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IndiGo has abandoned its pure low-cost carrier model

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IndiGo has abandoned its pure low-cost carrier model


IndiGo has taken a series of significant steps to move away from a pure low-cost strategy, long its mainstay and which helped it become India’s largest airline

IndiGo has abandoned its pure low-cost carrier model
This is the first installment of a two-part article on IndiGo’s shift from LCC strategy. 
In recent years, IndiGo has launched a series of significant steps, making a marked departure from a pure low-cost strategy, long its mainstay and which helped it become India’s largest airline. As the airline spreads its wings, the extent of its ambitions is becoming clear.
IndiGo is no longer content being the dominant domestic airline in India. It is steadily positioning itself to become a major player in the international segment as well. The change has not been sudden. Far from it.
The shift — by way of an evolving strategy — has been deliberate. And looking back, one can clearly see a pattern emerge.
The low-cost strategy
IndiGo started as a pure low-cost carrier (LCC). Elements of the LCC model were made popular by Southwest Airlines in the US and then copied the world over.
A raft of LCCs sprung up all over the globe. The disciplined airlines that were devoted to the core principles of the LCC business model thrived. The salient principles of the LCC model are a focus on short-haul sectors, no-frills, point-to-point flights, and low fares delivered via a single fleet and engine type.
Complexity for this model was (and is) akin to a cancer and kept at bay. Genuine LCC airlines utilize their assets to the hilt, with fast turnarounds, minimal ground times and stubborn about stifling costs. Rather than building a network spread across several points, they focus on maximising frequencies, allowing for amortization of fixed costs over a greater spread. They also consistently offer low fares, which are a key determinant of demand, especially in price-sensitive markets such as India.
The foundation was the fleet order
IndiGo was formed when Rahul Bhatia from the promoter group InterGlobe Enteprises and aviation veteran Rakesh Gangwal decided to join hands. Bhatia at the time ran InterGlobe, which was well known but within travel circles. Gangwal was a seasoned airline executive, having led several airlines and transformations.
The duo arrived on the scene with an announcement of a 100 aircraft order at the Paris Airshow in 2005. Everyone stood up and took note.
This massive fleet order set the foundation for IndiGo and the method of financing aircraft via the sale-and-leaseback method was cash-accretive for the airline.
The airline continued to scale and soon overtook its competitors. This was driven by a focus on fundamentals, continuous strengthening of the balance sheet coupled with broader macro-economic trends where India saw a credit boom, strong economic growth and a growing middle class. A very successful IPO in 2015 further cemented this success and as competitors faltered, the airline continued to generate cash while keeping its cost base competitive.
The first deviation: introduction of a second fleet type
Within a decade, IndiGo became an extremely valuable asset. The founders became extremely wealthy men and investors were pleased with the strong returns. With a market cap above $7 billion, the airline soon became the envy of many.
But in 2017, IndiGo made a move that left many perplexed. It signed a term sheet with French aircraft maker ATR for 50 ATR 72-600 aircraft in a deal valued at $1.3 billion. These were turboprop airplanes used for regional routes—which IndiGo had long avoided. Deliveries of the aircraft began towards the end of 2017.
Come to think of it, this was IndiGo’s first big step away from a pure LCC mode. It not only brought in a second fleet type (which meant added complexity in operations), the asset type was not as liquid on aircraft markets compared with its A320s.
That was not all. Flying these aircraft required pilots at an overall payscale higher than the cost of the A320s. The impact to the overall cost per available seat kilometer (CASK) was masked due to other elements.
Even today, the profitability of the regional operations remains in question (IndiGo does not disclose separate numbers for its regional operations).
The second deviation: an unsolicited bid for Air India
IndiGo’s next big bold move came with its unsolicited bid for Air India in July 2017. The intent of expanding in the international market and its greater ambitions became evident.
But many wondered about the airline’s game plan and how IndiGo would integrate operations if it succeeded in its bid for Air India. But IndiGo was very clear on the terms it required towards taking control of Air India. It wanted only parts of Air India, which would have burnished its international plans. But the government had other plans and in subsequent bid rounds involving the privatisation of Air India, IndiGo abstained.
How did the market react? The stock took a pounding and fell on average by 8 percent in the two days after the announcement.
The third deviation: a management shakeout
The third shift away from its core strategy came about in 2018. This was the year that saw several old hands exit the airline. The most notable departure was that of Aditya Ghosh as president after more than a decade with the airline.
Replacements followed. These appointments were mostly expatriates who IndiGo claimed were brought in to position the airline for the next phase of growth. Greg Taylor, a United Airlines veteran joined as CEO designate; Cindy Szadokierski, also a United Airlines veteran, joined as vice-president, airport operations; Michael Swiatek, an executive serving an airline in Latin America, was brought in as chief planning officer; William Boulter, an executive who had served across the globe including a stint with the International Air Transport Association (IATA) was brought in as chief commercial officer; Scott Brandt, an executive with varied experience including 13 years with United Airlines was appointed vice-president of corporate planning and analysis; Wolfgang Prock-Schauer, an executive who had previously served as the CEO of Jet Airways and GoAir, was appointed as COO.
The common thread: all of the executives handled large, complex and global operations for legacy airlines. With the exception of the COO, none had experience working with an LCC for any length of time.
Towards dominating more than just the Indian skies
With these developments in place, IndiGo evolved from a pure LCC to a more complex operation. Key metrics indicated that the airline was positioning for a broader role.
Unprecedented expansion in the metro cities was evidence of this tactic. IndiGo grew to more than hundred flights a day from each metro.
It also signed a deal with Travelport to distribute inventory via what is traditionally a high-cost channel. Fleet enhancements most notably the conversion of A320 orders to A321s and a new order, which included the A321XLRs, were also geared towards this broader mandate.
On the network front, IndiGo started to revisit its connecting traffic patterns with more options being offered to passengers. New yield management systems were implemented and data analytics enhanced. And the capacity spreads were revisited.
IndiGo was on its way to spreading its wings and towards dominating more than just the Indian skies. But there was significant turbulence ahead.
(The second part of the article will be published on Wednesday and cover further developments and IndiGo’s likely plan for the future).
Satyendra Pandey has held a variety of assignments in aviation. He is the former head of strategy at a fast growing airline. Previously he was with the Centre for Aviation (CAPA) where he led the advisory and research teams. Satyendra has been involved in restructuring, scaling and turnarounds. Has also provided policy inputs and suggestions.
Read his columns here.
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