Despite adding to its fleet and flying to new destinations at the same time, low fuel prices aided by the induction of the new-generation Airbus A320 planes helped IndiGo to rein in fuel costs at 34.7 per cent of revenue, compared with 46.1 per cent in the previous year, as total fuel cost declined 16.9 per cent year-on-year.
 
“We are bullish on IndiGo, as industry growth remains robust, air traffic is expected to grow over 20 per cent and the carrier is on track to expand its fleet,” JP Morgan said in a research report, valuing the stock at nine times its EBITDA margin.

 
As one grows in size, there comes a different set of problems. IndiGo has begun facing issues with the engines of the Airbus A320neo planes for which it signed up with manufacturer Pratt & Whitney for 150 aircraft. But the airline says that its fleet induction plan remains on track and the slow delivery of aircraft will not have any meaningful impact on its business.
 
Analysts say that the country’s poor infrastructure may act as a lag on IndiGo’s mammoth aspirations. “Where will they find the airports to land and park so many A320neos? The airline will do better to deploy some of the planes in international routes. It will bring precious foreign currency for the company,” says Mark Martin, CEO of Dubai-based Martin Consultancy.

 
As the domestic market soars, IndiGo will have to face increased competition from the Tony Fernandes-backed low-cost carrier AirAsia. “Air Asia, though of a much smaller size, will prove to be a threat once Tony starts pumping in money,” says Martin. Ten years back no one could have thought of IndiGo displacing Jet, he adds.
 
IndiGo President Aditya Ghosh is not perturbed by this. “We are today flying to 35 airports within the country and there are at least 30 more airports which can today take A320 or 737 (Boeing) narrow-body jets. And at two or three new airports every year, we have a lot of runway ahead of us. These are not small cities, there are several cities in this country which we do not fly today and if I just run off a few of them you will just think they are slam-bang opportunities, whether it is Mangaluru, Tirupati, Vijayawada, Amritsar, Bhopal or Jodhpur; I can keep going on like this. So there are a lot of opportunities ahead of us over and above what we are already flying to,” he said.

 
As of now, IndiGo sits pretty on top, with a 40 per cent market share and its flights flying at more than 90 per cent occupancy. The airline recently announced six new destinations, including two overseas. With the aircraft delivery schedule getting normalised, will IndiGo soon become the first airline to have more than half the market?