Interglobe Aviation Ltd

Aviation sector has struggled to make money for the investor across the world. It is asset heavy sector with uncontrolled variables like global oil prices, government regulations, capacity utilization etc.

Midst of all these troubles Indigo have managed to not only keep him afloat but also be profitable. Industry mistakes have also helped him smoothly compete with them, as in, in bad times they were paying interest and Indigo was able to keep prices low to gain market share.

Certain Mistakes which Indigo solved were:

1. Single type of aircraft:
   Unlike its peers, IndiGo stuck to ordering a single type of aircraft. The Southwest Airlines of the US - pioneered this practice by buying only Boeing 737 in large numbers at a discount. IndiGo has followed the same strategy. It has consistently placed a 400+ aircraft order, all of them Airbus 320. Consequently, it saves millions in maintenance costs, spare parts inventories and pilot, crew and mechanical training. This gives the airline the unique flexibility of being able to deploy its existing fleet of 131 aircraft throughout the route network, replace them in no time and deploy pilots and crew anywhere without costly disruptions and reconfigurations. It should be noted that bulk orders get airlines discounts ranging from 20-60%, with early buyers of new models getting preferential pricing as well.
2. No Frills airline:
   Moreover, while full time carriers focus on the experience of flying, IndiGo focused on what they thought would matter to its flyers - It communicated to the flyer his basic need of getting from point A to point B on time. This saved them in shifting the focus from customer experience to efficiency in operation as they do not go beyond two to four hours of flying time routes.
3. Selling and leasing back planes helps its balance sheet:
   It maintains a young fleet by selling and leasing back its planes. IndiGo uses six-year sale and leaseback agreements, so the airline is constantly replacing its aircraft. This prevents the need for overall checks and major repairs. Under this model, IndiGo pays a marginal percentage as advance to Airbus at the time of placing the order and assigns the rights to purchase the aircraft to a lessor. When an aircraft ordered in 2005 gets delivered in 2010, its market value has already gone up. Now, on the date of delivery, IndiGo sells it back to the lessor and pays outstanding dues to Airbus. On the sale of each of these aircraft, which IndiGo got at a discount five years ago, it reportedly makes good money. Immediately, it rents or leases the same aircraft from the lessor for a short period of time. So, leasing has three benefits for IndiGo — immediate profits (cash flow), a young fleet (low maintenance costs) and savings on depreciation cost (as ownership of the aircraft remains with the lessor).

These actions transpired into a sustainable business and the company benefited in numerous ways. Some of them being:

1. Best in class operating margin in the industry:
   Practices followed by Indigo have helped him maintain its operating margin well above the industry as we can see that Indigo enjoys 20% operating margin whereas spice jet and jet airways enjoys 14% and 11% operating margin respectively. This would help Indigo price lower than its peers in troubled times.
2. Indigo rivals have a huge hole to fill:
   If we have a look into its peers, we can see that Jet Airways and Spice jet have created a big hole for themselves, which they have to cover Up. As shareholders fund of Indigo is Rs 3779 crores whereas for Jet airways and Spice jet shareholder’s fund is Rs (4899) crores and Rs (609) crores respectively.
3. Highest market share:
   Indigo enjoys 40.1% market share which is well above 2^nd biggest player jet airways which stands at 17.9%.

What Ahead?:
Capacity addition by airlines has led to double-digit passenger growth in the country. Indian airlines achieved a 36th consecutive month of double-digit traffic growth as demand rose 16% in March ’18. Traffic continues to be stimulated by sizeable increases in the number of domestic routes served. Company’s order book for newer aircrafts is standing at 400. Which is the largest in the industry and this would boost its availability in different sectors of the industry thereby gaining higher marker share. Company also opted out of the Air India deal which we guess is the best decision as that would have bought big hole for Indigo to fill up. The capacity expansion of almost 3.5 times would lead to higher revenue as company would be able to price it lower than players to exclude other players from that route. The deliveries of aircraft would also help generating huge cash flow from sale to lessor. Hence, the cash flow of the company would remain strong. Value migration from rail to air travel would also take place with growing GDP. India’s domestic air travel market of ~70m passengers in FY15 is comparable with the AC coach passenger count (~95m) of railways, but represents a very small percentage (~2% of ex-suburban rail passengers) of total rail passengers. IndiGo has been able to keep its load factor high despite fleet expansions. Also, Airbus A320 neo is going to be game changer for the industry as its fuel efficient (10-15% saving on fuel) and also has higher seating capacity (186 vs 180 in existing A320) thereby improving the profitability.