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Plane Smart Case Study on IndiGo Airlines July 2011

Case Study on IndiGo Airlines by Kavita Lakhani, APSM04, IIM-C, July 2011

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Introduction This case traces the steady ascent of IndiGo Airlines (IndiGo), a private domestic low-cost airline based in Gurgaon, Haryana, India. Although some doubted it would work successfully in India, where many residents don't earn enough to fly, IndiGo has taken off and how! It is the world‘s fastest growing low-cost carrier in the world (source: CAPA) and India‘s youngest airline, having flown over 21 million passengers [1] in less than five years. IndiGo has been very successful with its low-fare, short-haul strategy. This upstart of an airline, has deposed the maharaja -- Air India‘s domestic arm -- to become the country‘s third largest airline after Naresh Goyal‘s Jet Airways and Kingfisher Airlines owned by liquor baron Vijay Mallya. IndiGo has regional ambitions which will take wing once the airline turns five this September. As per Indian rules, an airline must complete five years before it can fly overseas. Since IndiGo started in 2006 it has already grown in leaps and bounds, serving India‘s growing band of middle-class consumers and set itself apart from other low-cost carriers. IndiGo has built its success on a signature cocktail of clipped costs, a squeaky-clean reputation for punctuality and hassle-free services, rapid expansion into new routes and of course, its bread-and-butter affordable fares. This case enumerates the reasons for IndiGo‘s success in a highly competitive industry. IndiGo's profits seem abnormally high relative to its revenue, aver industry analysts. With rising fuel costs straining the entire industry, questions are being raised about IndiGo's ability to sustain its position and ‗much-abovethe-industry‘ profitability in the face of stiff competition by both stand-alones and low-cost subsidiaries of full-service carriers. Aircraft 'deal of the year' wakes sleeping giant When an unknown Indian airline - at least outside its home market – places the second largest aircraft order in aviation history, something important is happening. IndiGo, India‘s fledgling budget carrier didn‘t exist five years ago. Today, it still only operates 42 aircraft in the nation‘s explosive-growth aviation market and where the formal projection for national annual GDP growth is just under double figures for the next decade. In Jan 2011, IndiGo signed a Memorandum of Understanding and finalized the order by June at the Paris Air Show to acquire 180 A320s worth nearly US$16 billion.[2] That is roughly one third of the fleet of Southwest Airlines, the US‘ largest carrier. It is enough to occupy the entire Airbus production line for

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six months – although, as Airbus general director Fabrice Bregier noted, this is ―spread out over several years, of course‖. The planes will be delivered from Toulouse starting 2016 until 2025.[2] The order firmly places the spotlight on the massive growth potential that IndiGo and many airlines – and others – now see in the South and Southeast Asian market. And the potential role that the sleeping elephant of India can play in the way that evolves. Global Travel Trends and Outlook 2011 The two years of financial crisis had its impact on the airlines industry as well. However, the last quarter of 2010 witnessed a strong cyclical upswing in airline revenues for most global and Indian carriers. In terms of absolute growth, the intra-Asia Pacific region is the clear leader with more than 6.2 million additional seats and 40,203 more published flights in April 2011 against April 2010[3]. Over the last five years, figures within the Asia-Pacific region have shown average capacity growth of 7% compared to the global average of 4%.[3] Factors that contributed to such a turnaround were better economic conditions that led to a stronger market growth and better aircraft utilization. Passenger Demand – Worldwide & Asia Worldwide passenger demand is expected to rise 4.4% over the next year with the Asia-Pacific region growing faster at 6.4%, according to the International Air Transport Association (IATA), which represents the majority of airlines operating in the $598-billion industry. [4] IATA estimates that by 2014 there will be 3.3 billion more air passenger journeys across all regions, up 800 million from 2009. Of that 800 million, 45% will travel on Asia-Pacific routes. [5] Asia-Pacific carriers recorded a 9% year-onyear increase in passenger demand in 2010. The economies of China and India continue to lead the region‘s recovery.[6] Discount airlines in Asia? Ten years ago they barely existed, and in many countries the average consumer couldn't afford to fly anywhere. But now nearly a fifth of the region's airline seats are supplied by low-cost carriers (LCCs), up from 6% in 2005. Their market share is set to rise 2 percentage points annually to about 26% in 2015.[7] Also, the share for domestic flights in some countries is much higher: 34% in Thailand, 49% in Australia and 59% in India.[8] The growth in budget airlines has chopped the region's average short-haul fare by more than half since 2000. That's sparked a boom in travel and tourism

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throughout the region as affordable tickets and new routes draw tens of millions of extra passengers. The battle for frequent frugal fliers in Asia - home to more than four billion people and the world's fastest-growing economies - is expected to keep rates low and traffic growth high in the region and possibly decide the leading global airlines of the future. In the five years to 2014, the number of people flying in Asia will rise by 360 million to one billion, according to IATA estimates.[9] India’s Robust Economic Growth In the current world order, India secures a high rank amongst the fast-growing economies. India was one of the countries to have resiliently withstood the global economic slowdown during 2008-2009. In the past decade, growth has been led by the services industry. Except during 2009, the Indian economy has been consistently growing through the decade at a rate higher than 8%. The International Monetary Fund (IMF) places the forecast at 8.4% for 2011 compared to 9.4% for 2010.[10] There is a strong correlation between domestic air traffic and GDP as airports are the gateways of economic growth. Consistent with GDP growth air traffic has witnessed robust growth and is expected to show an upward trend in line with GDP growth forecast.

Figure 1: Thomas Cook Report

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Fast Growing Aviation Market Despite a population of 1.21 billion, India is an under-served market. The aviation industry is still very nascent in India, where hardly 5% of the population uses air transport. That figured is expected to grow exponentially, with the domestic market recording the highest growth rate for aviation globally, according to aviation experts. At present one in 200 Indians flies just once a year. There are millions on trains in India that will move to air travel. According to Kapil Kaul, CEO, Centre for Asia-Pacific Aviation (CAPA) India, the number of Indian airline passengers is expected to grow nearly four-fold from 123 million to 450 million by 2020.[11] Based on the CAPA forecast, India will become the third largest aviation market in the world within 10 years, behind the USA and China.[12]

Figure 2: CAPA India Outlook 2011 Report While conceptually the market is huge, infrastructure is the big limiting factor. The domestic passenger market, which grew at 18% in 2010, is expected to outpace capacity addition by airlines this year, consulting firm CAPA said in its April outlook for 2011. Domestic capacity growth is estimated at 12-14% and local traffic will grow at 17-18%, possibly rising to 20%.[13]

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Challenges for the industry Fuel Price: Several challenges remain on the horizon. Foremost amongst these is the direction of fuel prices. The sharp price fluctuations are a major concern and could seriously impact growth and profitability if prices continue to move upwards. Indeed, inflation in general is a key macro-economic challenge, the responses to which could have a negative impact on demand. And a series of scandals concerning governance and corruption have tarnished India‘s image amongst global investors which has already been reflected in a decline in foreign direct investment. Airport Infrastructure: Meanwhile, the strong growth in traffic is once again highlighting supply-side constraints, most notably in the areas of airport infrastructure and human resources. Capacity shortages are re-emerging at the 4 or 5 largest airports in the country, resulting in growing congestion and delays. Investor interest in developing the airport sector has also been impacted by the current dispute between private operators and the economic regulator on the proposed single till tariff regime. [14] In Mumbai, the country‘s commercial and financial capital, after being significantly delayed has finally got clearance for the second airport at Navi Mumbai.[15] The new airport is expected to miss its planned opening in 2015, placing significant pressure on the current facility. However, come autumn Delhi will become the first Indian city to have an integrated domestic-cum-international terminal (1D) exclusively for low-cost carriers (LCCs), like London's Stanstead.[16] The GMR-backed Delhi airport management has decided to make Terminal 1D fit for international operations (with customs and immigration facilities), in time for the biggest Indian LCC, IndiGo, to launch international flights from here by September. The terminal is all set to grow bigger by 2013. Skills & Training: Airlines in particular are also concerned about where they will find the people to support their growth plans. A shortage of skills is already impacting their expansion, and this is the case not only in technical roles such as pilots and engineers but also in management positions. These concerns have been further exacerbated by the recent discovery of several cases of pilots being granted licenses on the basis of forged records and documents, suggesting that the already deficient supply of skills is even weaker than presumed.

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IndiGo: Beginning A Labor Of Love At its simplest, IndiGo is a story of how two extremely low-profile men, sitting 7,000 miles apart, have built an airline with a cost structure and profit margins that few have achieved. The two, Rahul Bhatia and Rakesh Gangwal, own 50% each of InterGlobe Aviation, the company that runs IndiGo.[17] As managing director of InterGlobe Enterprises, a US$2 billion (revenue) group, with subsidiaries in the hotel, airline and travel technology business, Bhatia is the one in charge of operations. In 2004, InterGlobe entered the hotel business, forming a joint venture with France‘s Accor to build 25 hotels in the country. The current projection is that by 2015, InterGlobe would have about 90 properties which would translate to 17,000 rooms between owned properties and managed properties.[18] InterGlobe is a franchisee of Galileo, represents companies like Hawker Beechcraft, Sikorsky, Dornier Seaplane and Pacific Aerospace. Bhatia had long been mulling starting his own airline even before India opened its skies to private airlines in 1994; but it wasn‘t until 2005 that he took the plunge. He has used almost two decades of experience of the travel business as well as, some say, his contacts in the government, to set up and run IndiGo. The Kolkata-born Gangwal, an engineer from IIT Kanpur, had a long career in aviation with Air France, United Airlines and as President and CEO of US Airways. They met almost accidentally in the corridors of the United Airlines headquarters in Chicago in 1985, while Bhatia was doing IT work for the airline. The acquaintance grew into a friendship over the next decade and a half, before IndiGo was planned and launched. IndiGo took delivery of its first Airbus A320 aircraft in July 2006. The airline commenced operations in August 2006 with a service from Delhi to Imphal via Guwahati. Today, IndiGo is India‘s largest low-cost carrier, with 3,400[19] employees and 26 domestic routes.[20] Its main base is Delhi's Indira Gandhi International Airport. IndiGo is targeted at the ever growing, upwardly mobile Indian middle class - it aims to minimize the cost, time, stress of air travel for people who are already very busy with things to do, places to be and people to see. IndiGo‘s On-Time Performance is one of the best in India. IndiGo‘s Technical Dispatch Reliability is 99.91% making it the airline with the least number of cancellations in India.[21] With the introduction of step less stairs and Q-

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busters, IndiGo is the only Indian airline with a ‗boarding ramp‘, resonating the airline‘s uncompromising character on customer comfort where low-cost never means low quality. The former allows passengers to board into the aircraft effortlessly, and the latter helps in providing the boarding pass to passengers anywhere within the airport premises.[22] Luggage stickers read ‗Fragile‘ over a little heart-shaped graphic, so cute that kids like to steal them. IndiGo‘s airsickness bags urge the passenger to ‗Get well soon‘. Cookies packaged in pretty pastel pink and blue tins move like hot cakes. Even the tape that separates their (check-in counter or boarding) queues reads ‗no red tape‘. It is, of course, a precise shade of indigo. [22] For the roughly 30,000 passengers it carries daily, the focus on basics, like a fresh clean product and high on-time performance, defines IndiGo. [24] In 2010 and 2011, IndiGo bagged the prestigious Skytrax World Airline Award for being the best low-cost airline of India & Central Asia. [25] [26] Wingspan Airline fleet planning is typically done a decade ahead, but not many start-up carriers have the vision or resources to do it. IndiGo is easily the most meticulous of the domestic airlines in terms of fleet and network planning with aircraft induction plans already in place for the next decade. IndiGo placed its maiden order for 100 Airbus A320 family aircraft during the 2005 Paris Air Show. The total order was worth US$6 billion, one of the highest by any domestic carrier during the show. It took delivery of its first Airbus A320-200 aircraft on 28 July 2006 and received six aircraft during that year. The airline will receive all 100 A320 family aircraft by 2015-2016. [27] IndiGo‘s burgeoning fleet currently totals 42 planes and has flown over 21 million passengers. Over the next four years, 61 more Airbus A320 planes, which were ordered before the airline even began its first flight, will join its fleet. For beyond that (2015-2025), IndiGo has government permission to induct 150 planes.[28] In January this year, IndiGo signed a Memorandum of Understanding for an additional 180 Airbus A320 including 150 A320 New Engine Option (NEO) aircraft worth US$15.6 billion. The planes will be delivered from Toulouse starting 2016 until 2025.[29] IndiGo‘s shopping extravaganza, billed as the largest aircraft purchase of large passenger jets in aviation history, is not an ego trip by Bhatia who has a reputation for being level-headed and focused.

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IndiGo is gearing up to roll out international operations in September 2011. By end 2011, IndiGo will have 15-18% capacity deployed for international routes.[30] It is poised to become a point-to-point operator connecting multiple destinations in South Asia, West Asia, South-East Asia and the Middle East by the time the new batch of 150 enters service. If not for the government rule restricting airlines that are less than five years old from flying overseas, 6E [the IndiGo call-sign], would already be doing it. The airline has also acquired three parking spots in Indira Gandhi International Airport and Chhatrapati Shivaji International Airport. [31] The A320neo, available from 2016, incorporates new more efficient engines and large wing tip devices called Sharklets delivering significant fuel savings of up to 15%, which represents savings of over 400,000 USgal of fuel and up to 3,600 tons of CO2 annually per aircraft. In addition, the A320neo provides a double-digit reduction in NOx emissions and reduced engine noise. [32] ―This order for industry-leading, fuel-efficient aircraft will allow IndiGo to continue to offer low fares,‖ say Rakesh Gangwal and Rahul Bhatia, co-founders of IndiGo.[33] IndiGo Fleet Aircraft Airbus A320-200 Airbus A320 NEO Total In Service On order Passengers 42 — 42 89 150 239 180 180 Notes 5 leased Launch customer

**The A320 Family (A318, A319, A320 and A321) is the world‘s best-selling single-aisle aircraft family. With 99.7% reliability and extended servicing periods, the A320 Family has the lowest operating costs of any single aisle aircraft. The A320neo will have over 95% airframe commonality with the standard A320 Family whilst offering up to 500nm (950 km) more range or two tons more payload.[34]

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A Cyclical Aviation Industry The airline industry has clearly two distinct peak seasons in the year; the summer holiday rush spanning across April, May and June and then the winter festive season in October, November and December. Q3 (July to September) happens to be the leanest season for the industry. During seasonally high periods, the demand has increased by 18% year-to-year, whereas in 2010 capacity saw a modest increase of around 10% thereby pushing up airline yields. [8] In fact, the capacity became constrained during the winter rush and the market witnessed fares of around Rs.40,000 (nearly 250% over regular fares) between high-traffic sectors like Mumbai and Delhi. This came under severe criticism from consumer groups and the Ministry of Civil Aviation. 2010 saw greater discipline in the industry whereby there was cautious capacity addition reflecting conservative decision making by the airlines. The capacity that remained more or less the same throughout the year, witnessed some addition towards the end of the year when resurgence in demand was strongly established. The seasonality of the industry is evident from the load-factor curve in the graph below.

Figure 3: Source: Thomas Cook Report CAPA has pegged overall domestic capacity growth at 12-14% in 2011, with demand outstripping capacity with a projected domestic traffic growth of approx. 18%.[35]

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Emergence of LCCs National carrier Air India has not made a profit since its merger with Indian Airlines in 2007; it has a mind-boggling debt of Rs 47,000 crore, accumulated losses of Rs 20,300 crore, and is desperately dependent on government handouts for survival. Kingfisher Airlines has not made a profit since inception in 2005, has loans in excess of Rs 6,000 crore (after the recent loan restructuring), and accumulated losses of around Rs 5,300 crore. The net worth of both these airlines today has been badly eroded. The other original fullservice carrier, Jet Airways, has made a loss on a consolidated basis in each of the last four years, has debt of around Rs 13,700 crore and accumulated losses of Rs 1,730 crore (as on March 2011). [36] Clearly, not a pretty picture. The skies, though, look somewhat clearer when it comes to the country's lowcost carriers. Low-cost carriers emerged as a clear winner in 2010. The concept, which was implemented in the year 2005 in India, faced a lot of apprehensions in the industry. Critics were of the opinion that the success of the LCC-model industry in the USA was for factors that didn‘t exist in India. But the gushing demand washed away all these apprehensions and the model stood vindicated. All three pure LCCs (IndiGo, SpiceJet and GoAir) witnessed increase in market share, load factors and yields. Kingfisher and Jet Airways were forced to start their own LCC operations in response to their success. Jet Airways added capacity in the low frill segment in the form of JetLite (erstwhile Sahara) and Jet Konnect. Kingfisher too, was part of the rally through its low frill wing-Kingfisher Red. When LCC demand peaked during the economic slowdown, Jet Airways and Kingfisher had almost 75% of their capacity deployed in this model. "LCCs currently are the drivers behind the growth of the aviation industry," says Kapil Kaul, CEO, CAPA India. "This is why even full-service carriers like Jet Airways and Kingfisher have subsidiaries that function as LCCs. This way, more people can be wooed to fly while operational costs are kept relatively low. In the coming five years, most domestic flying sectors, as well as international ones of 4-5-hour duration, will be dominated by LCCs.‖ Today IndiGo's fleet stands at 42 planes. The increased capacity has catapulted IndiGo to the third position with 19.6% market share, behind Jet Airways + JetLite (25.5%) and Kingfisher (19.8%).[37] The LCC segment is expected to grow by 35-40% year on year. [38]

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India’s domestic market share by carrier: June 2011

6.1% 14% 25.5%
Jet Airways+JetLite Kingfisher IndiGo

14.9% 19.8% 19.6%

Air India (dom) Spice Jet GoAir

Figure 4: Directorate General of Civil Aviation (DGCA) Low costs – Myth or reality IndiGo resembles low-cost carriers around the world in most ways: online booking, no free meals, a simple fleet lineup, a focus on short- and mediumrange flights, quick turnaround times in airports. But for one notable difference - its ability to hold down expenses far better than other airlines. Fuel makes up 40% -- higher for low-cost carriers -- of an airline‘s cost in India. It generally forces airlines to raise fares, thereby dampening demand and hitting expansion plans. Oil prices are more or less a constant between US$100120 a barrel. Jet Airways had a fuel bill of Rs 1,279 crore for the March quarter of financial year 2010-11, while Kingfisher also paid Rs 902 crore towards fuel consumption for the same quarter.[39] This is at least 50% higher compared to what international carriers pay in West Asia. Airlines say this anomaly is owing to the higher sales tax on ATF prevalent in India. CAPA‘s report on the outlook for 2011 estimates airlines will lose about US$650-$700 million because of higher prices of crude pricing. Of these, the report estimates $500 million or more will be Air India's losses alone. IndiGo was among the first airlines to have the aircraft taxi to the terminal with one engine, shutting down the second engine to save fuel. Another

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example is of pilots flying at higher speeds (and burning more fuel) to reach Mumbai quickly, only to spend the next half-hour circling the airport. This was curtailed and fuel burn reduced. In fact, the opportunity to reduce costs and to further improve IndiGo‘s environmental performance through the A320neo was key to its purchase decision. The A320neo, available from 2016, incorporates new more efficient engines and large wing tip devices, which together promise 15% fuel burn savings.[40] IndiGo has been freshening its fleet through smart leasing strategies. Sale and lease back is a process where airlines sell aircraft to a leasing firm at a higher value which then leases aircraft back on monthly rentals to the original owner, thereby helping the airline save on capex. Airlines typically sell the aircraft to lessors and, if the market is on the upswing, make a minimum profit of $3-4 million on a plane, since the price would have risen since the order date. To structure the lease and financing structures, IndiGo hired CFO Riyaz Peermohammed, an old Emirates hand who handled treasury and corporate finance at his earlier job. IndiGo has six-year sale and lease back agreements for most of its planes. The lessor takes the planes back after this and the airline can induct a brand new one in its place. Though at a cost, this is effectively like a perpetual elixir of youth. The most important financial implication is that it never has to undertake the ‗D' check, where the aircraft is completely stripped down and airlines often discover the need to spend on major repairs. This check is usually done when the plane is about eight years old. As with the five aircraft returned earlier, some of the 34 A320 aircraft in IndiGo‘s fleet may be returned next year as the airline completes six years. Getting aircraft on short-term lease, which are then replaced by newer aircraft, ensures IndiGo saves on heavy maintenance, retain fuel efficiencies and pay less for insurance. As of July 2011, the average age of IndiGo's fleet was 2.3 years.[41] With the two deals, 241 aircraft will be delivered to IndiGo by Airbus between now and 2025. That‘s more than half the 430 aircraft currently in service with all Indian carriers, including Air India, Jet Airways, Kingfisher Airlines, SpiceJet, IndiGo and GoAir, put together. IndiGo may not keep all the aircraft and may continue to follow its model of taking planes on short-term leases of

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three-six years and returning them to the lessors thereafter. By financial year 2023, they would have bought 241 and returned 120 aircraft to have a fleet size of 123 planes. By doing this, IndiGo will always have a young fleet. Raja Natesan, CEO of online travel agency Yatra.com, thinks Indian LCCs could make large foreign airlines sit up and take notice. Natesan, who was regional manager (South-East Asia) at Kingfisher Airlines in 2008-2009, says full service airlines have not succeeded in competing with LCCs. ―They can never be truly low-cost; they can only be low fare. The LCC philosophy has to be ingrained in the planning and operations of an airline right from the time the aircrafts are bought.‖ [42] Airline costs are measured in terms of CASK or cost per available seat kilometre, designed to give an idea of how much it costs the airline to fly each seat (which may or may not have a passenger in it) for a kilometre. Citibank's airline industry analysts Jamshed Dadabhoy and Arvind Sharma say the capital costs per passenger for full service airlines have jumped several fold over the last few years, while those of LCCs have remained stable or moved up very little. SpiceJet for instance has a CASK of between Rs. 2.30 to Rs. 2.40 while the number for Jet Airways is around Rs. 3.60.[43] For LCCs, costs can be cut everywhere, and they may well be indirect ways. While taking delivery of a new plane, Airbus customers in India, including Air India and Kingfisher, send their pilots, crew and engineers to Toulouse to the plant. But IndiGo prefers to have the planes delivered in Delhi. This comes at a marginally higher cost, the advantage is that two sets of pilots and crew are not out of the system for the 10-15 days required to fetch a plane from Toulouse. IndiGo‘s higher aircraft utilization (over 12 hours per plane everyday) and quicker turnaround time (about 30 minutes) has impressed industry veterans like Saroj Datta, executive director of Jet Airways. Mr Datta opines that the LCC concept became acceptable because of the better service. By comparison, Air India‘s aircraft utilisation is 9 hours. [44] IndiGo‘s airplane usage is likely to go up further when it starts international services. [45] Another visible difference between IndiGo and other carriers including SpiceJet, which operates in the LCC space, is the very low marketing and advertising spend. The airline started a campaign only in 2010, after a spat with SpiceJet on on-time performance claims. IndiGo‘s management team

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firmly believes in word of mouth. IndiGo has no loyalty programs, yet half of those flying are repeat customers. Profitability Built as they are on a low fare-high load factor model, LCCs do not find it too difficult to rapidly grab a chunk of any market. Capt. Gopinath's Air Deccan (India‘s first LCC) opened new stations and grew rapidly, managing to overtake Indian Airlines for a brief period. But Air Deccan's eventual inability to survive proved that a huge network and large number of passengers do not necessarily mean profits. IndiGo is on its way to demolish some myths about the Indian airline industry. The most common of these is that you can't make money in the airline business. High taxes on fuel, absence of cheaper secondary airports and crowded metro airports, make profits difficult, if not downright impossible. Both LCCs (IndiGo and SpiceJet) that made profits in 2009 and 2010 have proved this wrong. For the three largest airlines, Air India, Jet Airways and Kingfisher, that have posted the highest losses, it is not operating costs but the high interest costs arising from the huge debt acquired over the last few years that has proved to be a killer. In August 2009, while the other airlines were bleeding from mile-high debts and declining number of passengers, IndiGo was making money. Its results for 2009-2010, posted with the Directorate General of Civil Aviation (DGCA) and audited by KPMG, showed a pre-tax profit of Rs. 550 crore on a turnover of Rs. 2,664 crore. SpiceJet, a listed LCC, was the only other carrier that ended the year in the black, with a profit of Rs. 61 crore. For comparison, Jet Airways and Kingfisher, the two biggest private airlines, turned up a combined loss of Rs. 2,114 crore in the same period.[46] However, the competition treated IndiGo‘s results with much scepticism. They pointed out that net profit margins are rarely above 4% for the best of airlines around the world. Numbers, they said, can be distorted by one-time incomes such as sale and lease back. IndiGo did two such deals in the period. Undeterred by sceptics, its management has persevered. IndiGo is not a listed company and does not declare its profits publicly. In 2010-11, this unbelievably profitable low-cost carrier reported pre-tax profits of about Rs 600 crores on revenues of Rs. 3,500 crores, as estimated by industry analysts. [47]

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Taking Off Online Across the globe, consumers continue to turn to the web for their travel needs. From trip research, price comparison shopping and booking, consumers are finding the convenience of the web vital to their personal and business travel. Significant upside in the market remains as internet penetration increases in the region, and people who could not afford to travel before can now take cheaper flights. In India, low-cost airlines have generated significant audience growth over the past year as attractive offers and promotions have prompted more consumers – and especially younger travelers – to consider these airlines. IndiGo has become the kind of brand that spawns customer appreciation pages on Facebook, an unlikely acclaim for an Indian airline where service-oriented brands usually get flak for failures, not fans for their flair. [48] IndiGo grew its audience its online traffic to 0.76 million visitors, in 2010-11 to help maintain its lead as the top-visited low-cost airline site in India. [49]

Figure 5: Vizisense Annual Web Tracker Going mobile In India, most air tickets are sold either through online portals or travel agents. While mobile-phone ticketing option is not popular in India (less than 1% of all tickets are booked using phones) the trend is fast catching up. Mobile phones are set to become a significant sales channel for airlines. According to transport communications and IT solution provider SITA's airline IT trends survey released recently, almost nine out of 10 airlines are selling or planning to sell tickets through the mobile phone network by 2014. Besides offering convenience to passengers, mobile booking can allow airlines to control ticket

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distribution costs that can be as high as 10 per cent of all total expenses. In May 2011, low-cost carrier IndiGo upgraded its mobile phone booking solution enabling passengers to check in and get weather updates. Capacity addition India currently has 430 commercial air planes[50]. By comparison, China, with a comparable population, has 2,600 planes.[51] The overall positive direction of the industry in terms of traffic, yields and profitability, supported by strong long term fundamentals is expected to lead to a resumption of fleet orders. India's carriers are estimated to raise US$1.5 billion in equity and order up to 200 new aircraft in 2011/12, with a list price of $11-12 billion. These will include 125-150 narrow-bodied planes, 30-50 smaller planes and 10-15 widebodied planes for long-haul international flights.[52] These acquisitions will be in addition to the massive order placed in January this year for 180 narrowbodied planes by IndiGo that was worth US$15.6 billion at list prices. Kiran Rao, Airbus India president, said that with the IndiGo deal he had clinched 18% of the 1,000 aircraft that India is predicted to buy over the next 20 years. [53] State owned Air India, which has a fleet of 136 planes, has placed orders for 111 new aircraft - 43 from Airbus and 68 from Boeing - worth USD$11 billion.[54] Deloitte Consulting India Pvt Ltd has chalked out a turnaround plan for the airline. As per its turnaround strategy, Air India will look at ways to optimize profit by introducing new routes for the domestic and international market, add capacity on the existing routes, as well as focus on expanding their fleet size. While on the international side, it plans to start direct daily flights to Melbourne and the US, also it will add capacities on its existing international routes such as in far East and in Gulf countries. Air India has plans to launch its low-cost subsidiary, Alliance Air, on domestic routes by October 2011. Particularly in this year, it is focusing on connecting to more domestic routes especially North East Region and Tier II and Tier III cities. Domestic passenger traffic is expected to increase during the year due to improved sentiment and more discretionary money in consumers‘ wallets. As a consequence of continued rising demand (18%) and less-than-proportional increase in capacity (approx.12%), fares are expected to remain firm with sharper seasonal variations. International passenger numbers, which grew by approximately 10% in 2010, are expected to increase this year towards the upper end of a 10-12% range.[55]

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Jet Airways, which earns 60% of its revenues from its international operations, will concentrate on its network of international routes as competition increases in those sectors. Its focus is expected to be on the European region. Overseas expansion by Indian LCCs - IndiGo and SpiceJet - is one of the drivers of the expected acceleration in international traffic and highly competitive fares. IndiGo will add 14 new Airbus A320 aircrafts to its existing fleet in 2011-12. It is going to launch its international operations in August 2011 with a focus on short-haul destinations in West Asia, South Asia and South-East Asia.[56] IndiGo‘s main rival SpiceJet plans to add 13 planes in 2011. Last November, SpiceJet agreed to buy 30 Nextgen turboprop aircraft from Canada‘s Bombardier Inc. for as much as $915 million.[57] Another LCC, GoAir has also placed a fresh order with Airbus for 72 A320neo aircraft at the Paris Air Show in June 2011. [58] In the backdrop of high load factors, the focus of the airlines is going to be on increasing yield. According to analysts, average load factors of about 80% have been achieved by the industry in the recent months and expected to continue. Yields are likely to strengthen by an average of 5-7% over the next 12 months.[59] The market could probably absorb even slightly higher fares, but that Indian carriers are reluctant to test price elasticity due to past experience, a desire not to cede market share and increased regulatory and media scrutiny of fare levels. Scaling Up In its April 2011/12 aviation industry outlook, CAPA India has projected that the country‘s private carriers will post a combined profit of US$350-400 million for the financial year ending 31 March 2012. However, state-owned Air India is expected to remain in the red with losses in the range of US$1-1.25 billion, assuming an average oil price of US$85-95 per barrel. The total debt of Indian carriers is expected to increase from US$15-16 billion in 2010-11 to US$20 billion [60] by end of the financial year, unless serious efforts are made to de-leverage their balance sheets. Approximately half of this debt is aircraft-related, with the balance accounted for by working capital loans and trade creditors such as airport operators and fuel companies. The large three airline groups (Air India, Jet and Kingfisher) in particular need to reduce their net debt and boost liquidity as their cash positions remain low. The LCCs are expected to launch Initial Public Offers in the 2011/12 fiscal. GoAir has already announced plans to raise about Rs. 675 cr (US$150million) to

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fund its operational expenses. [61] It may not be long before a new prospective source of investment is opened up. CAPA believes that there is increasing probability that the proposal to allow foreign airlines to acquire up to 25% equity in Indian carriers will be approved shortly. LCCs that are on an expansion spree are going to differentiate their strategy. IndiGo is eyeing Greenfield airports for expansion. It is looking to increase connections to cities like Patna and Dibrugarh, where prosperity is growing. [62] On the network, IndiGo is sticking to routes with an average stage length of 1 hour 30 minutes. It has daily flights on all its routes, and is the largest operator on a third of these routes. It will continue aligning flight timings to match connections from Mumbai and Delhi. SpiceJet, which has placed orders for 30 new Bombardier aircraft, will be deploying them on non-metro routes. Small towns are going to see greater connectivity as corporate India looks to expand its operations beyond the traditional boundaries. ―India has only 36 runways where a Boeing 737 can land. With Bombardier Q400s, we‘ll be able to land on 97 runways in India,‖ says Neil Mills, CEO, SpiceJet.[63] SpiceJet, which saw a major restructuring in its management, has emerged stronger and at the moment, expansion into south and Tier II and Tier III towns seems to be the priority. Airlines will exploit all cash generating opportunities on all value-added activities. LCCs have started onboard food and in-flight entertainment at specific prices on an optional purchase basis. This will gradually transform the industry into a kind of full service carrier-low cost carrier hybrid model. 201112 is likely to be a year marked by high growth and high cost pressures like airport charges, fuel and ground handling. The real test for IndiGo starts now. Rival LCC SpiceJet, a listed company, has a very similar model and is much better capitalized. The kind of margins that IndiGo has shown will be very tough to sustain. Also, there is little to differentiate between the two Indian LCCs - both operate high density seating and have similar network strategies. The models are very close to that of Southwest airlines in the U.S., which has a single aircraft type and a network that is a combination of two-three city hubs and many focus cities, with lots of flights but little connecting traffic between them and a very simple fare structure.

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Scalability for IndiGo is unlikely to be a problem, says Kiran Rao, Airbus vice president, sales and marketing. The airline has been able to plan its operations to the last detail over the past four years, he says. Days before an aircraft is delivered they are well-planned about where to operate it and usually have begun selling tickets. IndiGo CEO, Aditya Ghosh says efforts had begun in 2010, as IndiGo had hoped the government would allow it to fly overseas before it completed five years. Though the approval didn‘t come, network planning, marketing, training and product definition began in earnest. With flights to Dubai, Singapore and Bangkok, IndiGo is expecting a large percentage of its customers to be first-time fliers and expat Indian labour. Crew training is, therefore, crucial. ―The idea is to anticipate all their needs, so that the passengers feel comfortable while flying with us,‖ says Ghosh. [64] The crew are encouraged to speak in Indian languages and those who raise an eyebrow at first-time fliers are not welcome. The planning is also reflected in the flight timings. IndiGo flights to Singapore and Bangkok coincide with the notoriously strict check-in times of hotels in these two cities. Departures from Dubai are in late evenings, to let people spend the day there. International flights have higher fares and the top-line will grow in this financial year. But, for IndiGo, the major challenge will be finding the right balance between fares and costs. Conclusion Be it web stats, industry awards or sheer sales in a hotly contested marketplace, IndiGo stands out as one of India‘s very few big LCCs earning world recognition, without relying on a political connection, government concession or protected market. Other Asian airlines such as AirAsia have proved that it is possible to grow and keep your margins high. With its fetish for punctuality, new planes and affordable fares, IndiGo has been steadily ascending. Whether IndiGo will continue to deliver on its promise and eventually take top leadership position in India and other Asian markets in the long term, is a matter of conjecture. In the meanwhile, the airline continues to confound its doubters and delight proponents with its dynamic moves. Reference Materials
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4. High hopes for Asia‘s overcrowded budget airlines, Reuters, July 1, 2011, http://www.financialexpress.com/news/high-hopes-for-asias-overcrowded-budgetairlines/811207/0# Can 'no frills' work for longer flights?, Saira Syed, BBC News Singapore, July 27, 2011, http://www.bbc.co.uk/news/business-14287579?print=true New Deloitte Survey Finds Business Travelers Anticipate More Trips in 2011, November 9, 2010, http://www.travelindustrywire.com/article49996.html High hopes for Asia‘s overcrowded budget airlines, Reuters, July 1, 2011, http://www.financialexpress.com/news/high-hopes-for-asias-overcrowded-budgetairlines/811207/0# Flying On A Budget, Brian Mertens, Forbes Magazine, December 20, 2010, 12:00 AM ET, http://www.forbes.com/global/2010/1220/features-airasia-tony-fernandes-flying-on-budget.html Competition takes off in Asia's budget-airline market, Eric Bellman, Wall Street Journal, July 22, 2011, http://online.wsj.com/article/SB10001424052702304567604576453651762471330.html#printMode Indian carriers capacity increase in 2011 to be muted: Thomas Cook report, April 16, 2011, 16:00 Hrs [IST], http://www.travelbizmonitor.com/PrintArticle.aspx?aid=13153&sid=0 Indian high flier‘s mega deal, Forbes India, January 13, 2011 - 5:34 am | Naazneen Karmali, http://blogs.forbes.com/naazneenkarmali/2011/01/13/indian-high-flier/Indian high flier‘s mega deal IndiGo, the little airline that plans to Go far, April 21, 2011, http://www.centreforaviation.com/news/2011/04/21/indigo---the-little-airline-that-plans-to-gofar/page1, http://www.airlineleader.com/CustomContentRetrieve.aspx?ID=1241112&A=SearchResult&SearchID= 109938&ObjectID=1241112&ObjectType=35 CAPA: Combined profit of $350-400mn for Indian carriers this fiscal, April 7, 2011, http://www.domain-b.com/aero/aero_general/20110407_indian_carriers_oneView.html Airports Authority pressured to change stand on tariffs, Times News Network, New Delhi, March 31, 2010, http://timesofindia.indiatimes.com/business/india-business/AAI-pressured-to-change-standon-tariffs/iplarticleshow/5744910.cms Navi Mumbai international airport clears final hurdle, Mumbai Mirror, May 17, 2011, http://www.mumbaimirror.com/article/2/201105172011051703053832270d99fa4/Navi-Mumbaiinternational-airport-clears-final-hurdle.html Special terminal for low-cost airlines at IGI, Saurabh Sinha, Times News Network, May 24, 2011, 06.34am IST, http://articles.timesofindia.indiatimes.com/2011-05-24/delhi/29577547_1_1d-1cterminal-for-low-cost-airlines-london-s-stanstead The man behind IndiGo's amazing success, February 8, 2011 06:44 IST, http://www.rediff.com/business/slide-show/slide-show-1-the-man-behind-indigos-amazingsuccess/20110208.htm IndiGo's Rahul Bhatia on his secret recipe for success, April 29, 2011 at 14:22, CNBC-TV18, http://www.moneycontrol.com/news/business/indigos-rahul-bhatiahis-secret-recipe-forsuccess_537804.html IndiGo plans to hire 1,500 people in 2011, March 2, 2011, 5:21 PM IST PTI-Mint, New Delhi, http://www.livemint.com/2011/03/02171857/IndiGo-plans-to-hire-1500-peo.html IndiGo to add 14 new aircrafts in 2011-12, PTI, Wed, March 30, 2011. 7:06 PM IST, http://www.livemint.com/2011/03/30190615/IndiGo-to-add-14-new-aircrafts.html Dubai: Destination Mangalore for IndiGo Airlines Soon, Daijiworld Media Network, Dubai, July 26, 2011, http://www.daijiworld.com/news/news_disp.asp?n_id=109629 IndiGo website, IndiGo ups the cool factor on Indian television with its brand new commercial - India, May 14, 2010, http://book.goindigo.in/skylights/cgi-bin/skylights.cgi?module=c3&page=PRESS2010 The IndiGo brand story. How IndiGo airlines' brand strategy makes budget travel in India better, if not the best, Aditi Saxton, CNNGo, February 17, 2011, http://www.cnngo.com/mumbai/life/brandstory-behind-indigo-044435

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24. How Rahul Bhatia Found IndiGo Gold, Cuckoo Paul, Forbes India, November 3, 2010, 6:00 PM ET, http://www.forbes.com/2010/11/03/forbes-india-how-rahul-bhatia-found-indigo-gold.html 25. IndiGo Best Low-Cost Airline India & Central Asia at 2010 World Airline Awards, http://www.worldairlineawards.com/Awards-2010/lowcostindiacasia.htm 26. IndiGo signs $16-bn deal for A320neo, A320 planes, BS Reporter / Mumbai June 23, 2011, 0:39 IST, http://www.business-standard.com/india/news/indigo-signs-16-bn-deal-for-a320neo-a320planes/440154/ 27. Airbus website, IndiGo celebrates delivery of first Airbus A320, July 28, 2006, http://www.airbus.com/newsevents/news-events-single/detail/indigo-celebrates-delivery-of-firstairbus-a320/ 28. How Rahul Bhatia Found IndiGo Gold, Cuckoo Paul, Forbes India, November 3, 2010, 6:00 PM ET, http://www.forbes.com/2010/11/03/forbes-india-how-rahul-bhatia-found-indigo-gold.html 29. IndiGo website, IndiGo commits to 180 A320s, largest jet order in aviation history - Toulouse, France, January 11, 2011, http://book.goindigo.in/skylights/cgi-bin/skylights.cgi?module=c3&page=PRESS 30. IndiGo will kickstart international ops with Delhi-Dubai flight, Samir Hashmi, ET Now Jun 30, 2011, 06.43am IST, http://articles.economictimes.indiatimes.com/2011-06-30/news/29721937_1_demandsupply-thing-indigo-president-aditya-ghosh-international-routes 31. IndiGo acquires parking bays in Delhi, Mumbai airports, Ashwini Phadnis, Hindu Business Line, New Delhi, June 20, 2005, http://www.thehindubusinessline.in/2005/06/20/stories/2005062001800300.htm 32. How Rahul Bhatia Found IndiGo Gold, Cuckoo Paul, Forbes India, November 3, 2010, 6:00 PM ET, http://www.forbes.com/2010/11/03/forbes-india-how-rahul-bhatia-found-indigo-gold.html 33. IndiGo: first India, then the world, Akanksha Awal, Financial Times, beyondbrics, January 12, 2011 6:58 pm, http://blogs.ft.com/beyond-brics/2011/01/12/indigo-first-india-then-the-world/ 34. Airbus website, IndiGo commits to 180 A320s, largest jet order in aviation history, http://www.airbus.com/presscentre/pressreleases/press-release-detail/detail/indigo-commits-to180-a320s-largest-jet-order-in-aviation-history/press-releases/ 35. CAPA: Combined profit of $350-400mn for Indian carriers this fiscal, April 7, 2011, http://www.domain-b.com/aero/aero_general/20110407_indian_carriers_oneView.html 36. Airlines flying into headwinds, Anand Kalyanaraman, Hindu Business Line, July 23, 2011, http://www.thehindubusinessline.com/features/investment-world/article2288018.ece 37. Domestic airline traffic rose 18% in June: DGCA, Tarun Shukla, Mint, July 20, 2011, http://www.livemint.com/articles/2011/07/19220323/Domestic-airline-traffic-rose.html?atype=tp 38. SIA‘s proposed LCC may further fragment Indian market, Anish V. Punnackattu & Imran Khan, TravelBiz Monitor, Mumbai, June 1, 2011, http://www.travelbizmonitor.com/PrintArticle.aspx?aid=13574&sid=0 39. Carriers leave fares unchanged despite 3% slide in ATF prices, Financial Express, Mumbai, May 17, 2011, http://www.financialexpress.com/news/Carriers-leave-fares-unchanged-despite-3-slide-inATF-prices/791660/ 40. Indigo likely to pay over $900 m as premium for 150 Airbus NEO aircraft, Ashwini Phadnis, Hindu Business Line, Delhi, May 29, 2011, http://www.thehindubusinessline.com/industry-andeconomy/logistics/article2059734.ece?css=print 41. IndiGo - Details and Fleet History, http://www.planespotters.net/Airline/IndiGo 42. Will IndiGo Have A Happy Flight Abroad? Beware AirAsia. Beware Air Arabia. India‘s most successful budget airline is coming your way, Cuckoo Paul, Forbes India, July 21, 2011, http://business.in.com/article/big-bet/will-indigo-have-a-happy-flight-abroad/26942/1 43. How Rahul Bhatia Found IndiGo Gold, Cuckoo Paul, Forbes India, November 3, 2010, 6:00 PM ET, http://www.forbes.com/2010/11/03/forbes-india-how-rahul-bhatia-found-indigo-gold.html 44. How Rahul Bhatia Found IndiGo Gold, Cuckoo Paul, Forbes India, November 3, 2010, 6:00 PM ET, http://www.forbes.com/2010/11/03/forbes-india-how-rahul-bhatia-found-indigo-gold.html 45. Govt wants AI to raise fleet utilization, Mihir Mishra, Business Standard, Delhi, May 18, 2011, http://www.business-standard.com/india/news/govt-wants-ai-to-raise-fleet-utilisation/435953/

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46. How Rahul Bhatia Found IndiGo Gold, Cuckoo Paul, Forbes India, November 3, 2010, 6:00 PM ET, http://www.forbes.com/2010/11/03/forbes-india-how-rahul-bhatia-found-indigo-gold.html 47. Will IndiGo Have A Happy Flight Abroad? Beware AirAsia. Beware Air Arabia. India‘s most successful budget airline is coming your way, Cuckoo Paul, Forbes India, July 21, 2011, http://business.in.com/article/big-bet/will-indigo-have-a-happy-flight-abroad/26942/1 48. The IndiGo brand story. How IndiGo airlines' brand strategy makes budget travel in India better, if not the best, Aditi Saxton, CNNGo, February 17, 2011, http://www.cnngo.com/mumbai/life/brandstory-behind-indigo-044435 49. Indians are spinning the web big time, Amit Bhartiya, Financial Express, July 12, 2011, http://www.financialexpress.com/news/Indians-are-spinning-the-web-big-time/816318/ 50. Indian air-passenger traffic to grow by 18% per annum: Experts, Press Trust Of India, New Delhi, July 17, 2011, http://www.hindustantimes.com/Indian-air-passenger-traffic-to-grow-by-18-per-annumExperts/Article1-722159.aspx 51. IndiGo mulls IPO, other options to fund $16 bn Airbus order, Tarun Shukla, Mint, New Delhi, January 12, 2011, http://www.livemint.com/2011/01/12123621/IndiGo-mulls-IPO-other-option.html 52. CAPA India expects private Indian carriers to report USD350-400 million profit, April 8, 2011, http://www.centreforaviation.com/news/2011/04/08/capa-india-expects-private-indian-carriers-toreport-usd350-400-million-profit/page1 53. IndiGo‘s late new year celebrations, Tarun Shukla, Mint, New Delhi, January 13, 2011, http://www.livemint.com/2011/01/12084817/IndiGo8217s-late-new-year-c.html 54. Turbulence at Air India as strike threatens future, Salil Panchal, AFP, May 4, 2011, http://search.theredirector.eu/hostednews/afp/article/ALeqM5iYjKqq_5o3iklC4_DUqwWtNxxQTw?do cId=CNG.55f0da6b0832923a420f0af08b851e4c.341 55. CAPA India expects private Indian carriers to report USD350-400 million profit, April 8, 2011, http://www.centreforaviation.com/news/2011/04/08/capa-india-expects-private-indian-carriers-toreport-usd350-400-million-profit/page1 56. IndiGo to add 14 new aircrafts in 2011-12, Mint, New Delhi, March 30, 2011. 7:06 PM IST, http://www.livemint.com/2011/03/30190615/IndiGo-to-add-14-new-aircrafts.html 57. SpiceJet FY net soars 65%, Hindu Business Line, Chennai, May 28, 2011, http://www.thehindubusinessline.com/todays-paper/tp-economy/article2055300.ece 58. GoAir may place order at Paris Air Show, Tarun Shukla, Mint, New Delhi, May 30, 2011, http://www.livemint.com/2011/05/29214104/GoAir-may-place-order-at-Paris.html?atype=tp 59. CAPA India expects private Indian carriers to report USD350-400 million profit, April 8, 2011, http://www.centreforaviation.com/news/2011/04/08/capa-india-expects-private-indian-carriers-toreport-usd350-400-million-profit/page1 60. CAPA India expects private Indian carriers to report USD350-400 million profit, April 8, 2011, http://www.centreforaviation.com/news/2011/04/08/capa-india-expects-private-indian-carriers-toreport-usd350-400-million-profit/page1 61. CAPA India expects private Indian carriers to report USD350-400 million profit, April 8, 2011, http://www.centreforaviation.com/news/2011/04/08/capa-india-expects-private-indian-carriers-toreport-usd350-400-million-profit/page1 62. How Rahul Bhatia Found IndiGo Gold, Cuckoo Paul, Forbes India, November 3, 2010, 6:00 PM ET, http://www.forbes.com/2010/11/03/forbes-india-how-rahul-bhatia-found-indigo-gold.html 63. Govt‘s plans to upgrade Indian airports hit an air pocket, P.R. Sanjai, Mint, July 6, 2011, http://www.livemint.com/2011/07/06003207/Govt8217s-plans-to-upgrade.html 64. Will IndiGo Have A Happy Flight Abroad? Beware AirAsia. Beware Air Arabia. India‘s most successful budget airline is coming your way, Cuckoo Paul, Forbes India, July 21, 2011, http://business.in.com/article/big-bet/will-indigo-have-a-happy-flight-abroad/26942/1

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Case Study on IndiGo Airlines by Kavita Lakhani, APSM04, IIM-C, July 2011

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