INDIGO AIRLINES: GROWTH STRATEGY ANALYSIS

Introduction

1. Indian airline industry is growing at a phenomenal growth rate of 18 to 20 % YOY basis as per latest stats published by DGCA, the Indian Aviation Regulator. Post 1953 air carriage sector was monopolized by Air India and Indian Airlines, the official State carriers. With privatization andliberalization policy adopted post 1991, Indian government allowed private players in the highly lucrative domestic carrier segment. Many of the pioneer operators faced bankruptcy and exited, but some have evolved andexhibited sound business and operational resilience despite many challenges. Presently there are minimal barriers to entry in the domestic carrier segment; however some barriers remain in the international routes. With Indian GDP expected to grow between 7 to 9 % for next 10 years and huge population with increasing income to service, this segment will witness interesting developments. Aviation passenger market is cyclic in nature and witnesses increase in passenger load factor and revenue growth, generally during May and December.

2. On the expenses side top three inputs in this segment are Aircraft ownership cost, fuel and highly specialized manpower. With the lucky drop in ATF prices internationally most operators have come out of the red in recent months and are entering into fuel hedging contracts to extend their competitive advantage. Cheap manpower though available in plenty, but a general deficiency in highly specialized areas exists. Even today there are large number of expat pilots and foreign senior management specialists employed by Domestic Airlines companies.

3. Major competitors in this space are Jet Airways, Air India, Spice Jet, Go Air, and few others with minimal market share. As world over airline business is one with intense rivalry and competition, Indian scenario has also witnessed intense price and differentiation competition. Jet Airways and Air India are Full service carriers and operate in a different sub-segment of this market i.e. full service operators. Nearest rivals are Spice Jet and Go Air which are Low cost operators and operate in the same space as Indigo as depicted in the Strategy Map. Nature of competition among LCC is based on operational excellence and innovative cost cutting.

4. Indigo Airlines, is the largest domestic Low-cost Airline in India, with a 38.9% market share and 2.8 million passengers as on May-2015. Indigo Airlines maintained its market share lead over other competitors in this industry. According to a recent report by global aviation consultancy CAPA, IndiGo could grab up to 50 percent share in just two more years and 40 percent this fiscal itself. As India's domestic aviation grows on the back of low fuel prices and increasing demand, IndiGo seems poised to reap maximum benefits among all Indian carriers, which the airline has been preparing (market dominance) for a long time. It is clear that not just CAPA, IndiGo itself sees a huge potential in the Indian aviation market and is trying to out-maneuver competitors by aggressive capacity expansion. As of now, the airline has a fleet of 96 operational aircraft and offers over 600 daily flights connecting 38 destinations. It went public and garnered up to $400 million, by selling 25 percent equity, in Indian markets recently.Growth strategy adopted by IndiGo is robust and paying dividends. Primary approach followed is growth by scale and not by M&A or diversification. IndiGo has been consistent with operational excellence and focused on cost cutting and in the forefront while offering innovative travel options.

Strategic Growth Analysis

5. Considering very positive outlook for general aviation demand in India, Growth for airlines in India is an obvious choice. There are various growth options available for airline companies operating in India. They are:

a) Growth by scaling.b) Growth by entry.c) Growth by acquisition,andd) Growth by Innovation

5.1 Growth by scaling. This is a pure organic method of growth and Indigo is poised for a successful implementation of this strategy. Since 2011 Indigo Airlines has been steadily scaling up its operations while maintaining its margins. Its market share has been steadily increasing and also its profitability. The company has not undertaken any risky or capital intensive measure to notch up its operation.

Scenario planning. Two major uncertainties in the domestic carrier segment are entry of multinational more efficient low cost carrier, and the other being rise in ATF prices.

As the company is planning for growth by scaling and has to make significant capital investments based upon positive demand forcast, it is prudent to check the robustness of this strategy by scenario testing. One of the major uncertainties facing domestic airlines are whether government will allow foreign Low cost operators in domestic carrier business. Recently there has been talks of open skies and opening of Indian markets to FDI. Second significant uncertainty is steep hike in ATF prices in near future. Many analysts are predicting price hike by 2017-18.Any traffic short falls and associated ATF price hike could prove lethal for Indian Low Cost Operators if they borrow too much for expansion. A scenario matrix for these two parameters is as shown below.

Scenario A Scenario B

Scenario C Scenario D

Low high

ATF Prices-‡

Competition from foreign player

Scenario A is characterized by entry of few international players but ATF prices being low. In this case the Indigo will have to rely on its strength of focused low cost efficient model to survive. If the foreign operator starts a fare war Indigo could be in trouble. It will have to quickly adapt to international efficiency standards to survive in such a case. However low ATF prices will be a boon and company with its average salaried staff and local knowledge will be sufficiently leveraged against exposure. It may have to prepare a case for support by government intervention by legislation or by airlines alliance against any future price war. Present strategy of growth by scaling operations, appear sound in this scenario as company has not incurred too much debt for expansion.

Scenario B. is characterized by high competition and high ATF prices. This is the most challenging scenario for IndiGo Airlines. In this scenario Foreign Company may survive due to better financial condition but domestic low cost operators will find it extremely difficult to break even. Challenge will be increase the fares to offset the ATF hike in prices yet to maintain the load factor. It is an established fact that any price hike is a negative factor for airlines demand, so ATF price hike will definitely result in passenger load factor drop. As IndiGo is a short lease operator with a staggered lease of average 6 years, it will be in an advantageous position to fore close various leases and reduce its inventory to cut losses and may discontinue loss making routes at a faster pace than most competitors. It will positively give competitive value position to Indigo vs. its competitors in this scenario as well.

Scenario C is characterized by low fuel prices and no international carrier entry into India. This is a win- win situation for IndiGo Airlines. The company is already a market leader in domestic operation and poised for a major capacity increase from 2016-17 onwards.ATF prices remaining low would be a very desirable scenario for other operators as well, but would be specially suitable for the company as IndiGo will be able to notch up operations at a reasonably less cost.

Scenario D is a scenario where ATF prices are high but threat of an international player in India is minimal. This scenario will not be a threat to

the company but will reduce its profitability to some extent. As the ATFprices will be high it will eat up into the profitability of all the players. As IndiGo’s cost of operations is the cheapest, it will be able to sustain its operation without having to worry for increasing the ticket price and losingcustomers. In any case it has been observed that in the past whenever there has been ATF price hike all the operators have gone in for price hike without any fuss. In this scenario also IndiGo also appears resilient and may follow other operators and defend its margins.

5.2 Growth by entry strategy. In the case of airline companies growth by entry, particularly in domestic segment is easy. As per standard business knowledge all it requires to start a low cost operations is approx $ 10 million. In case of entry into new routes by existing operators things are even much easier. They have to just tie up for aircraft ground handling and ticketing, which in most cases outsourced on contract basis. Aircraft availability and a formal clearance from regulator are to be obtained. Considering Aircraft availability and city pair connectivity scenario in India IndiGo is placed in a very advantageous position. IndiGo has announced new routes beginning this holiday season (Q4 2016), which coincides with the aircraft deliveries they had ordered three years back. Their capacity enhancement, market demand and growth by entry into new domestic routes is playing out just perfectly, to the envy of other competitors, and this brings IndiGo to a very advantageous market value position in Indian domestic Aviation sector. This value position will continue to be unshakable for next 5 to 7 years, when other domestic operators will be able to go in for capacity increase at comparable cost as that of IndiGo.

5.3 Growth by Acquisition. Presently in Indian domestic aviation sector there are no companies waiting to be acquired, so growth by acquisition is not a visible option. Even if, in coming years some other smaller low cost operator files for bankruptcy Indigo should not strategize for acquisition. Considering most aircrafts on their inventory are short lease method, and permits from regulator (DGCA) available freely, there appears no significant value proposition in acquiring these companies.

Though acquisition of other low cost operators is not economically lucrative, other out of the box acquisitions or alliances might add strategic value to the company. It is proposed that Indigo should carry out detailed evaluation of acquiring or having an alliance with a Flight Training School and a cabin crew training establishment. Qualified personals from its partly owned training establishments can be retained for internship and On Job Training at a very advantageous remuneration. It will further reduce the cost of achieving growth by scale.

5.4 Growth by Innovation. Airline passenger segment being a service sector environment has very little scope to innovate. As the principal resource that is an airplane is more or less constant, processes to operate and handle passengers are also heavily regulated. Only scope of innovation exists in ticketing domain and new city pairs being offered by these operators. World over, low cost operators offer single fare tickets which go up in price as the travel date approaches. These tickets are non refundable or draw heavy cancellation charges. Recently IndiGo innovated and introduced modify ticket plan, where by any passenger can change the date of travel by paying Rs 1500/, per segment. It appears to be a novel idea as not many people will ask for postponement but still would have paid up to 60 to 70 percent extra for the journey just for having the option to change journey date, which they may never exercise.

6. Synthesis

IndiGo airline is following a meticulous and calibrated growth strategy, which is primarily “Growth by Scaling”. It is not only well thought out strategy but also perfectly well timed strategy. Many strategic decisions taken in the past are visible now when fruits of adopting well thought out strategy are showing up.

IndiGo is expected to take deliveries of Airbus neo aircraft beginning 2016 (till 2020).this belongs to the total order of 250 aircraft ordered by IndiGo. As presently the order book for Airbus is closed for fresh orders, (the best choice for LCC world over), the competitors of IndiGo will be in a

disadvantageous position. With such a rapid increase in capacity, the airline may give tough competition to other LCC operators from next calendar year onwards. These aircrafts are highly fuel efficient and may result in 10 to 15 % savings in fuel cost. Demand forecasts for domestic travel are expected to grow exponentially for at least a decade. IndiGo is placed in a very enviable position to reap the benefits of adopting and implementing a classical organic Growth by Scaling approach, in the face of positive demand forecast.

7. REFERENCES

1. http://www.worldbank.org/en/publication/global-economic-prospects/summary-table.

2. DGCA Website.

3. CAPA- centreforaviation.com

1

Subject: Performance of domestic airlines for the year 2016. Traffic data submitted by various domestic airlines has been analysed for the month of January 2016. Following are the salient features: Passenger Growth

Passengers carried by domestic airlines during Jan 2016 were 76.55 lakhs as

against 62.45 lakhs during the corresponding period of previous year thereby registering a growth of 22.58% (Ref Table 1).

Passenger Load Factor

The passenger load factors of various scheduled domestic airlines in Jan 2016 are as follows (Ref Table 2):

62.45 62.4576.55 76.55

0.00

20.00

40.00

60.00

80.00

100.00

YoY MoM

Pax Car

ried (in

Lakhs)

20152016

81.7 82.5

82.5 92.

1

84.9

84.7

84.0

81.9

74.8 83.

8

83.486.

7

83.8

83.0 92.

1

86.5 88.5

87.1

82.7

77.6 82.

2 82.7

0.020.040.060.080.0

100.0

Air India Jet Airways JetLite Spicejet Go Air IndiGo Air Costa Air Asia Vistara Air Pegasus Trujet

Pax Loa

d Facto

r (%)

Jan-16 Dec-15

Growth: YoY = + 22.58 % MoM = + 22.58%

2

The passenger load factor in the month of January 2016 has slightly decreased compared to previous month primarily due to the end of tourist season.

Cancellations

The overall cancellation rate of scheduled domestic airlines for the month of January 2016 has been 1.10%. Airline-wise details of cancellations are as follows:

Various reasons of cancellations are indicated below:

0.230.500.510.520.550.59

0.971.22

1.9110.83

11.46

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00JetLite

Air AsiaSpicejet

Jet AirwaysGo Air

VistaraIndiGoTrujet

Air India (Dom)Air Pegasus

Air Costa

Cancellation Rate (%)

Technical 13.6%

Operational 4.0%

Weather 32.9%Commercial 1.6%

Conse/Misc 47.9%

3

Passenger Complaints during the month

During January 2016, a total of 823 passenger related complaints had been received by the scheduled domestic airlines. The number of complaints per 10,000 passengers carried for the month of January 2016 has been 1.1. The airline-wise details are as follows:

Various reasons of passenger complaints are indicated below:

0.30.3

0.50.5

0.80.9

1.01.0

1.32.8

0.0 0.5 1.0 1.5 2.0 2.5 3.0VistaraTrujet

IndiGoSpicejet

Air PegasusAir Asia

Air CostaGo Air

Jet Airways + JetLiteAir India (Dom)

No. of Complaints/10,000 Pax

Fare0.9% Refund6.2%

Flight Problem30.5%

Baggage22.4%

Customer Service28.7%

Disability0.1%

Staff Behaviour6.0%

Catering0.1%Others5.2%

4

The reason for complaint as percentage compared to the previous month is as follows:

Airline-wise status of redressal of complaints is given at Table – 4.

Compliance of Route Dispersal Guidelines During the month of Jan 2016, all the scheduled domestic airlines complied with the mandatory capacity deployment requirements contained in the Route Dispersal Guidelines. Airline-wise details are given in the following Table: Airline ASKM Deployment (%) of Category I

Cat III Cat IIA Cat II Air India + Alliance Air 103.4 1.50 20.5 Jet Airways + JetLite 68.2 1.07 11.0 Spicejet 107.8 1.01 23.9 Go Air 158.8 1.16 49.2 IndiGo 123.0 1.32 21.8 Vistara 62.9 1.08 10.5 Air Asia 485.1 8.13 42.8 Minimum Capacity Requirement in accordance with RDG (As % of Capacity Deployed in Category I) Category II - 10% Category IIA - 1% Category III - 50%

0.7

4.3

20.9

19.4

28.7

0.2

8.3

0.5

17.0

0.7

3.5

28.0 28.2

27.1

0.1

7.7

0.1

4.6

0.9

6.2

30.5

22.4

28.7

0.1

6.0

0.1

5.2

0.05.0

10.015.020.025.030.035.0

Fare Refund Flight Problem Baggage Customer Service Disability Staff Behaviour Catering Others

Nov-15 Dec-15 Jan-16

5

On-Time Performance (Scheduled Domestic Airlines)

On-Time Performance (OTP) of scheduled domestic airlines has been computed for four metro airports viz. Bangalore, Delhi, Hyderabad and Mumbai. Airline-wise OTP at four metro airports for the month of January 2016 is as follows:

Airport-wise On-Time Performance of scheduled domestic airlines complying with

Route Dispersal Guidelines is as follows:

56.065.0

69.574.775.075.4

86.6

0.0 20.0 40.0 60.0 80.0 100.0Air Asia*

Air India (Dom)Go Air*Spicejet

IndiGoJet Airways+JetLite

Vistara

OTP (%)

OTP at Four Metro Airports

*Note - Operations of Go Air only at BOM, BLR, DEL; Operations of Air Asia only at DEL & BLR

61.3

61.5

77.2

80.7

0.0 20.0 40.0 60.0 80.0 100.0

BOM

DEL

BLR

HYD

OTP (%)

Air India (Domestic)

6

71.5

75.0

78.8

81.0

0.0 20.0 40.0 60.0 80.0 100.0

DEL

BOM

HYD

BLR

OTP (%)

Jet Airways + JetLite

69.6

71.0

71.0

86.8

0.0 20.0 40.0 60.0 80.0 100.0

DEL

BLR

BOM

HYD

OTP (%)

Spicejet

7

64.6

72.0

79.3

0.0 20.0 40.0 60.0 80.0 100.0

BOM

DEL

BLR

HYD

OTP (%)

Go Air

66.4

77.9

78.2

79.2

0.0 20.0 40.0 60.0 80.0 100.0

BOM

HYD

DEL

BLR

OTP (%)

IndiGo

8

Reasons for delay have been analysed, which are presented below. It has been

found that majority of delays have been attributed to ‘Reactionary’.

79.5

87.1

89.6

91.2

0.0 20.0 40.0 60.0 80.0 100.0

BOM

BLR

DEL

HYD

OTP (%)

Vistara

Pax 2%Ramp 1%Tech 2%

Ops 4%Reactionary 65%

Airport 5%

Wx 10%

ATC 9% Misc 2%

9

Compliance of CAR Section 3, Series M, Part IV In accordance with the Civil Aviation Requirement Section 3, Series M, Part IV,

airline are required to submit data on number of cases of denied boarding, cancellations and delays along with the status on a monthly basis. Airline Denied Boarding Cancellations Delays Beyond 2 Hrs

No. of Pax Affected

Status of Facilities & Compensation

No. of Pax Affected

Status of Facilities & Compensation

No. of Pax Affected

Status of Facilities

Air India 431

Refund Rebooked on other flights Hotel accommoda-tion Compensation of Rs. 22.42 lakhs

6168

Refunds Rescheduling Hotel accommoda-tion Compensation of Rs. 31.49 lakhs

83265 Refreshments Refunds where

pax desired Rescheduling Compensation of Rs. 103.3 lakhs

Jet Airways and JetLite

660

Refund Rebooked on other flights Hotel accommoda-tion Compensation of Rs. 16.83 lakhs

1526

Refunds Rescheduling Hotel accommoda-tion Compensation of Rs. 0.53 lakhs

4880 Refreshments Refunds where pax desired Rescheduling

Spicejet Nil Nil 945 Refreshments Rescheduling Compensation

of Rs. 0.35 lakhs

3785 Refreshments Transfer to other

airlines Compensation of Rs. 3.34 lakhs

Go Air Nil Nil 41 Refreshments Rescheduling 2369

All pax given refreshments Refunds where pax desired Rescheduling

IndiGo Nil Nil Nil Nil 11782 Refreshments

Air Costa Nil Nil 1808 Refreshments Rescheduling Compensation of Rs. 5.0 lakhs

369 Refreshments Rescheduling Compensation of Rs. 0.72 lakhs

Air Asia 2 Refund Compensation

of Rs. 0.13 lakhs

156 Refund Compensation

of Rs. 0.03 lakhs

6158 Refreshments Compensation of Rs. 6.73 lakhs

Vistara 9 Refund Compensation

of Rs. 0.71 lakhs

560 Refund Compensation

of Rs. 3.18 lakhs

3085 Refreshments Rescheduling Air Pegasus Nil Nil 24 Rescheduling 371 Refreshments Rescheduling Trujet Nil Nil 19 Refreshments Rescheduling 27 Refreshments Rescheduling

10

SUMMARY

Denied Boarding Cancellations Delays No. of Pax Affected

Facilities & Compensation

No. of Pax Affected

Facilities & Compensation

No. of Pax Affected

Facilities

1102 Rs. 40.09 lakhs compensation 11247

Rs. 40.58 lakhs compensation and facilities

116091 Rs. 114.09 lakhs towards compensation and facilities

Table 1 TOTAL DOMESTIC PASSENGERS CARRIED BY SCHEDULED DOMESTIC AIRLINES (IN LAKHS) - YEAR 2016

Month & Year Air India (Domestic)

Private Carriers

Total Domestic

Percentage Share Private Carriers Air India

Jan 12.23 64.32 76.55 84.0 16.0 Feb Mar Ist Quarter 12.23 64.32 76.55 84.0 16.0 Apr May Jun IInd Quarter Jul Aug Sep IIIrd Quarter Oct Nov Dec IVth Quarter Total 12.23 64.32 76.55 84.0 16.0 Data of 2014 Air India

(Domestic) Private Carriers

Total Domestic

Percentage Share Private Carriers Air India

IstQtr 11.65 50.80 62.45 81.3 18.7 IIndQtr IIIrdQtr IVthQtr Total 11.65 50.80 62.45 81.3 18.7 Growth (%) = +4.98 +26.61 +22.58

12

Table 2 MONTH-WISE SEAT FACTOR OF SCHEDULED OPERATORS IN 2016 (PASSENGER LOAD FACTOR IN PERCENTAGE)

Month Air India (Dom) Jet Airways JetLite Spice Jet Go Air IndiGo Air Costa Air Asia Vistara Air Pegasus Trujet

Jan 81.7 82.5 82.5 92.1 84.9 84.7 84.0 81.9 74.8 83.8 83.4 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Table 3

MARKET SHARE OF SCHEDULES DOMESTIC AIRLINES (YEAR 2016)

Month & Year Passengers Carried (in Lakhs) Market Share (%)

Air India Private Air Carriers

Total Jet Airways Jet Lite Spice Jet Go Air IndiGo Air Costa Air Asia Vistara Air Pegasus Trujet Air India Jet Airways Jet Lite Spice Jet Go Air IndiGo Air Costa Air Asia Vistara Air Pegasus TrujetJan 12.23 14.32 2.06 10.11 6.20 27.26 0.59 1.75 1.50 0.24 0.29 76.55 16.0 18.7 2.7 13.2 8.1 35.6 0.8 2.3 2.0 0.3 0.4 Feb Mar

IstQtr 12.23 14.32 2.06 10.11 6.20 27.26 0.59 1.75 1.50 0.24 0.29 76.55 16.0 18.7 2.7 13.2 8.1 35.6 0.8 2.3 2.0 0.3 0.4 Apr May Jun

IIndQtr Jul

Aug Sep

IIIrdQtr Oct Nov Dec

IVthQtr TOTAL 12.23 14.32 2.06 10.11 6.20 27.26 0.59 1.75 1.50 0.24 0.29 76.55 16.0 18.7 2.7 13.2 8.1 35.6 0.8 2.3 2.0 0.3 0.4

14

Table 4

Airline

Complaints Redressal Status

Total Per 10,000

Passengers Carried

Closed Open

Air Costa 6 1.0 6 - Air Asia 16 0.9 16 - Vistara 4 0.3 4 - Go Air 61 1.0 61 - IndiGo 126 0.5 125 1 Spicejet 50 0.5 50 - Jet Airways + JetLite 216 1.3 216 - Air India (Dom) 341 2.8 203 138 Air Pegasus 2 0.8 2 - Trujet 1 0.3 1 - Total 823 1.1 684 139