IndiGo profits from low rents, servicing

The airline has lowest unit costs amongst its Indian peers because of operating a single fleet type

IndiGo has achieved the number one rank in India because of its fleet expansion and brand recognition. But there is another area where IndiGo has shown remarkable consistency, profitability.

The airline has the lowest unit cost among its peers because it operates a single type of fleet and has lower maintenance costs. On Tuesday, IndiGo filed its prospectus with the Securities and Exchange Board of India to raise Rs 2,500 crore through fresh issue and sale of shares by its current investors.

The airline operates 96 Airbus A320 planes. Of these 74 are on an operating lease, including 12 leased from Tigerair, and the rest are on financial lease.  IndiGo’s critics have claimed that its profits are a result of sale and lease back transactions, a claim which the management has earlier denied.



The airline’s two large aircraft orders — 100 A320s in 2005 and 180 A320s in 2011 —have helped it to negotiate favourable terms with Airbus and related suppliers. A single fleet helps reduce costs of maintenance, spare parts, and training.

IndiGo has also been able to keep its lease rents low, adjusting purchase incentives it earns from Airbus and component makers.  The incentives are amortised over the lease period and adjusted against lease payments each year. In 2013-14 and the nine months of 2014-15, the airline earned, respectively, Rs 360 crore and Rs 264 crore in cash and non-cash incentives.

According to the airline's draft red herring prospectus, IndiGo had total debt of Rs 4,000 crore in December 2014.

All its debt is aircraft-related and the airline has no working capital debt. As a consequence, interest outgo is far lower than peers. IndiGo’s interest payments accounted for Rs 91 crore in the nine months of 2014-15 and Rs 122 crore in 2013-14. In contrast, rival Jet Airways’ finance costs were nearly Rs 1,000 crore in 2013-14 and  Rs 884 crore in 2014-15. SpiceJet reported Rs 136 crore and Rs 163 crore as costs for 2013-14 and 2014-15, respectively.



Maintenance expenses accounted for only about three per cent of its total expenses in the past few years, which is lower than other domestic airlines. On the revenue side, IndiGo has reported strong growth. This includes income from seat selection, date change fees, and onboard sales.

Ancillary revenue provides nearly 10 per cent of the airline’s revenue from operations. For Jet and Air India the share is five per cent and one to two per cent, respectively.

HSBC Global Research analysts Rajani Khetan and Mark Webb stated in a recent report, “SpiceJet’s considerably reduced size and the resultant increase in IndiGo’s market share over the past six months should make IndiGo well placed to lever on the growth in the domestic market.”

IndiGo's share will cross 40 per cent in 2015-16 and could approach 45-50 per cent in  two years, the Centre for Asia Pacific Aviation said in a report.