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IndiGo appears better placed than Jet Airways in managing growth.
At the time of its IPO in 2005, Jet Airways was a profitable airline, had very low debt and was a domestic market leader with 42.9 percent share in FY 2004-05. But Jet was unable to manage growth as it inducted wide body planes for international operations and acquired Air Sahara in 2007. Its debt ballooned and the airline turned from a profit-making to a loss-making entity. Recently it had to write off its entire investment in Air Sahara which is rechristened as JetLite.
Can IndiGo avoid Jet's troubles? IndiGo has over 38 percent share in domestic market and faces no immediate threat from rivals. But like other carriers IndiGo too is facing risks from growth in capacity as it puts pressure on ticket prices.
While IndiGo has so far been successful in keeping its costs in control, the challenge for the airline will be to manage growth as it expands over the next few years.
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IndiGo's single fleet no frills model gives it an advantage over its rivals. IndiGo's operations are far less complex than Jet Airways, it runs a tight ship and has lower unit costs than peers. The airline recorded a profit of Rs 720 crore in nine months ending December 2014.
IndiGo has fleet of 96 Airbus A320 aircraft and has another 180 planes on order. By end of March 2018 the airline plans to have a fleet of 137 Airbus A320 planes allowing it to maintain leadership.
Amongst the new airlines Vistara has indicated it will induct twenty A320 planes by 2018. AirAsia India has gone slow on expansion and has added just five planes till now. At a group level AirAsia is occupied with fending off bad press following a report which questioned its accounting practices, says analyst Shukor Yusof.
But launch of the new airlines is causing fragmentation of passenger traffic and poses further risks to pricing powers of airlines.
HSBC Global Reseach has revised its estimate for narrow body capacity addition for FY 16-17 from 9-11 percent to 12-15 percent. The revision was done in view of SpiceJet's revival and growth plans of new airlines. Narrow-body planes include Boeing 737s and Airbus A320 which are flown on domestic routes.
While the report was not specific on IndiGo, it said "this level of growth could pose risks to industry's utilisation and pricing levels. However, as most capacity growth is expected to be narrow-body led, risks to domestic and short-haul international are likely to rise."
Also incremental capacity addition will put pressure on yields if demand does not match up with supply, said an sector expert. He added that the airline's ability to retain cost advantage would depend on commercial terms of its order for 180 planes. In 2011 IndiGo announced order for 180 A320 planes and deliveries are expected later this year. IndiGo has taken deliveries of all 100 planes it ordered in 2005.
"IndiGo's route development and network strategy requires a careful think. As the domestic market saturates, IndiGo will be forced to take up more international routes, where, arguably, they have had limited success compared to the domestic market," according to aviation blog Bangalore Aviation.
Till now IndiGo's international ambitions have been limited and earns about 10 percent of revenue from foreign routes. The airline only flies to Dubai, Muscat, Bangkok, Singapore and Kathmandu. It could see further competition on international routes with the government proposing to relax the restrictions on start up airlines to launch foreign flights.
" I am not sure about the international expansion plans but it would need careful assessment and consideration as market and competitive dynamics on international routes are totally different from domestic. However, induction of Airbus A320 Neos especially Airbus A321 will enhance reach and make more International destinations viable. The A320Neo inductions will bring significant benefits esp due to lower fuel burn which will have positive impact on profitability. Serious focus on ancillaries will have further revenue upside," said Kapil Kaul of Centre for Asia Pacific Aviation (CAPA).
According to Kaul, IndiGo's challenges are largely internal - to remain competitive on costs and reduce complexities. "It will have to maintain and enhance reliability, schedule integrity , operational excellence and service delivery . More important it will have to retain the strong performance culture and people orientation," Kaul said.
