Competition & Strategy

Indigo Airlines

Rajeev (1501021)
Jayaram Moningi(1501022)
Mukesh V(1501023)
Naveen Reddy(1501029)
Rahul Singh(1501032)
Venkataramanan S(1501052)
Vivek S(1501055)
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Introduction

‘The easiest way to become a millionaire is to start off as a billionaire and then enter the
aviation business’ - Richard Branson

This statement sums up the difficulty in surviving the aviation industry. However there are a
few examples which have delivered even in these conditions and Indigo is one of them. It is
one of the few Indian airlines that is profitable now and it has been profitable for more than 7
years now. In this report, we will look at those factors that lead Indigo to perform better than
its competitors.

PESTLE analysis

Economic Factors

Fluctuations in Aviation Fuel Prices affects the costs and profitability in a both positive and
negative way. Slow economic growth results in decreasing passenger volume and push up the
overall costs. Rise in middle-income group population increases occupancy ratio of flights
and helps airliners in bringing down operational costs.

Political Factors

By allowing 100% FDI in Greenfield airports and 74% in existing airports enables airliners to
tap into new routes, markets and earn additional revenue. Tighter regulations put in place by
DGCA (Directorate General of Civil Aviation) regarding passenger safety is adding to costs of
airliners as they have to comply with these norms. 5/20 rule, which mandate that domestic
airliners should operate for at least 5 years and possess 20 carriers before they can operate in
international routes, is deterring new entrants into entering the industry.

Technological Factors

The advent of Video conferencing had a profound impact on airline industry by reducing
number of commuters. Adoption of satellite based navigation system for piloting and e-
ticketing in order to be on par with competitors escalates the costs.

Social Factors

The emergence of the millennial generation into the consumer class has resulted in customers
being much more demanding in terms of service. This is affecting airliners’ cost structure.

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Passenger profile has changed with them being more economically minded and hence choosing
economy class tickets.

Legal Factors

There has been a sharp increase in the number of legal cases against airline service providers
from both workers (delayed payment of salaries) and customers (grievances regarding lack of
service or poor quality service) is accelerating legal costs. Since airline industry is highly
regulated, any non-compliance is scrutinized. Hence companies are taking measures to adhere
to the rules and regulations and the end result is soaring of costs.

Environmental Factors

Adverse weather may result in delay/cancellation of flights and causes loss of revenue to the
airliners. Airliners, in order to reduce carbon foot print, are adopting fly-green methods and are
participating in CSR programmes.

So, this PESTLE analysis for airline industry has highlighted factors that are affecting its
external environment. With these factors, we have come to the conclusion that the rise in costs
of doing business, tighter rules and regulations imposed by DGCA, intense competition from
other players and changes in demographic profile of passengers all have affected the viability
and profitability of the airline industry badly.

Industry analysis of the Indian civil aviation industry using Porter’s 5 forces frame work

Bargaining power of buyers

Since buyer decides to choose airline service based on the availability of the flights to his
destination whenever he wants and cost of the ticket at that time, it is not necessary for the
buyer to choose the same airline every time. And there are so many companies providing
similar services, a buyer will not lose anything by switching from one company to other. So
the switching cost of the buyer is very low. Since there are so many channels like mobile apps,
different websites, agencies, over the counter services are available to book the tickets and
there is lot of information about discounts and offers of different airline services available on
the internet, buyer has lot of options to book the ticket and books where ever it is cheaper. This
will increase the bargaining power of the buyer. There is also some scope for reliability and
brand loyalty. Some airlines are known for their on-time services, some or for their on-board

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services, some are for maintaining good relationships with customers. This will lead customers
to stick to the particular airline service based on their preferences. This will reduce the buyers
bargaining power up to some extent. By considering all the above factors, we may conclude
that bargaining power of the buyers is moderate to high.

Bargaining power of suppliers

There are primarily 3 major suppliers to airline Industry

1. Airplanes

2. Fuel

3. Labour (pilots and cabin crew members)

Airplanes:

There are very few airplane manufacturers in the world. Only Airbus and Boeing hold more
than 90% of the market share. It implies that it is a very concentrated industry. So there are not
many options available for airline companies to switch from one supplier to other. The
contracts between airplane manufacturers and airline companies are long term contracts and
huge investments are involved. Airline companies generally prefer long-term relationships
with them to get discounts and customized planes. So the switching cost for the airline
companies is very high.

Fuel:

In the airline industry, Fuel costs account for around 30 percent of the operating expenses and
companies don’t have control over the fuel price. Fuel prices are affected by so many external
factors like worldwide economy growth, wars, OPEC countries and some other factors.

Labour:

The major portion of the labour in the airline industry are highly skilled. There has always been
a demand for skilled labour and this demand is very high especially for the pilots in India
considering the fact that 11% of the growth rate in Indian airline industry. There have been
incidents like Arab countries poaching Indian pilots making the situation worse. In India, there
is six months of mandatory notice period decided by the DGCA for the pilots which is generally
3 months for employees in other industries. It shows how much demand is there for efficient
pilots in India.

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There also some labour laws that need to be complied by airline companies. The above factors
show the bargaining power of the suppliers is very high and the threat is very high.

Threat of new entrants

Since Airline industry is highly capital intensive, huge investments are required to start
an airline company. So there will be very high fixed cost. Customers give equal importance to
safety along with ticket price and travel experience, so they won’t trust new or unknown airlines
very easily irrespective of their discount offers. It takes so much time to create some customer
base. Incumbent players always try to not allow new entrants into the industry. So they will
always try to retaliate the new entrants by engaging price wars which they can survive because
of their economies scale but the new entrants would not. Since airline companies require highly
technical and skilled workforce, recruiting them would be difficult. Because of the scarcity of
pilots, new entrants have to pay high salaries to attract the experienced pilots from incumbent
companies. To start an airline company, lot of permissions and licenses required from civil
aviation ministry, environmental department, department of transport and other related
departments. So a lot of bureaucracy is involved which will delay the process. By considering
the above factors, we can say that entering into the airline industry is relatively difficult and
threat for the incumbent companies is low.

Competitive rivalry

The airline industry in India is a little bit fragmented because of so many existing
players like Indigo, spice jet, Air India, jet airways, Go Air, Jet lite, Air costa, Air Asia and so
on. So there will be a lot of competition among each other. Exit barriers are very high in this
industry. Since the fixed cost involved in this industry is extremely high, companies won’t exit
the industry easily and may engage price wars to increase their market share to survive. So the
threat of the competitors is very high.

Threat of substitutes

Emerging technologies like video conferencing virtually connecting the people which
is reducing the necessity for people to travel. The advent of high-speed bullet trains in India
also could be another alternative for the air travel. So the threat of the substitutes in this industry
is relatively low to medium.

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Porter’s sixth force (complementor)

Tourism could be the complementor to the airline industry because, when a consumer decides
to go to a tourist destination, he, in general uses an airline service to get to the destination

Summary

Porter’s force Threat level

Bargaining power of buyers Moderate to high
Bargaining power of suppliers High
Threat of new entrants Low
Competitive rivalry High
Threat of substitutes Low to moderate

Except from the new entrants, remaining all forces possess threat in airline industry. By
this porter’s framework we can conclude that profitability in the airline industry would be very
low which is evident from the following figure. Except Indigo, the other 2 players have been
in the losses most of the times.

3000 Source: MoneyControl

2000

1000

0
2011 2012 2013 2014 2015
-1000

-2000
Indigo Spicejet Jet Airways

Figure 1

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Non-Market Analysis of Indigo Airlines

The Airline Industry in India or mostly in any part of the world is controlled or regulated by
the Government. The nonmarket component can be just as crucial as the market component in
this Industry as the opportunities of a firm are controlled by Government. It is therefore
important for Indigo Airlines to formulate and implement its nonmarket strategy effectively.

We will analyse the Non-Market Strategy for the Indigo Airlines using 4I’s framework: Issues,
Institutions, Interests, and Information:

Government Regulations

Issues Foreign Direct Investment (FDI), Safety, 5/20 rule

Institutions Directorate General of Civil Aviation (DGCA), Ministry of Civil Aviation
(MoCA)
Interests The DGCA is the regulatory body under MoCA that endeavors to promote
safe and efficient Air Transportation.
Information Though India has adopted Open Sky policy, the Government has laid down
the following regulations for the Civil Aviation Industry:
 FDI of up to 49 % and investment of up to 100 % is permitted by Non-
resident Indians (NRI).
 There are a set of safety norms (Standard Recommended Practices) set
by DGCA for operations of Aircrafts which are strict and high to
maintain.
 5/20 rule allows only those airlines which have a 20-aircraft fleet and
have operated in the domestic sector for 5 years.

Strategy  Indigo’s strategy is to utilize the FDI that has opened up and lobby
against any decrease in the percentage of investment. In fact, one of
the owner Rakesh Gangwal is an NRI.
 It should continually meet the safety norms by DGCA.
 Indigo along with Jet Airways is lobbying for keeping the 5/20 rule as
it is since they have already served the rule and got the license to
operate internationally

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Economic Situation

Issues High Local Sales Tax, Rupee’s Value, Price of Automatic Transmission Fluid
(ATF)
Institutions Governments, Reserve Bank of India (RBI), Organization of Petroleum
Exporting Countries (OPEC)
Interests  The Governments Revenue is dependent on the tax.
 The careful management of money supply
 Maximization of revenue for a given demand by OPEC
Information  High Local Sales Tax that is generally around 4.3% increases ATF
prices
 Steep Rupee depreciation increases the cost of fuel.
 Fuel Price is highly unstable.
Strategy Indigo Airlines tries to negotiate the sales tax which is comparatively higher
than other countries. It also uses fuel hedging and technologies to control the
cost of fuel.

Environment Regulation

Issues Noise, Pollution, Climate Change, Risk

Institutions Activist Groups, Media
Interests The growth of the industry should be long term and sustainable.
Information The threshold limits as set by World Health Organization (WHO) should not
be exceeded.
Strategy  The use of advanced aircraft technology to reduce fuel consumption.
 Collaborating to achieve a shared vision for the sustainable
development.
 Efficiently optimizing shared capacity.

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Social Factors

Issues Trends, Social status, Tourism, culture

Institutions Social Activist, Media, Ministry of Tourism
Interests To uplift the social stature of the society and act on the concerns.
Information  Only a minutiae percentage of people in India use Air Travel
 Tourism in India is highly supported and funded by Government.
Strategy  The Magazine Hello6E on board markets for tourism in India.
 Indigo makes the dream of flying for the first time real through its no
frill one class aircrafts.

Apart from above, wars and terrorism may significantly impact the sales in the airline industry
and so a close watch must be maintained to predetermine the change of routes and act
accordingly.

Value Chain Activities

Operations

1. Single Type of Aircraft:

Indigo's entire fleet consists of A-320-232 aircraft while Air India, Jet Airways and
Spice Jet use 10, 9 and 3 different types of aircraft respectively. This leads to greater
flexibility by taking advantage of the use of the same crew from pilots to flight
attendants to the ground force thereby reducing hiring, training and upgradation costs.

2. One Class:

Having only Economy class means that Indigo does not have to spend time, money and
crew on different classes of passengers. They also don't need to maintain expensive
lounges at airports further reducing costs.

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3. Young Fleet:
Indigo has an average fleet age of less than 3 years. A younger fleet leads to lesser
maintenance costs. Indigo intends to maintain a lower fleet age as all its aircraft are
leased for a period of 5-6 years. This way they avoid the mandatory aircraft
maintenance check which is done after 8 years of operation. (These checks generally
take up to 2 months during which the aircraft remains inoperable)

4. Fuel:
Domestic fuel taxes are very high (30 per cent) along with an 8.2 per cent excise duty.
This results in fuel accounting for 45 per cent of total operating costs, as against the
global average of 30 per cent.
Indigo's aircraft try to save fuel by using software for flight planning which optimizes
for minimum fuel burning routes and altitudes and also by making use of latest fuel
saving technology. Indigo is the first airlines to place order for the Airbus A320neo
family (which were received and started operations recently). These aircrafts claim
15% lesser fuel consumption and 8% lower operating costs.
Indigo were amongst the first airlines to have the aircraft taxi to the terminal with one
engine, shutting down the second engine to conserve fuel. The company also
participates in Fuel hedging after it was allowed in 2007.

5. Route Planning:
Indigo operates fewer number of destinations than its competitors but with a higher
frequency - with a fleet of 102 planes for 36 destinations. In comparison, Spice Jet flies
to 46 destinations with 58 planes.

The network maps of all Indigo's destinations are connected to at least 2 or more
destinations, whereas this is not the case with its competitors. This means Indigo keeps
its aircraft in the air for a longer period of time and saves on airport charges. This leads
to Indigo having a high aircraft utilization rate of 11.5 hours per day per plane. This
also means that customers don't have to search for connecting flights with other
competing operators.
While competitor’s destinations also seem well connected, they have a larger presence
in Tier 2 and Tier 3 cities and traffic to and from these cities tend to be seasonal.

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 6. Robust maintenance contracts:
Indigo has a Power by the Hour contract with International Aero Engines (IAE) (who
supply the engines) that put the responsibility of performance on the manufacturer.
Indigo has such agreements with Airbus, as well as with their other vendors for critical
components. Such contracts lead to a reduced inventory of spares, also indigo rarely
face the need to pull out their planes for repairs.

7. Turnaround time:

An airline makes money as long as it is on the air, and is charged for the duration
it stays at an airport. Indigo has one of the quickest turnaround time of 30 minutes.
Having a single make of aircraft again helps in this regard as the time taken by the
crew gets reduced. Also policies like involving customers in cleaning up aircrafts
show the level of commitment to speeding up their process and taking off as early
as possible. Also, their Average Stage length (flying time per flight) of 1.5 hours,
means they do not have to stock and serve hot meals in most flights. This also
contributes to their low turnaround time.

Marketing

Little Advertising spend

Dead space advertisement:

Indigo utilizes ‘dead space’ effectively. Engine is a good example of dead space. The
cost of putting up a message in dead space is nothing but it is another medium through
which they communicate with their passengers.

Indigo, in general doesn’t shoot expensive advertisements. They created only animated
advertisements - barring one instance- highlighting their customer centric approach.
These animated advertisements helps Indigo keep their advertisement spending low
when compared to shooting regular advertisements. According to their latest filing,
Indigo spent only 1% of the revenue on marketing and promotional activities. This is
an indicator of how frugal they have been when it comes to promotional spending.

Reliance on Word of Mouth Marketing

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 Indigo Airlines’ reliance on word-of-mouth (WOM) marketing is evident as it sends
out emails regularly to its customers. To avoid making it look like a spam, the emails
are designed clean, simple and easy to understand. One just needs to click on a link to
get to the page of actual content. E-mails are usually sent out to people who leave their
information on website while booking tickets.

Strategic marketing

Indigo also strategically times its promotions and advertisements. For instance, it
advertised heavily when it started international operations. It also indulged in heavy
promotional campaign when Kingfisher was sinking, with catchphrases like 'Let the
bad times roll… Fly Indigo in good times and in bad times.' taking a dig at Kingfisher's
tagline 'Fly the good times.' This move was criticized but it worked for Indigo.

Human Resources

Lean Workforce

Indigo has one of the leanest workforce amongst the airline companies. They operate a
fleet of 40 planes with just 4000 people. They maintain a ratio of 1:100, which is better
than the worldwide industry average of 1:125. This obviously helps them to cut down
costs and ultimately drives up their profits. Also, their management is less heavy at the
top and hence better decisions could be taken faster.

One central training program

Indigo’s one central training program is unique proposition where it gives three kinds
of training to its employees namely Functional Skill Training, Customer Services &
Soft skill, Leadership. This variety in the training program helps its employees to be
well rounded and deliver a superior service to its customers. Indigo was also awarded
as one of the best companies to work with as per ‘Great Places to Work’ survey. For
promotions and internal job postings, Indigo gives preference to its existing internal
employees which enhances the employee trust on the company. All this ultimately leads
to negligible attrition rate, which means cost savings on new employee trainings.

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 Another classic example that illustrates Indigo’s commitment to cut costs was when
Indigo mass hired unemployed Kingfisher pilots. When Kingfisher sunk in 2012,
Indigo went ahead and hired around 200-300 Kingfisher pilots, offering them the same
or lesser salary than what was offered by Kingfisher. With this move, Indigo not only
saved on employee costs, but also on training costs as they got a bulk of pilots who
were already trained by kingfisher.

Technology

ACARS

Unlike manual systems used by other airlines, Indigo planes are equipped with a digital
link system for transmission of short, simple messages between aircraft and ground
stations via radio or satellite called Aircraft Communications Addressing and Reporting
System (ACARS). Before every Indigo flight departs an automatic message is
prompted from the aircraft to its operations control centre - and immediately the same
departure time gets recorded in the software. Similarly, the moment the flight lands an
automatic message is triggered from aircraft to control centre. By this way, on-time
performance is diligently monitored by Indigo.

Indigo has been using ACARS since its founding – much before the Govt. directed all
the airlines to compulsorily incorporate ACARS in 2014.

RNP

To put in place a more secure and safe landing system and save fuel, Indigo Airlines
follow required navigation performance (RNP) approach in regular airline operations.
They conduct this approach on several routes including the Kochi-Bengaluru route.

The RNP procedure brings great benefits to both the authorities and the airline and
enable accurate flight path on contained and secure trajectories; a shorter flight path,
saving 75 Km on each approach, which is approximately 400 Kg of fuel saving per
landing and a corresponding amount of reduction of greenhouse gas emissions; freedom
from dependence on conventional ground-based navigation installations by using on
board systems and GPS and easier traffic management in non-radar environments.

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VRIN ANALYSIS

As can be seen from the above figure, Indigo’s fleet utilization, brand and human resources are
all valuable, rare, inimitable and non-substitutable resources that give Indigo a distinct
competitive advantage. The brand Indigo which is known for on time service is a reputation
that Indigo has built over a period of time and it is not something that the competitors could
easily imitate. Similarly, Indigo has been buying similar airlines from Airbus for a long time
now, that it is not possible for the competitors to imitate and gain a cost advantage.

Figure 2

Marketing capabilities of Indigo is something that is a necessity since the competitors

also possess this resource and it brings the rivals at a competitive parity. Fuel management /
fuel hedging is another capability that all the other airlines possess. It was pioneered by Indigo
because of which Indigo gained a first mover advantage and its fuel management was a source
of competitive advantage for some time. But, since others a catching up, it will become a source
of competitive parity in some time.

Cost Structure:

Jet fuel is the biggest component of an airline's cost structure. Fuel Cost accounts for
nearly 40% of the total revenue. With the falling prices of crude oil airlines industry as a whole
and firms with high fuel costs in particular are benefitting. Recently Aviation Turbine Fuel
(ATF) price was slashed by 10 per cent. ATF price in Delhi was reduced by Rs. 4,428 per

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kilolitre (kl) or 9.99 per cent to Rs. 39,892.32 per kl. Further, price was reduced by Rs. 4,765.5
per kilolitre, or 11.94 percent to Rs. 35,126.82 per kiloliter but it was hiked by 12% again
recently. Jet Airways has maintained a low fuel cost when compared to IndiGo and SpiceJet
despite IndiGo carrying lesser fuel per flight and being equipped with technology like Sharklet
fuel saving wing tip devices that deliver significant fuel savings of up to 15 per cent. This might
be attributed to better lobbying and fuel hedging capabilities of Jet Airways. A
fuel hedge contract allows a company to establish a fixed cost. Jet Airways also entered into
deals with rival airlines like Kingfisher on joint fuel management to reduce expenses.

IndiGo relatively kept its fuel costs low by carrying lesser fuel and by not serving hot
meals on board, thus reducing the weight on board and resulting in lesser fuel consumption.
IndiGo and SpiceJet do not hedge their fuel prices which gives Jet Airways a relative
advantage. By adding A320neos to its fleet it will be further reducing its fuel costs and increase
its capacity by a huge margin. IndiGo is scheduled to take delivery of 24 A320neos by March
2017, starting from March, 2016.

In terms of Employee cost IndiGo has the least cost per revenue ratio because it employs
far fewer people. It has one of the industry’s leanest work forces. In 2012 IndiGo had 96
employees per aircraft compared to Air India's 250 a plane. But given the huge expansion plans
of IndiGo the employee costs might go up because of the limited pool of employees available
especially pilots. IndiGo tactically recruited Kingfisher’s pilots at much lower salaries by
paying them the 7 month salary due.

Operation expenses form the major part of the miscellaneous expenses. Operations is the major
part where IndiGo saves at. IndiGo has a standardized fleet of A320s which requires it to deal
with one set of pilots, spares and engines. The pilots need not be trained to fly different
airplanes and IndiGo having outsourced the maintenance of flights to another firm at a cheaper
price it reduces on the costs.

A plane generates revenue as long as it is in the air. IndiGo closely monitors turnaround
time and fixes tough targets; currently, it gets an aircraft ready for its next flight in 30
minutes which is the least in the industry. This helps in keeping the plane airborne for 12 hours
a day. IndiGo also maintains a no shrills policy thereby cutting on costs and doesn’t encourage
any loyalty scheme for passengers.

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 IndiGo has not a single penny in working capital or non-aircraft purchase related debt.
It has one of the lowest debt structure which is evident from its low debt service. Almost 30%
(Rs 1,166 crore out of its Rs 3,912 crore) of the debt will be retired from the proceeds of its
IPO.

Cost Structure
60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%
Power and Fuel Cost Employee Cost Miscellaneous Interest Expense
Indigo SpiceJet Jet Source: MoneyControl

Figure 3

Key Performance Indicators:

Average Seat Miles (ASMs) represent the capacity of an airline firm. It is the number of seats
(empty or filled) flying one mile. Revenue Passenger Miles (RPMs) is the number of revenue
earning seats (filled) flying one mile. It represents occupancy or utilization. Though Indigo and
Jet Airways operate similar number of planes Indigo has higher ASM because of its higher
utilization of aircraft (keeping them air-borne). The higher ASM can also be attributed to the
thinner seats that Indigo uses and the lesser boot space it provides. It has 29 inches of seat pitch
of which 4 inches is occupied by the seat itself. SpiceJet’s Boeing 737-800 & 900 aircraft
feature a 35 inch seat-pitch. The lighter seats shave off 700kgs from the aircraft’s weight
saving about 50kgs of fuel per flight.

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 IndiGo SpiceJet Jet Airways

Passengers/Flight 90.52407 78.55534 69.93525

Load Factor 80.8 74.31 78.8

Average No. of seats per 112 106 89

flight

ASM 7816020398 5743910402 6922389813

RPM 6315344482 4268299820 5454843173

Profit/ASM(Rs. Per seat 1.006906277 -0.332526078 -0.693402153

mile)
Source: strategicmoves.wordpress.com/2013/10/31/indigo-airline-cracking-the-profitability-code/

Neither passengers per flight nor the average number of seats per flight indicate the
utilization of aircraft because Jet airways operates aircraft with a capacity as high as 186 and
as low as 62. Hence the average of these capacities would be low when compared to IndiGo’s
standardized fleet of A320s. But Load Factor is a clear indication of utilization. Load factor is
the ratio of Revenue Passenger Miles and Available Seat Miles. This indicates how many seat
miles generate revenue for every available seat mile. But again only high load factors do not
indicate a profitable performance. How much each passenger pays is also important. Hence we
look at Profit per Available Seat Miles (ASMs). Here Indigo shows its domination, while other
players incur losses Indigo is the only airline that makes profits. Indigo concentrates most of
its resources in busy routes. For instance it operates 18 direct flights per day between Delhi and
Mumbai. IndiGo’s tries to provide more capacity on select routes unlike other players. As each
destination requires new investments (rentals, staff, ground-handling, equipment et cetera), this
helps contain costs. Operating aircraft with lesser capacities to Tier-2 cities would cost more
than normal.

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Business Model:

Figure 4

The picture shows the business model of Indigo Airlines and how the low cost structure
model is contributing to high profits. Indigo orders its aircraft in bulk and one of the most
recent purchases was an order of 180 airplanes (150 A320neos and 30 A320s). Such huge
orders give them a high bargaining power because airplane manufacturers would not risk to
loose such long term customers. Having a standardized fleet would not only reduce cost
because of low maintenance and carrying costs of spares. But, a standardized fleet increases
IndiGo’s dependency on aircraft manufacturer Airbus. Though bulk orders gives higher
bargaining power, a standardized fleet nullifies it to a certain extent.

Indigo maintains fleet with an average age of 4.5 years which would further reduce to
4 years in the future with the induction of newer aircraft. Younger fleet offer higher engineering
efficiency and breakdown less often, helping the planes run on time. Moreover, passengers
prefer newer jets as they are equipped with better facilities. Sale and leaseback is a process
where a lessor buys the aircraft from the airline and lease it back to the aircraft. The airlines
firms obviously sell the aircrafts at a premium and this allows the firms to invest the capital
elsewhere. Indigo has been one of the most active users of Sale and leaseback financing. So it
need not include cost of acquiring aircraft in its balance sheet, rather only incurs leasing costs.

Indigo maintains a no frills policy and hence carries lesser food and cutlery, reducing
the weight of the aircraft. It has built a reputation of being an on time airline service provider

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and hence a no frills policy does not impact the willingness to pay. This reduces cost and also
creates additional revenue. The lower variable costs lead to lower prices which further lead to
higher market share and higher revenue.

Generic Strategy

In the words of Rakesh Gangwal, Indigo is a ‘Strict low cost carrier’. So, across its
value chain activities, Indigo looks to cut costs wherever possible, without compromising on
the bare minimum services that has to be provided to its customers. Indigo has modelled its
business based on Ryanair and southwest airlines, some of the low cost carriers from the
western world which have been performing impressively. Their primary goal is to serve the
routes where demand is high and profitability is high. They also operate on a hub and spoke
model enabling them to fly to different destinations across India. This leads to a high utilization
rates which helps them get higher profits.

Some of the other choices made by Indigo , that has already been explained in the value
chain analysis such as Young fleet, Standardized fleet, sale and lease back, high turnaround
time, Only economy class are some of the things that helps Indigo cut majority of its costs and
gain a competitive advantage vis a vis the other airlines in India. It can be deduced that Indigo
fits into ‘Cost Leader’ in Porter’s Strategic Positioning Model framework.

Competitive Dynamics

AirAsia, relatively a new entrant in Indian Airlines industry has already got its
competition to respond in all out price wars. The incumbent market leader, Indigo is not silent
an observer and is responding tooth and nail it to the aggressive strategies followed by AirAsia.
Even Mr. Fernandes, AirAsia CEO has acknowledged that Indigo is making life difficult for
them. Indigo has countered every move made by AirAsia in India, be it by cutting fares or
adding more flights on existing routes where AirAsia flew its own. On each new route started
by AirAsia, Indigo has followed suit, setting off a price war. Indigo also launched several
flights from the cities AirAsia was aiming at, looking to thwart the AirAsia’s efforts to tap
niche routes. When AirAsia announced a non-stop flight between Bengaluru and Chandigarh,
Indigo took off on the route before AirAsia could. Indigo has taken competition head-on, not
making it easy for new entrants.

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 Last December, AirAsia launched a direct flight between two cities (Pune to Jaipur),
adding 5,000 seats per month on the route. The Indian carrier also offered ‘all-inclusive, one-
way’ fare from as low as 699 for flights from Bengaluru to Chennai, Kochi, Goa, Jaipur and
Chandigarh and vice versa. On the Bengaluru to Kochi route, Indigo had to cut its fares, which
were around 4,000. After AirAsia started a week-long sale offering promotional tickets priced
as low as 380 (all-inclusive) on travel dates between June 10, 2015, and January 17, 2016,
Indigo announced special fares starting as low as 1,647 (all-inclusive).
The fare quoted by AirAsia was less than half the price of AC bus tickets that run on the routes.
Similarly, Indigo announced all-inclusive fares starting 1,499 to take on rival SpiceJet earlier
this year, 100 lower than the latter’s 1,599 offer. In January this year, Vistara debuted Delhi-
Ahmedabad and Mumbai-Ahmedabad routes. Soon, Indigo added a fifth daily flight between
Delhi and Ahmedabad and a sixth daily service between Mumbai and Ahmedabad.

Indigo doesn’t initiate fare wars, but tend to match the fares offered. It has also been
more selective on a case to case basis rather than offering blanket discounts. Indigo looks at
discounts from the point of view of capacity availability. If it has a high load factor, it can’t
match the offers. Typically, Indigo matches promotions of this kind on weaker routes.

Conclusion

Some of the factors that made Indigo profitable was discussed. It is difficult for competitors to
replicate Indigo’s model, which is why Indigo has had a sustained profitability over the years.
However, even if the competitors are able to replicate a few value adding activities of Indigo
Airlines, they can be saved from the blushes. A very good example can be spice jet, which
recently turned profitable, thanks to some of the best processes it adopted from successful
airlines. Airline industry is poised to grow at a faster pace with increasing connectivity and
disposable incomes and a healthy competition among airlines is imperative for the overall
betterment of the industry.

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References

 http://www.slideshare.net/parthsingh18/mapping-the-success-of-indigo-airlines
 http://articles.economictimes.indiatimes.com/2012-06-11/news/32175194_1_kingfisher-airlines-pilots-
indigo-pilot-planes
 http://articles.economictimes.indiatimes.com/2014-03-31/news/48735375_1_jet-airways-air-india-dgca
 http://www.thehindu.com/business/companies/indigo-plane-becomes-first-to-land-using-fuelsaving-
technology/article3562910.ece
 http://www.dgca.nic.in/operator/sch-ind.htm
 https://en.wikipedia.org/wiki/Aircraft_maintenance_checks#D_Check
 https://en.wikipedia.org/wiki/Airbus_A320neo_family
 https://en.wikipedia.org/wiki/Fuel_hedging
 https://en.wikipedia.org/wiki/Power_by_the_Hour
 Press release | Airbus, Indigo places order for 130 A320 neo
 http://www.thehindu.com/business/jet-fuel-price-cut-by-10-nonsubsidised-lpg-
hiked/article8054739.ece
 https://www.iocl.com/Product_PreviousPrice/ATFDomesticPreviousPrice.aspx
 http://www.dgca.nic.in/operator/sch-ind.htm
 http://www.financialexpress.com/article/industry/companies/jet-airways-to-keep-it-simple-as-atf-
hedging-backfires-for-other-carriers/41027/
 https://www.flightglobal.com/news/articles/IndiGo-to-take-delivery-of-24-a320neos-by-end-march-
422494/
 http://www.businesstoday.in/magazine/features/IndiGo-operations-in-pictures/story/185133.html
 http://dgca.nic.in/dom_flt_schedule/Indigo_ws15-16.pdf
 http://www.airbus.com/presscentre/pressreleases/press-release-detail/detail/indigo-firms-up-order-for-
150-a320neo-and-30-a320s/
 https://www.planespotters.net/airline/IndiGo
 https://www.flightglobal.com/news/articles/analysis-lccs-profit-from-sale-and-leaseback-strate-
386073/

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