 "How IndiGo negotiated headwinds")
The Paris airshow is considered to be the mecca of the aviation world. Top airline executives and aircraft manufacturers from around the world gather under the same roof and aircraft deals worth millions of dollars are inked. It is also a fight between the largest aircraft manufacturers, Airbus and Boeing, to flaunt their muscle in terms of aircraft order.
The 2005 edition of the show though had a clear winner. Airbus SE ended with 261 orders as compared to 146 of that of Boeing. What gave Airbus a massive lead over its transatlantic rival was a surprise $6 billion order of 100 planes from an Indian start-up airline, IndiGo. Very few had heard about it before and naturally people were sceptical. To be fair to them, the airline then did not even have the nod from the Indian regulator to fly. The Teal Group, a US-based aerospace consulting firm, even said that the order will never convert to final delivery.
However, Airbus reposed its trust in 61-year-old Rakesh Gangwal, a graduate of the Indian Institute of Technology (Kanpur), who rose to become the CEO of US Airways at the age of 45. “Rakesh is a specialist in buying aircraft and shares a very cosy relationship with Airbus. At United he gave them their first order in America in the form of 50 A320 in 1992,” says a person who has worked with him. Thirteen years later, Gangwal, along with close friend Rahul Bhatia, went on to build IndiGo — which is currently worth around Rs 35,000 crore, multiple times more than the $80 million that the promoters' initial investment. Gangwal refused to be interviewed for the story.
The deal struck with Airbus had Gangwal’s expertise written all over it. The sector was reeling from the after effect of 9/11. Lessors, manufacturers, airlines were all under severe stress as the event marked a decline in passenger demand across the world. Gangwal saw this as an opportunity and bargained hard with Airbus.
“He knows the pitfalls of buying and leasing. It was a purchase on extremely beneficial terms for the airline. The purchase agreements and maintenance agreements played a major role in the initial success of the airline,” says a person who was part of the deal.
Gangwal also decided on a sale-and-leaseback model for acquiring aircraft, which experts feel is a principal contributor in IndiGo’s performance; though the airline management discounts that. Under the model, a lessor purchases aircraft from an airline and leases it back. This removes the associated debt from the carrier’s balance sheet, allowing it to invest equity elsewhere. For start-up carriers this can be extremely beneficial. According to data from Flightglobal, IndiGo has been the most active user of this model among the world’s low-cost carriers. According to industry estimates, the airline makes around $4-5 million dollar per aircraft.
If Gangwal had the pedigree of running an airline, Bhatia, who holds a degree in electrical engineering, had the sharp business acumen and an insatiable desire for owning an airline.
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Bhatia, along with his father Kapil Bhatia, has been in the periphery of the aviation business for a long time. Bhatia senior founded Delhi Express Travels — a group of travel organisations which eventually became InterGlobe, the holding company of the airline. Through InterGlobe, Bhatia became the general sales agent for more than a dozen carriers, including majors like United, Delta and China Eastern.
Subsequently, a tie-up with Galileo – a global airline seat booking platform – resulted in the formation of Galileo India. A series of deals with major airlines for technology oriented back office functions, including critical initiatives like frequent flyer programmes, followed. Bhatia, known as a reticent person, bought the habit of keeping things low-key in a glitzy aviation sector that has marked the business strategy of IndiGo. A senior journalist covering the sector remembers the IndiGo launch party in a Delhi hotel. “When Praful Patel arrived, he looked around and said, 'A very low cost party by a low-cost carrier'.”
People who know Bhatia describe him as a person who is wary of meeting new people. Bhatia refused to get interviewed for the story. “Rahul is a practical dreamer. He is not foolhardy. Ever since the aviation sector started seeing private players entering the ring, he aspired to own an airline but he made it happen when the right team came together,” says Seema Luthra, who served as senior executive at Interglobe.
The promoters had started a building a team from the beginning of 2004 — a year before the aircraft order was placed and two years before it made the first flight. Private airlines normally hired executives from Indian Airlines to build a new carrier. “It was a short cut, just replicate whatever you did there, but they would also bring in the inefficiencies of Indian Airlines which could prove disastrous, so a talent hunt began for efficient people across the world.” says a member of the founding team.
So, in came CEO Bruce Ashby and COO Steve Harfst from US Airways and North American Airlines, respectively. CFO Riyaz Peermohammed, CCO Sanjay Kumar and VP (operations) Capt Shakti Lumba made up the rest of the team. Sanjay and Riyaz are still with the airline. Having trustworthy names in the team helped the airline to gain the trust of the regulators and the approval process became hassle free. A Directorate General of Civil Aviation official remembers how the airline had its pilots trained in low-visibility landing from the beginning. “It was unprecedented, while older airlines were still waiting, IndiGo had approval for functioning in low-visibility conditions in five months,” he says.
By 2006, when IndiGo started operations, the country already had tasted low-cost flying through Captain Gopinath-promoted Air Deccan. But Air Deccan, in its penchant for low-fare tickets, compromised on quality, while IndiGo cut costs through some sound route planning, minimising jet fuel cost and quick turnaround time.
“CEO Ashby decided to fly to a city which has a population of millions and can connect at least four cities from the locations — there was sound route planning,” says an IndiGo insider. Ashby declined to comment for the story.
The airline also refused to have a full-fledged in-flight magazine and trained its pilots rigorously to save fuel. “Pilots were discouraged from flying at high speed and trained to increase altitude slowly to save jet fuel,” the person says.
By 2007, the two full-service carriers, Jet Airways and Kingfisher, had woken up to the IndiGo threat, which was adding one aircraft every month. Jet and Kingfisher bought Air Sahara and Air Deccan to launch their versions of a low-cost carrier. While Air Sahara was rebranded as JetLite, Deccan started flying as Kingfisher Red. But the initiatives ended up increasing expenses for them and creating brand confusion among passengers. Kingfisher shut shop in 2012 and IndiGo turned out to be the biggest beneficiary of this. By July 2012, six years after it started operations, IndiGo became the market leader with 27 per cent market share, compared to 26 per cent of the Jet group and since then the gap has been widening. “IndiGo had a better business plan for the market than Jet — which in the meantime got tangled up in complexities of international operations, leading to increased operational costs,” says Steve Forte, former CEO of Jet Airways.
As one grows in size, there come different problems. Analysts say that the country’s poor infrastructure may not complement IndiGo’s mammoth aspirations. “Where will they find the airports to land and park so many A320 neos, the airline will do better to deploy some of the planes on international routes, it will bring precious foreign currency for them,” says Mark Martin, CEO of Dubai-based Martin Consultancy.
President Aditya Ghosh is not perturbed by this. “Today, we are flying to 35 airports within the country and there are at least 30 more airports which can today take A320 or 737 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 to today and if I just run off a few of them you will just think they are slam-bang opportunities, whether it is Mangalore or Tirupati or Vijayawada or Amritsar, Bhopal, 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 the domestic market soars, IndiGo will have to face increased competition from Tony Fernandes-backed low-cost carrier Air Asia. “Air Asia, though of a much smaller size, will prove to be a threat once Tony starts pumping money, 10 years back no one could think that IndiGo will displace Jet,” says Mark.
At present though, IndiGo sits pretty at the top with its 38 per cent market share — double that of second placed Jet Airways. With 136 aircraft by FY 17, consultancy firm CAPA estimates that the airline will have 50 per cent market share by then.
If Bhatia and Gangwal are artists and the Indian sky a canvas, they have painted it blue. The blue of IndiGo.