The last two weeks have been exciting times for Indian Aviation. The union cabinet gave its nod to privatise National carrier Air India and Secretary Civil Aviation Mr. R N Choubey informed that IndiGo has expressed interest in the National carrier. I have closely followed IndiGo since inception and have many a times predicted their next steps including routes, strategies and expansions. However, I must admit that I expected the airline to have a long haul plan in place before they would move to the turboprops. In reality it was the reverse, probably because of UDAN – the Regional Connectivity Scheme of the government.
My post on IndiGo signs term sheet for 50 ATR72-600 did mention the potential launch of long haul services with A330neo or A350 and it looks like the time has now come for that order.
With a sudden drop in share price amidst market speculation, the airline organized an analyst call on July 06, 2017. The co-founders – Rakesh Gangwal & Rahul Bhatia were on the call, a rare moment for the airline.
Contrary to what many believed that IndiGo’s bid is for slots, night parking and market share, the airline made it very clear in the opening minutes of the call that it is primarily interested in International operations of Air India and Air India Express. However, the letter submitted by the airline to the government also talked about acquiring all operations of Air India and Air India Express as an option, which the founders said would be explored if the government so decides.
The call made it very clear that the airline would pursue a three pronged strategy going forward with long haul, short haul and regional services. Additional details on the long haul model should be known in the next investor call which is expected at the end of this month.
Questions on Long Haul LCC
Long haul low cost operations are currently less than 1% of total seats deployed but there are over 150 routes operated by 14+ airlines in the world. The market which was struggling when oil prices were at its peak has since recovered and airlines like Norwegian, Airasia X, Scoot are rapidly expanding.
The questions about sustainability, corporate traffic preferring Full Service Carriers (FSC) and challenges around lack of secondary airports will come to haunt IndiGo one more time. However the airline has answered all of time in the last decade, starting with a strong corporate product which not only helped captured sizable market but also was benchmarked and replicated by peers.
The airline can definitely dump capacity and see increase in outbound travel as millennials look to travel on budget and household incomes go northwards on the back of growing GDP of the country.
Long haul market is also seeing blurring of lines between LCC and FSC, similar to that on short haul. Most FSCs charge for seat selection and baggage and the seat pitch is competitive in economy for most of legacy FSCs plying between India & Europe.
IndiGo will see challenges on the station cost front. Unlike it’s currently philosophy of selecting a destination which can handle multiple flights and/or destinations a day commercially, not all the international (wide-body ops) and regional routes (ATR ops) will satisfy this condition.
Questions are raised on profitability of other long haul LCC and ability to attract passengers for longer flights, India is uniquely placed in terms of geography with flights to United Kingdom, Africa or Japan within 9 hours of block time, something which neither Scoot, AirAsia X or Norwegian have.
IndiGo seems to be taking the cake away from Spicejet which had announced its intentions to start long haul LCC operations.
IndiGo will soon have four types of aircraft in the fleet. A350 or A330neo, A320 & A321 single aisle and the turboprop ATR72-600s. The airline is already handling three types of engines for its A320 fleet (IAE, CFM, Pratt&Whitney).
Aditya Ghosh had once described that his airline would like to be like Roger Federer – boringly consistent. While the consistency would continue, the complexity is certainly increasing and with this I see no reason why the airline should not opt for the 186 seater A320neo which will further reduce the cost per seat when the engine issue settles and the airline starts quick induction of the large order.
No LCC in India was a point to point carrier in true sense (barring first year or so of AirAsia India) but IndiGo has recently shifted to a full fledged network carrier model. While there will be challenges in building an effective hub due to terminal transfer for its passengers at Mumbai & Delhi, the only spoke missing in this well oiled wheel is a Frequent Flier Program and this spoke should be completed soon denting domestic competition further.
When the individual operations of turboprop and wide-body fleet reach 20 aircraft each, will the airline hive them off as separate subsidiaries and unlock value from them by listing each of the subsidiary?
There were many discussions, agreements and disagreements in September 2015 when I wrote that the airline could consider getting into leasing business or start another airline in ASEAN or SAARC. At this juncture I am even more inclined to say that the parent could consider that as an option and the government could go that extra mile to help India be an easy leasing hub. (IndiGo’s fleet planning – the missing 30)
Till the larger decisions are taken the airline has to concentrate on getting its fleet planning back on track. The simple 6 year lease story has taken a beating due to the engine issues delaying induction for the A320neo fleet. What looked like a master stroke back then, of converting 30 A320ceo to the A320neo, could well be looked at over excitement now or is it a blessing in disguise that the airline is not getting planes in quick succession at a time when the country has no additional capacity on the airport side.
The airline will go ahead with an order for wide-body aircraft, with or without Air India. The wide body aircraft will give the airline an edge to fly to short haul international destinations (Bangkok, Singapore, Riyadh, Dammam) with lower per seat cost.
Tailpiece – Will IndiGo buy Air India?
The answer to this will be dependent on how the government decides to sell Air India? A piece meal approach or core & non-core business sold separated or another way?
My take is that IndiGo will not buy Air India in any of its form. At best, it could buy Air India express. However, the participation of IndiGo will increase the valuation and competition for others who are in the fray (TATA’s?). I faintly remember how Reliance & Kingfisher were in the fray for Air Deccan and in the end Capt. Gopinath had the last laugh, the rest is history. Would the valuation been lower had there not been such a competition? Any chances that Kingfisher would have been in business today, had it paid much lower for Air Deccan?
Time will tell if its TATA’s , IndiGo or a combination of a large business house & Qatar Airways who would snap Air India and that time does not seem far. I will have another post on How Air India can be sold and I hope I can write it soon. Keep reading!