Analysis of Operations of Indigo Airlines

Table of Contents

Introduction ................................................................................................................................ 1

Industry overview ...................................................................................................................... 1

Company overview .................................................................................................................... 2

Breakup of Costs ........................................................................................................................ 4

Breakup of Revenue ................................................................................................................... 5

Location Strategy ....................................................................................................................... 6

Overview of Key Operating Parameters .................................................................................... 9

Fuel Inventory ............................................................................................................................ 9

Training .................................................................................................................................... 10

Spares and Maintenance .......................................................................................................... 10

Fleet Management .................................................................................................................... 11

Sales and Lease Back Model ................................................................................................... 11

Flight Time............................................................................................................................... 12

Single Class .............................................................................................................................. 12

No Frills Service ...................................................................................................................... 12

Baggage Management .............................................................................................................. 13

Digitisation ............................................................................................................................... 14

Conclusion ............................................................................................................................... 15
Introduction

Indian economy has registered itself as one of the fastest growing economies in the whole

world, growing at a rate of 7.7% during FY17 and at 8.2% during the first quarter of FY18.

Structural facilitations brought in by the government (that includes GST, digitisation, etc.),

fiscal stimulation, strong policy formations and strong consumption appetite have led to such

impressive growth. With globalisation at the centre of India’s trade, connectivity has become

a crucial influencing factor for further growth. This has been the reason for the pivotal role

played by airlines industry in India, since the de-regularisation of it in 1994, which was also

boosted by participation of private companies in infrastructure development for air traffic.

Industry overview

Indian domestic airline industry is currently the third largest and the fastest growing industry

in the world, only behind USA and China. Also it sits at the fourth position for total aviation

market, along with UK. The potential that lies ahead is enormous – the domestic market’s

ability to multiply by almost 6 times in the next 20 years compared to 1.5 times for USA and

nearly 4 times for China. The market is highly under-penetrated for a population of nearly 1.3

billion people – around 636 commercial aircrafts. Comparatively, USA has around 7179

aircrafts for its population of 0.33 billion. This clearly illustrates the gap that India needs to

cover to become a huge force in commercial air space.

Current Standing of Indian Aviation Industry:

Number of flyers, FY17: 264.97 million

Number of flyers by FY36: 430 million

Freight traffic, 2017: 2.98 million tonnes

Freight Traffic by FY23: 4.14 million tonnes

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Expected investment in next 5 years: US$ 15.52 Billion

Exhibit 1: Passenger traffic in India, Association of Private Airport Operator, Airports Authority of India .

Company overview

The major players in the Indian market are as follows

Airline Market Shares

Indigo 39.4%

Jet Airways 15.2%

Air India 13.6%

SpiceJet 12.6%

GoAir 8.9%

Jetlite 2.3%

Source: Directorate General of Civil Aviation

The cyclical downturn in the aviation market has affected all the players, with all except

Indigo reporting continuous losses. The rise in global crude oil price, rising global trade

tensions, inflation prevailing in the Indian market, rising competition due to Chinese products

have all affected aviation sector in one way or another. Amidst all these, Indigo has been

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gaining market share continuously ever since its inception in 2006 and is also showing profits

continuously for the past 10 consecutive financial years. The reason for this can be strongly

attributed to the efficiency in supply chain management of the said airline. This has been the

reason for choosing Indigo as the company for analysing its operations.

Indigo established itself as the leading low cost carrier (LLC). All of its operational strategies

have been focused to reduce cost and at the same time provide customers with the (possible)

best in-class service. Some of the important parameters of Indigo’s, or for any airlines for the

matter, are given below.

1) Hub and spoke Vs Point to Point model

2) Location decisions

3) Pricing strategy

4) Seat inventory

5) Asset maintenance strategy – Leasing (Light) Vs Buying (Heavy)

6) Technology upgradation

7) Fuel inventory

8) On-board 6E sales

9) Marketing and promotion strategies

10) F&B expenditure control

11) Minimizing wastage of time in circling

12) Check-in (Queuing) strategy

13) Other Value added services

Some of the above stated strategies are of more importance than the rest. The majority of the

focus will be on the same. Rest of the parameters will be discussed on need basis. Due to this

being airlines industry, primary data collection wasn’t feasible as this required clearance from

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higher management, which wasn’t attainable. So secondary data and research reports have

been used to analyse the operations of Indigo and the same for comparison with other

airlines.

Breakup of Costs

Cost

Fuel Maintenance Leasing Cost Training

No. of Aircrafts Fuel per

No. of Aircrafts No. of Aircrafts
Departure

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 Indigo Expense 2017-18
(in milions)

29% ATF
42% Aircraft ownership
Employee benefits

12% Other

17%

Source: Indigo Annual Report, 2017-18

Breakup of Revenue

Revenue

Cargo On- Food and

Passenger Board Beverages
6E sales
No. of Avg.
Pax Ticket
Price No. of Average F&B
Passengers Spend

No. of No. of Average

Aircrafts Departures Tonnage per
departure

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Location Strategy

Indigo’s locations being served are mentioned below.

India

Port Blair Rajahmundry Tirupati

Vijawayda Vishakapatnam Dibrugarh

Guwahati Jorhat Patna

Chandigarh Raipur Delhi

Goa Ahmedabad Surat

Vadodara Jammu Srinagar

Ranchi Bengaluru Hubli

Mangaluru Kozhi Kozhikode

Thiruvananthapuram Indore Mumbai

Nagpur Pune Imphal

Dimapur Bhubaneshwar Amristar

Jaipur Udaipur Chennai

Coimbatore Madurai Trichy

Tuticorin Hyderabad Agartala

Dehradun Lucknow Gorakhpur

Varnasi Siliguri Kolkata

International

Dhaka Sharjah Hong Kong

Kuwait city Kuala Lampur Male

Kathmandu Muscat Doha

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 Singapore Colombo Bangkok

Phuket Abu Dhabi Dubai

Indigo follows the hub and spoke model that tremendously reduces the cost of operations.

The central hub for Indigo airline is Indira Gandhi International Airport, Delhi. Maximum

number of flights pass through this airport to other airports. For eg: If a passenger wants to

travel from Coimbatore to Amristar, there are no direct flights. This particular route has very

less air traffic. So the flight will take the passenger from Coimbatore to Delhi and then to

Amristar. This way three passenger segment could be served

1) From Coimbatore to Delhi

2) From Coimbatore to Amristar

3) From Delhi to Amristar

But to connect cities that have lesser traffic, just one hub is not enough. And so Indigo

created few more airports as focus cities. They are listed below.

1) Vishakapatnam

2) Ahmedabad

3) Bengaluru

4) Mumbai

5) Chennai

6) Hyderabad

7) Kolkata

Focus cities serve as mini hubs – airports with high traffic and higher capacity are chosen

which in turn serve as hubs for all the airports in its vicinity that don’t have direct flights

from the required destination. For eg: Kolkata serves as focus city for Agartala, Guwahati,

Dimapur, Imphal and other north-east Indian cities. These cities are termed as spokes.

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This way a huge number of cities with lesser air traffic can be served at lesser cost. The only

problem for passengers would be to either switch airplane at focus cities or to wait for an

airplane that would connect the focus hub and the required spoke city.

85% of Indigo’s current capacity is being utilized for domestic purposes. The latest airport to

join Indigo’s list of destinations being served is Allahabad (Prayagraj) – the operations

commenced from November 15, 2018 connecting Allahabad and Bengaluru.

Internationally, Indigo has set ambitious targets – it is planning on connecting other focus

cities with existing destinations and the new routes will include 18 short haul destinations in

the Middle East, Southeast Asia and China, and six long-haul flights to cities in France,

Germany, Belgium, the UK and Switzerland.

India has ambitious plans to expand its air traffic. It has 100 fully serviced airports at the

moment and is planning on increasing the count to 131 by the end of 2019 and 200 by the end

of 2035, a solid 100% increase. The air traffic is experiencing double digit growth for past

three years. Reliance on Delhi airport will cost Indian airlines a lot. So Indigo must take

advantage of the infrastructure development to identify new routes and start expansion

planning sooner to make use of the first mover advantage.

Annual growth rate of passengers carried; Source: World Bank Data.

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Overview of Key Operating Parameters

Source: Indigo Annual Report, 2017-18

Fuel Inventory

ATF – Aviation Turbine Fuel is the propellant used by airplanes. It constitutes to 45-50% of

airline’s cost. Reducing this cost by a meagre amount will lead to huge savings. The cost of

these fuels are primarily influenced by international markets over which Indigo has zero

control. Dollar denominated exchange makes it even worse due to currency fluctuations. ATF

is stored in fuel storage facilities at each airport. These storages in 98% of the airports are

under the control of State owned entities like BPCL and HPCL – a near state of monopoly.

Other Oil Marketing Companies have to create their own infrastructure in airports to store

ATF. The setup cost is too high in this case and so other private entities stay away from this

market, further strengthening the position of PSUs. To change this state of monopoly, Indigo

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must lobby with other airlines to replicate the Open-Access model which is present at Delhi

airport across all airports. In this model, the PSUs allow other OMCs to use their facilities in

return for a nominal fee. Infrastructure creation is not necessary which in turn reduces cost.

Also, competition increases which leads to further pressure on cost reduction. Heavy

government support is required for such policy changes.

Fuel Hedging is the process of creating contracts in advance to protect against oil price

volatility. It should be done with better forecasting accuracy to mitigate the impact on bottom

line.

“Every 1000 rupees saved adds at least 400 rupees to the airlines’ troubled bottom-line”,

according to India Rating and Research Pvt. Ltd.

Training

Indigo uses a single type of narrow bodied aircraft for all its domestic services – Airbus

A320. This way all its pilots have to essentially train to use only one type of aircraft. The

necessary support infrastructure (like simulation equipments) are also required in lesser

quantity. This way the costs are drastically reduced. Only when technology upgradation of

flights take place the pilots have to be re-trained (if necessary).

Spares and Maintenance

MRO – Maintenance Repair and Overhaul constitutes second most to the overall expenses of

the airline. Indigo buys its planes only from Airbus. They buy only one type of plane in bulk

quantities, thereby reducing the inventory of parts that has to be maintained (due to

interchangeability). Also it has entered into contracts with Airbus which mandates Airbus to

take responsibility for any product failure that happens. Though failures happen very less, the

cost associated with each failure is too huge. And this contract has shifted a huge amount of

burden from Indigo’s shoulders, thus enabling it to use its cash for other revenue generating

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aspects. Also it spent only ₹0.11 per available seat KM (ASKM) when its competitor Jet

Airways spent ₹0.74.

Fleet Management

Indigo has made bulk aircraft orders. It ordered 100 A320 aircraft in June 2005, 180 A320neo

aircraft in June 2011 and 250 A320neo aircraft in August 2015. As per Airbus, each of them

were the largest single orders at the time of placing the order. It helped them in negotiation

with Airbus which enabled them to reduce the overall costs associated with acquisition,

maintenance and operation of aircraft.

Current Fleet Composition:

A320ceo A320neo ATR Total

121 32 6 159

Source: Indigo Annual Report, 2017-18

Indigo was the first company to order Airbus 320neo. They reduce fuel burn by 15%

compared to current A320s thus greatly saving on fuel costs. Indigo has reduced its fuel

consumption per block hour by adding more such aircraft. They have current undelivered

order of 430 A320neos. Adding so many aircraft enables Indigo to selectively add new routes

and destination and thus broaden its network. From 15 October 2018 to 15 December 2018,

i.e. in a span of 60days Indigo has added 132 new flights.

Sales and Lease Back Model and low fleet age

It has signed ‘Sale and Lease Back’ deals with aircraft manufacturers. It enables it to get new

planes after leasing the earlier fleet of planes for six years. It helps in reducing the average

fleet age.

Indigo has an average fleet age of less than 4 years. It leases planes for around 5 years. It

results in less maintenance costs and higher fuel efficiency. This is a rarity in Indian airline

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industry. Also, it helps in saving costs and time (2 months when plane remains out of

operation) on D-checks which are done for planes that have operated for 8 years.

Maintenance operations are reduced. Indigo is further striking a balance between leasing and

buying. To gain ownership and reduce on the costs associated with leasing, company

acquired 6 aircraft out of its free cash in FY18.

Flight Time

An aircraft can generate maximum profitability if it stays in the sky. Indigo’s planes stay in

air for 12 hours a day when competitor’s planes stay for only 10 hours a day. This is achieved

due to quicker performing of on-ground services, such as refuelling, passenger boarding and

de-boarding, cabin cleaning, F&B replenishment, Restroom cleaning and baggage loading.

The average time taken by an Indigo plane to get ready for next flight is just above 30 mins.

Their record time is 14 mins. Each and every process is continuously timed for process

improvement and for process adherence check.

Single Class

Indigo planes have only one class – Economy while competitors have First class and / or

Business class. Having just one class has led to increase in number of rows of seats that in

turn leads to greater percentage of increase in revenue when compared to the associated

percentage in increase of cost.

No Frills Service

Indigo being a LCC doesn’t offer any complimentary services on board like no free meals nor

any entertainment facilities. This has decreased the cost by a huge margin. Around 80% of

food it serves has a shelf life greater than a couple of days. This in turn reduces the cost

associated with wastage due to perishability.

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Source: https://www.goindigo.in/information/food-menu.html

Baggage Management

Customers’ check-in baggage goes through a security clearance after which it goes to the

makeup area on conveyor belts. Based on the information on the baggage tags it is segregated

manually as per the destination. If the flight has a stopover, the baggage of those passengers

is to be kept near the unloading gate in the plane to unload that first. Crew baggage is also

kept in such a manner to unload that on priority.

For arrivals, in order to reduce the wait times of the passengers, the cargo and mail is

unloaded after the passenger luggage. Then it goes to the load control department. Narrow

bodied aircraft like Indigo has 4 compartments- 2 to the front and 2 to the rear. All the cargo

is kept in the lower region of the aircraft. The luggage is transferred to the plane manually. A

joystick in the aircraft operates the door to the cargo area.

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Wide bodied aircrafts use load containers and pallets (approx. equivalent of 2.5 containers) to

load the luggage and cargo. Each container is filled with approximately 40 pieces of luggage.

These containers are then put in the plane using high loaders. Numberings like 11LR, 12LR

are given to keep the cargo. First class, business and crew baggage is kept near the door and

unloaded first when the plane lands.

Aircraft like Boeing 747 can carry 18 containers and 4 palettes.

Digitisation

Indigo has adopted digital transformation in two parts- customer facing digital marketing for

their convenience and internal digital marketing to improve efficiency and increase

productivity. Indigo adopted the 6E-explorer program for digital marketing. They engage

travellers to stay in Indigo destinations for 4-6 days and advertise that to potential customers.

Indigo analyses fuel efficiency on the ground and employs detailed analytics in the total

carrier journey. When the plane lands, it is connected to 4G to transfer the in-flight

monitoring statistics for extensive analysis. The role played by altitude, temperature, winds

in the consumption of fuel is determined. A 1% reduction in usage of fuel by all this tracking

can save the costs by millions of dollars in the bottom line. Indigo uses latest fuel saving

technology. It uses analytic software to optimize the route and altitude which results in saving

fuel.

IoT predictive analytics is used to collect information for predictive maintenance. AI

algorithms and machine learning give in advance possible maintenance events. This helps in

minimisation of delays and improve service to the customers. Also Indigo was the first Indian

airline to use Electronic Flight Bags that helps crew in collecting data for kaizen.

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Conclusion

The various operating parameters that have contributed to the operational success and

profitability of Indigo have been analysed in this report. Comparison with other players have

shown the reason why Indigo has been able to stay profitable amid ongoing macroeconomic

crisis. But Indigo should have been able to shield itself from such external influences by

learning from past failures of other market players. Selection of profitable traffic routes

should have been the focus to reduce its operational expense and increase its revenue from

available seats KM. It also must have made sure of the quality of A320 Neo plane’s engines –

made by Pratt and Whitney and bought by Airbus. This would have ensured the prevention of

costs incurred due to improper flight operations. Better quality check by Indigo must have

been done before purchasing. But the technological changes brought by Indigo, being the first

in the Indian market, has helped it when it comes to increasing efficiency. Indigo must also

focus on increasing its revenue by capturing a better share of India’s Air Cargo and mail by

entering into exclusive contracts with leading LSPs. All this will ensure better operating

conditions, better economies of scales, all at lower cost for Indigo in future.

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Reference

Excerpt from an interview of Mr. Joshi, Ex-Indigo Ground Control Manager, Mumbai.

https://www.voanews.com/a/india-indigo-to-fly-to-smaller-cities/3844675.html

https://www.firstpost.com/business/5-reasons-why-indigo-is-market-leader-today-
424550.html

http://www.atraircraft.com/newsroom/indigo-selects-the-atr-72-600-for-its-ambitious-plans-
to-enter-regional-market-1436-en.html

https://en.wikipedia.org/wiki/List_of_IndiGo_destinations#List

https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/indigo-
firming-up-international-flight-plan-to-add-24-destinations/articleshow/64168228.cms

https://asia.nikkei.com/Business/Business-Trends/India-plans-to-build-100-more-airports-for-
1bn-flyers-by-2035

https://www.firstpost.com/business/indigo-profits-decline-cost-control-the-only-mantra-
airline-should-follow-to-stay-ahead-4873781.html

https://indianexpress.com/article/india/india-others/reducing-atf-cost-a-special-vehicle-to-
fuel-indian-carriers/

http://www.dgca.nic.in/reports/stat-ind.htm

https://www.goindigo.in/content/dam/goindigo/investor-relations/annual-report/2017-
18/Annual-Report-and-Notice-IndiGo-AR-2017-18.pdf

https://www.livemint.com/Companies/h5f7mFrIdZciR8bAfeVcbO/IPO-papers-throw-light-
on-where-IndiGo-gets-its-edge.html

https://cio.economictimes.indiatimes.com/news/strategy-and-management/how-technology-
became-indigos-passport-to-profitability/63104457