The price IndiGo may be paying in its quest to dominate the skies

The capacity glut it is facing on prime routes threatens to distort the demand-supply balance and force the airline to cannibalise profit of its own flights

Grounded planes. Lingering engine issue. Who cares? The sky will remain blue.

Let’s look at some numbers first. Out of every 10 flyers in India, four are IndiGo customers. All other Indian airlines fight for the remaining six.

In the last three months, IndiGo added 14 new aircraft to its fleet. All other Indian airlines together deployed 11 planes.

All of the above point to an airline in its pink of health and growing at breakneck speed. But if you are racing at 100 km/hr on an Indian road, chances are that you would hit a speed breaker. Well, IndiGo hit a speed breaker. The airline, which is considered to be a bellwether of Indian aviation industry, reported a 98 per cent decline in profit for Q1FY19 -- the steepest fall since it went public in 2015. Without a 50 per cent increase in other income, the numbers would have been worse.

The IndiGo management blamed aggressive pricing by competition in a high-cost environment for the bleed. “The impact of these lower yields on our profits was Rs 3.3 billion. We do not believe that the current revenue environment is sustainable given the increase in input costs,” IndiGo’s CFO Rohit Philip said.

But why is the undisputed leader with 40 per cent share of the market unable to command price? The reason rivals say is its own fundamental fallacy of a mega capacity induction.

Leave India, IndiGo dwarfs other low-cost airlines in Asia in terms of volume with the carrier flying 71.4 million seats in 2018 against Malaysian giant Air Asia’s 37 million.

The airline’s endless supply of planes comes from the two mega agreements it signed with Airbus in 2011 and 2015 for the A320. Thanks to those, IndiGo has been adding at least one 180+ seater every week for the last two years, and if all goes according to plan, it will have 200 such planes before the year ends. But is the Indian market ready for such a super connector? Is IndiGo running out of routes where it can fill up a 180-seater plane and make money out of it? Watchers of the sector say IndiGo faces a twin problem due to this unprecedented growth.

Since inception, IndiGo adopted the point-to-point network model, a tried and tested formula for low-cost carriers across the world. It operated flights predominantly on fairly dense city pairs, where multiple daily frequencies are feasible.  The fundamental was very clear and derived from US-based Southwest Airlines -- fly in the planes; deplane arriving passengers; embark departing passengers as soon as the arriving ones are off and send the plane back out as quickly as possible. In October 2013, with 70 aircraft, it flew only 29 destinations in India. In contrast, SpiceJet with 56 planes operated 45 domestic and 10 international destinations. 

But this has led to such a capacity glut on prime routes that the airline now risks distorting the demand-supply balance and cannibalising profit of its own flights.

Between Delhi and Mumbai IndiGo has 16 daily flights. From August the airline will launch its 13th weekly flight between Bangalore and Chandigarh, 27th weekly flight from Bangalore to Vizag. “They are carpet bombing with frequency. Will they be able to fill the planes? Definitely. But will all flights make money? Certainly not,” says a rival airline executive.

Secondly, due to unavailability of slots at Delhi and Mumbai airports, the airline has been forced to launch flights between city pairs where it may be difficult to get people fly.

All airlines have a mix of profitable and unprofitable routes as withdrawing from a route will lead to losing prized slots in capacity constrained airports. IndiGo, with its unparalleled growth plans, cannot afford it.

Ameya Joshi, founder of aviation blog Network Thoughts says that IndiGo has adjusted routes seasonally in order to hold the slots. “The flights to Surat from Mumbai and Delhi along with operations to Gorakhpur are replacements. It is a good strategy to explore if a valuable slot can be better utilised to push profit and revenue,” he says.

But the share of such thin routes has increased for IndiGo over the last one year.

Between July and second week of August IndiGo would be launching 25 new routes which include city pairs like Ahmedabad-Hubli, Kolkata-Indore, Kolkata-Jorhat, Jaipur-Varanasi, Delhi-Gorakhpur. “Nowadays often we are surprised with IndiGo’s deployment of the A320 jet. Those are quite thin routes and will take a long gestation period for them to mature for a 180+ seater to make money,” says an executive of a rival airline.

IndiGo though is no mood to relent and has clearly signalled that they will aggressively fight the battle and try to bleed their rivals till they give up. This fiscal, the airline will continue to increase capacity at 25 per cent- higher than the average growth rate of the Indian market.

“The occupancy rate are holding up pretty well. So our theory that there is demand is valid. Problem is irrational competition. We will match the fares and not give up our position. The other airlines are losing much more and we will compete as the lowest cost operator,” said an IndiGo executive.

Sounds like the arrogance of Goliath?

No. It is backed with logic and investment. Investment in technology. Investment in people. With an attempt to change its DNA from a point to point to a hub and spoke model. Essentially IndiGo will now start taking advantage of its size, revamp its schedule, build additional hubs on a regional basis and create major routes between them. So if you are flying IndiGo between two cities which doesn’t have direct air connectivity, the airline will fly you to the nearest hub and will have a connecting flight within next 30 minutes.

“We will build up a broad network and a lot of market with deep frequencies and that’s clearly thelong-termm strategy,” IndiGo’s CEO-designate Greg Taylor said when quizzed by analysts onloss-makingg routes.

This is where the 72 seater ATRs comes intothe picture. IndiGo placed an order for 50 ATR-72 aircraft last year and will become the largest regional operator with around 30 ATRs in its fleet by the second half of 2019. These will become the spokes and connect the thin routes with each other and major hubs. “We will build additional hubs on a regional basis and create major routes between them,” said the IndiGo executive.

While that would mean significant investment in a high fuel price improvement, IndiGo’s advantage of having a lower cost structure than its rivals will allow them to implement it. Despite a surge in fuel price and maintenance cost due to engine problems, the airline burnt Rs 3.69 per seat for one kilometre against rival SpiceJet’s Rs 3.96

“The lowest cost model almost serves as a rational for this business strategy but at the peril of near term earnings,” notes Ansuman Deb of ICICI Securities.

The plan to become India’s super connector is in place. But it will come at a price. IndiGo says they are ready to pay it.