INDIGO AIRLINES: GROWTH STRATEGY ANALYSIS

Introduction

1. Indian airline industry is growing at a phenomenal growth rate of 18 to

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

2. On the expenses side top three inputs in this segment are Aircraft
ownership cost, fuel and highly specialized manpower. With the lucky drop
in ATF prices internationally most operators have come out of the red in
recent months and are entering into fuel hedging contracts to extend their
competitive advantage. Cheap manpower though available in plenty, but a
general deficiency in highly specialized areas exists. Even today there are
large number of expat pilots and foreign senior management specialists
employed by Domestic Airlines companies.
3. Major competitors in this space are Jet Airways, Air India, Spice Jet,
Go Air, and few others with minimal market share. As world over airline
business is one with intense rivalry and competition, Indian scenario has
also witnessed intense price and differentiation competition. Jet Airways
and Air India are Full service carriers and operate in a different sub-
segment of this market i.e. full service operators. Nearest rivals are Spice
Jet and Go Air which are Low cost operators and operate in the same
space as Indigo as depicted in the Strategy Map. Nature of competition
among LCC is based on operational excellence and innovative cost cutting.

4. Indigo Airlines, is the largest domestic Low-cost Airline in India, with

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

Strategic Growth Analysis

5. Considering very positive outlook for general aviation demand in

India, Growth for airlines in India is an obvious choice. There are various
growth options available for airline companies operating in India. They are:
 a) Growth by scaling.
b) Growth by entry.
c) Growth by acquisition,and
d) Growth by Innovation

5.1 Growth by scaling. This is a pure organic method of growth and

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

Scenario planning. Two major uncertainties in the domestic carrier

segment are entry of multinational more efficient low cost carrier, and the
other being rise in ATF prices.

As the company is planning for growth by scaling and has to make

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

Compe
tition Scenario A Scenario B
from
foreign Scenario C Scenario D
player

Low high

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

Scenario B. is characterized by high competition and high ATF prices. This

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

Scenario C is characterized by low fuel prices and no international carrier

entry into India. This is a win- win situation for IndiGo Airlines. The
company is already a market leader in domestic operation and poised for a
major capacity increase from 2016-17 onwards.ATF prices remaining low
would be a very desirable scenario for other operators as well, but would
be specially suitable for the company as IndiGo will be able to notch up
operations at a reasonably less cost.

Scenario D is a scenario where ATF prices are high but threat of an

international player in India is minimal. This scenario will not be a threat to
the company but will reduce its profitability to some extent. As the ATF
prices will be high it will eat up into the profitability of all the players. As
IndiGo’s cost of operations is the cheapest, it will be able to sustain its
operation without having to worry for increasing the ticket price and losing
customers. In any case it has been observed that in the past whenever
there has been ATF price hike all the operators have gone in for price hike
without any fuss. In this scenario also IndiGo also appears resilient and
may follow other operators and defend its margins.

5.2 Growth by entry strategy. In the case of airline companies growth

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

5.3 Growth by Acquisition. Presently in Indian domestic aviation sector

there are no companies waiting to be acquired, so growth by acquisition is
not a visible option. Even if, in coming years some other smaller low cost
operator files for bankruptcy Indigo should not strategize for acquisition.
Considering most aircrafts on their inventory are short lease method, and
permits from regulator (DGCA) available freely, there appears no significant
value proposition in acquiring these companies.
 Though acquisition of other low cost operators is not economically
lucrative, other out of the box acquisitions or alliances might add strategic
value to the company. It is proposed that Indigo should carry out detailed
evaluation of acquiring or having an alliance with a Flight Training School
and a cabin crew training establishment. Qualified personals from its partly
owned training establishments can be retained for internship and On Job
Training at a very advantageous remuneration. It will further reduce the
cost of achieving growth by scale.

5.4 Growth by Innovation. Airline passenger segment being a service

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

6. Synthesis

IndiGo airline is following a meticulous and calibrated growth strategy,

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

IndiGo is expected to take deliveries of Airbus neo aircraft beginning

2016 (till 2020).this belongs to the total order of 250 aircraft ordered by
IndiGo. As presently the order book for Airbus is closed for fresh orders,
(the best choice for LCC world over), the competitors of IndiGo will be in a
disadvantageous position. With such a rapid increase in capacity, the
airline may give tough competition to other LCC operators from next
calendar year onwards. These aircrafts are highly fuel efficient and may
result in 10 to 15 % savings in fuel cost. Demand forecasts for domestic
travel are expected to grow exponentially for at least a decade. IndiGo is
placed in a very enviable position to reap the benefits of adopting and
implementing a classical organic Growth by Scaling approach, in the face
of positive demand forecast.

7. REFERENCES

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

2. DGCA Website.

3. CAPA- centreforaviation.com
Subject: Performance of domestic airlines for the year 2016.

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

Passenger Growth

Passengers carried by domestic airlines during Jan 2016 were 76.55 lakhs as
against 62.45 lakhs during the corresponding period of previous year thereby
registering a growth of 22.58% (Ref Table 1).
100.00 Growth: YoY = + 22.58 %
MoM = + 22.58%
80.00 76.55 76.55
Pax Carried (in Lakhs)

62.45 62.45
60.00
2015
40.00 2016

20.00

0.00
YoY MoM

Passenger Load Factor

The passenger load factors of various scheduled domestic airlines in Jan 2016
are as follows (Ref Table 2):
Jan-16 Dec-15

100.0
92.1
92.1

88.5

87.1
86.7

86.5
84.9

84.7

84.0

83.8
83.8

83.4
83.0

82.7

82.7
82.5

82.5

82.2
81.9
81.7

77.6

80.0
74.8
Pax Load Factor (%)

60.0

40.0

20.0

0.0
Air India Jet JetLite Spicejet Go Air IndiGo Air Costa Air Asia Vistara Air Trujet
Airways Pegasus

1
 The passenger load factor in the month of January 2016 has slightly decreased
compared to previous month primarily due to the end of tourist season.

Cancellations

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

Air Costa 11.46

Air Pegasus 10.83
Air India (Dom) 1.91
Trujet 1.22
IndiGo 0.97
Vistara 0.59
Go Air 0.55
Jet Airways 0.52
Spicejet 0.51
Air Asia 0.50
JetLite 0.23

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00

Cancellation Rate (%)

Various reasons of cancellations are indicated below:

Technical 13.6%

Operational 4.0%

Conse/Misc
47.9%

Weather 32.9%

Commercial 1.6%

2
Passenger Complaints during the month

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

Air India (Dom) 2.8

Jet Airways + JetLite 1.3
Go Air 1.0
Air Costa 1.0
Air Asia 0.9
Air Pegasus 0.8
Spicejet 0.5
IndiGo 0.5
Trujet 0.3
Vistara 0.3

0.0 0.5 1.0 1.5 2.0 2.5 3.0

No. of Complaints/10,000 Pax

Various reasons of passenger complaints are indicated below:

Others Fare
Catering 5.2% 0.9% Refund
0.1% 6.2%
Staff Behaviour
6.0%
Disability
0.1%

Customer Flight Problem

Service 30.5%
28.7%

Baggage
22.4%

3
 The reason for complaint as percentage compared to the previous month is as
follows:

35.0

30.5

28.7
30.0

28.7
28.2
28.0

27.1
25.0

22.4
20.9

19.4
20.0

17.0
15.0

10.0

8.3
7.7
6.2

6.0

5.2
4.6
5.0
4.3
3.5
0.9
0.7
0.7

0.5
0.2
0.1

0.1
0.1

0.1
0.0
Fare Refund Flight Baggage Customer Disability Staff Catering Others
Problem Service Behaviour

Nov-15 Dec-15 Jan-16

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

Compliance of Route Dispersal Guidelines

During the month of Jan 2016, all the scheduled domestic airlines complied with
the mandatory capacity deployment requirements contained in the Route Dispersal
Guidelines. Airline-wise details are given in the following Table:
ASKM Deployment (%) of Category I
Airline
Cat III Cat IIA Cat II
Air India + Alliance Air 103.4 1.50 20.5
Jet Airways + JetLite 68.2 1.07 11.0
Spicejet 107.8 1.01 23.9
Go Air 158.8 1.16 49.2
IndiGo 123.0 1.32 21.8
Vistara 62.9 1.08 10.5
Air Asia 485.1 8.13 42.8
Minimum Capacity Requirement in accordance with RDG (As % of Capacity Deployed
in Category I)
 Category II - 10%
 Category IIA - 1%
 Category III - 50%

4
On-Time Performance (Scheduled Domestic Airlines)

On-Time Performance (OTP) of scheduled domestic airlines has been computed

for four metro airports viz. Bangalore, Delhi, Hyderabad and Mumbai. Airline-wise OTP
at four metro airports for the month of January 2016 is as follows:

OTP at Four Metro Airports

Vistara 86.6

Jet Airways+JetLite 75.4

IndiGo 75.0

Spicejet 74.7

Go Air* 69.5

Air India (Dom) 65.0

Air Asia* 56.0

0.0 20.0 40.0 60.0 80.0 100.0

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

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

Route Dispersal Guidelines is as follows:

Air India (Domestic)

HYD 80.7

BLR 77.2

DEL 61.5

BOM 61.3

0.0 20.0 40.0 60.0 80.0 100.0

OTP (%)

5
 Jet Airways + JetLite

BLR 81.0

HYD 78.8

BOM 75.0

DEL 71.5

0.0 20.0 40.0 60.0 80.0 100.0

OTP (%)

Spicejet

HYD 86.8

BOM 71.0

BLR 71.0

DEL 69.6

0.0 20.0 40.0 60.0 80.0 100.0

OTP (%)

6
 Go Air

HYD

BLR 79.3

DEL 72.0

BOM 64.6

0.0 20.0 40.0 60.0 80.0 100.0

OTP (%)

IndiGo

BLR 79.2

DEL 78.2

HYD 77.9

BOM 66.4

0.0 20.0 40.0 60.0 80.0 100.0

OTP (%)

7
 Vistara

HYD 91.2

DEL 89.6

BLR 87.1

BOM 79.5

0.0 20.0 40.0 60.0 80.0 100.0

OTP (%)

Reasons for delay have been analysed, which are presented below. It has been
found that majority of delays have been attributed to ‘Reactionary’.

Airport 5%

Wx 10%

ATC 9% Misc 2%

Pax 2%

Ramp 1%
Reactionary 65% Tech 2%
Ops 4%

8
Compliance of CAR Section 3, Series M, Part IV

In accordance with the Civil Aviation Requirement Section 3, Series M, Part IV,
airline are required to submit data on number of cases of denied boarding, cancellations
and delays along with the status on a monthly basis.

Airline Denied Boarding Cancellations Delays Beyond 2 Hrs

No. of Status of No. of Status of No. of Status of
Pax Facilities & Pax Facilities & Pax Facilities
Affected Compensation Affected Compensation Affected
 Refund
 Refunds
 Rebooked on
 Rescheduling  Refreshments
other flights
 Hotel  Refunds where
 Hotel 83265
accommoda- pax desired
Air India 431 accommoda- 6168
tion  Rescheduling
tion
 Compensation  Compensation of
 Compensation
of Rs. 31.49 Rs. 103.3 lakhs
of Rs. 22.42
lakhs
lakhs
 Refund
 Refunds
 Rebooked on
 Rescheduling
other flights
Jet  Hotel  Refreshments
 Hotel
Airways 1526 accommoda- 4880  Refunds where
660 accommoda-
and tion pax desired
tion
JetLite  Compensation  Rescheduling
 Compensation
of Rs. 0.53
of Rs. 16.83
lakhs
lakhs
 Refreshments  Refreshments
945  Rescheduling 3785  Transfer to other
Spicejet Nil Nil  Compensation airlines
of Rs. 0.35  Compensation of
lakhs Rs. 3.34 lakhs
 All pax given
refreshments
41  Refreshments 2369
Go Air Nil Nil  Refunds where
 Rescheduling
pax desired
 Rescheduling
11782
IndiGo Nil Nil Nil Nil  Refreshments
 Refreshments  Refreshments
1808  Rescheduling 369  Rescheduling
Air Costa Nil Nil
 Compensation  Compensation of
of Rs. 5.0 lakhs Rs. 0.72 lakhs
 Refund  Refund
 Refreshments
 Compensation  Compensation 6158
Air Asia 2 156  Compensation of
of Rs. 0.13 of Rs. 0.03
Rs. 6.73 lakhs
lakhs lakhs
 Refund  Refund
 Compensation  Compensation  Refreshments
Vistara 9 560 3085
of Rs. 0.71 of Rs. 3.18  Rescheduling
lakhs lakhs
Air 24 371  Refreshments
Nil Nil  Rescheduling
Pegasus  Rescheduling
 Refreshments  Refreshments
Trujet Nil Nil 19 27
 Rescheduling  Rescheduling

9
 SUMMARY

Denied Boarding Cancellations Delays

No. of Pax Facilities & No. of Pax Facilities & No. of Pax Facilities
Affected Compensation Affected Compensation Affected
Rs. 114.09
Rs. 40.58 lakhs
Rs. 40.09 lakhs lakhs towards
1102 11247 compensation 116091
compensation compensation
and facilities
and facilities

10
 Table 1

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

Percentage Share
Air India Private Total
Month & Year Private
(Domestic) Carriers Domestic Air India
Carriers
Jan 12.23 64.32 76.55 84.0 16.0
Feb
Mar
Ist Quarter 12.23 64.32 76.55 84.0 16.0
Apr
May
Jun
IInd Quarter
Jul
Aug
Sep
IIIrd Quarter
Oct
Nov
Dec
IVth Quarter
Total 12.23 64.32 76.55 84.0 16.0

Percentage Share
Air India Private Total
Data of 2014 Private
(Domestic) Carriers Domestic Air India
Carriers
I Qtr 11.65 50.80 62.45 81.3 18.7
st

II Qtr
nd

III Qtr
rd

IV Qtr
th

Total 11.65 50.80 62.45 81.3 18.7

Growth (%) = +4.98 +26.61 +22.58
 Table 2

MONTH-WISE SEAT FACTOR OF SCHEDULED OPERATORS IN 2016

(PASSENGER LOAD FACTOR IN PERCENTAGE)

Month Air India Jet JetLite Spice Go Air IndiGo Air Air Asia Vistara Air Trujet
(Dom) Airways Jet Costa Pegasus
Jan 81.7 82.5 82.5 92.1 84.9 84.7 84.0 81.9 74.8 83.8 83.4
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec

12
 Table 3

MARKET SHARE OF SCHEDULES DOMESTIC AIRLINES (YEAR 2016)

Passengers Carried (in Lakhs) Market Share (%)

Month Private Air Carriers
& Year Air
Jet Jet Spice Go Air Air Air Trujet Total Air Jet Jet Spice Go Air Air Air Trujet
India IndiGo Vistara IndiGo Vistara
Airways Lite Jet Air Costa Asia Pegasus India Airways Lite Jet Air Costa Asia Pegasus
Jan 12.23 14.32 2.06 10.11 6.20 27.26 0.59 1.75 1.50 0.24 0.29 76.55 16.0 18.7 2.7 13.2 8.1 35.6 0.8 2.3 2.0 0.3 0.4
Feb
Mar
stQtr 12.23 14.32 2.06 10.11 6.20 27.26 0.59 1.75 1.50 0.24 0.29 76.55 16.0 18.7 2.7 13.2 8.1 35.6 0.8 2.3 2.0 0.3 0.4
Apr
May
Jun
ndQtr
Jul
Aug
Sep
IrdQtr
Oct
Nov
Dec
VthQtr
TOTAL 12.23 14.32 2.06 10.11 6.20 27.26 0.59 1.75 1.50 0.24 0.29 76.55 16.0 18.7 2.7 13.2 8.1 35.6 0.8 2.3 2.0 0.3 0.4
 Table 4

Complaints Redressal Status

Airline Per 10,000

Total Passengers Closed Open
Carried

Air Costa 6 1.0 6 -

Air Asia 16 0.9 16 -

Vistara 4 0.3 4 -

Go Air 61 1.0 61 -

IndiGo 126 0.5 125 1

Spicejet 50 0.5 50 -

Jet Airways + JetLite 216 1.3 216 -

Air India (Dom) 341 2.8 203 138

Air Pegasus 2 0.8 2 -

Trujet 1 0.3 1 -

Total 823 1.1 684 139

14