Indian Institute of Foreign Trade

EPGDIB PROGRAMME
International Business Strategy

Case Analysis

IndiGo Going Global

Come September, budget carrier IndiGo will press ahead with its boldest move since...
inception. India's fastest-growing airline will launch its first international flight from
Delhi to Dubai on September 1, followed by flights to Bangkok and Singapore from Delhi
and Mumbai.

In many ways, it will be a pivotal moment for the five-yearold carrier. 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. Now, as it prepares to start international flights,
some profound shifts are taking place in not only the airline's core operations but also
the Indian aviation industry. IndiGo has never been squeamish about expansion, but the
fervour with which it has burst into the international skies is certain to unnerve even
bigger rivals.

With typical bravura, the carrier announced a promotional offer of `9,999 for the
foreign routes though the flight schedules are still subject to regulatory approval. In
January, again with an eye on expansion, IndiGo said it will buy 180 planes from Airbus
for an estimated $15.6 billion - the order was finalised on Friday at the Paris Air Show -
in the largest jet order in commercial aviation history.

Now, IndiGo is mounting efforts to replicate its tried and trusted domestic model in the
international routes, according to three people familiar with the airline's operations.
Even so, analysts are questioning whether the airline can sustain its singular operating
style in a fiercely competitive new market. Or for that matter, whether its formidable
reputation in the domestic market will be a springboard for success in the international
market as well.

New Game, New Rules

"Flying international is a completely different ball game," says Mark D Martin, an

aviation industry veteran, who previously headed low-cost carrier SpiceJet's strategy.
"IndiGo is known for its consistency and an efficient business model that give it an edge
in the hotchpotch domestic aviation market, but the global market is an uncontrolled
environment where it will be dealing with different procedures, regulations and
cultures," says Martin, who has advised the Directorate General of Civil Aviation and
spearheaded the operations of foreign airlines in Rwanda, Saudi Arabia and the UAE.

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IndiGo happens to be a late entrant in a market where full-service and budget carriers
have established a strong footprint. In Dubai, it has to match wits against the UAE's
flagship airline, Emirates, which offers 184 flights a week to India, and FlyDubai. In
others, it will face competition from Singapore Airlines and low-cost rivals such as Air
Asia, Tiger Airways and Air Arabia. Domestic competitors too are spoiling for a fight.

Hot on the heels of IndiGo's bigbox fleet announcement came an order from bigger rival
Jet Airways for 10 A330s planes worth $2.5 billion. Low-cost carrier SpiceJet , owned by
Sun Group's Marans, has ordered 30 Airbus planes valued at $2.7 billion and 15 more
planes from Bombardier for $500 million. Wadia Group-promoted GoAir has ordered
72 planes for $7.2 billion.

SpiceJet, which flies to Kathmandu and Colombo, is also due to start flights to "South
Asian and West Asian countries by August or September", the airline has said. GoAir
will start international operations from 2013, says the airline's sales general manager,
Praveen Nair.

Aviation watchers and company insiders also expect a slugfest of fares in the market
with nearly every airline due to lower ticket prices. Competition is going to rise and it is
not going to be easy for anyone," says a senior Air India official asking not to be named.
The national carrier sharply reduced airfares than even budget carriers on select
domestic routes after a crippling pilot strike recently.

Safe Bet

For its part, IndiGo will clone its domestic model, which has earned it plaudits, revenues
and market share, in the international operations, says the persons familiar with the
airline's operations. IndiGo president Aditya Ghosh declined repeated requests for an
interview.

On domestic routes, the airline has enabled speedy check-in facilities through hand-held
devices for printing boarding passes, helping passengers avoid chaos at counters. IndiGo
has also deployed step-less boarding ramps for the elderly and handicapped. The carrier
boasts of the industry's best on-time performance and least flight cancellation rates,
which experts say is an upshot of constantly revisiting its business model and improving
efficiency in every layer of operation, including arrival and departure procedures,
backend support and baggage handling.

The airline is also known to invest heavily in training its staff, particularly the cabin
crew and pilots. It has added glamour to travel, roping in the services of fashion
designer Rajesh Pratap Singh and stylist Ambika Pillai to give a snappy look for its cabin
crew. The affordability, performance and hassle-free services apart, all the salient
features of the domestic model will be followed for the international operations, say the
persons who requested anonymity as they are not authorised to talk to the media.

Complementing these efforts will be more innovations to improve services on board,

they say. The paid no-frills model will continue but with a "wide variety of food and

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alcoholic beverages". There will be no in-flight entertainment system in the nine aircraft
deployed for the foreign routes.

IndiGo will also launch an aggressive "tongue-in-cheek" advertising campaign for the
foreign routes, the persons said, adding that passengers of all countries will have the
option to pay in their currency of choice. The airline will bulk up recruitment by roping
in 200 pilots, 900 cabin crew and nearly 600 engineers over 18 months. "A lot of
investment", they say, will go into training pilots and cabin crew to "bring alive the
IndiGo feel in the international market". The management team is excited about the
international operations, said the persons.

Growing Prosperity

IndiGo has prospered by remaining relentlessly focused on its key strengths. The airline
is widely believed to be consistently churning out profits - even when fuel prices soared -
while competitors have been bleeding. Its market share has swelled to 19.9% in May, a
shade below Kingfisher Airlines' 20%.

Airline consultancy Center for Asia Pacific Aviation says IndiGo has the advantage of
being debtfree and having the lowest cost structure in industry. IndiGo also has an
efficient corporate structure, all of which have collectively helped it become the fastest-
growing Indian airline and grab the highest load factor at 89.4% in May (measure of a
carrier's passenger carrying capacity) to boot.

For these reasons, some experts believe the airline has all the ingredients to succeed in
the foreign market. "The airline has the goodwill of passengers," says Manish Chheda,
managing director of Auctus Advisors, a consultancy. "People who travel IndiGo are
generally satisfied," he says.

On foreign routes, the baby steps have been easy. IndiGo's promotional offer of 25,000
tickets at an all-inclusive return fare of `9,999 in routes that typically cost `15,000-
18,000 has expectedly been lapped up by customers."Prices will eventually make all the
difference," says Vimla Dorairaju, head of Mahindra Homes Stays and Club Mahindra
Travel. Despite the presence of a scrum of rivals, IndiGo has the benefit of servicing
routes that are traditionally busy. "Dubai, Bangkok and Singapore are perennially
popular routes," says Ajay Prakash, president, Travel Agents Federation of India, adding
that during the peak season, it is still tough to bag seats in these routes.

After the promotional offer, IndiGo tickets are expected to cost around `14,000, the
average rate of fares offered on these routes. Experts say the days after the promotional
offer ends will be crucial for IndiGo as it will have to differentiate itself from the rest of
the pack. IndiGo will then be hardpressed to keep fares down and planes packed, they
say. "The challenge for the airline will be to keep its promise of giving affordable fares,"
says one of the persons familiar with the carrier's operations. On domestic routes, says
Chheda, there is not much of a difference between the fares offered by IndiGo and a full-
service airline like Kingfisher.

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Red Flags

Other warning signs are already there for the airline. As the new flights are only
marginally longer in duration compared with domestic flights, IndiGo can save money
on labour, but will be unable to offset the loss in efficiency due to escalating fuel costs,
say experts. Fuel represents about 35% of the cost of a flight while personnel expenses
constitute 30%. Stateowned oil companies recently raised jet fuel prices by 2.4% as
international crude oil rates amplified. Indian carriers have been bearing the brunt of 14
successive fuel price hikes since October 2010, when international crude oil prices
started soaring.

Despite these pressing concerns, IndiGo will focus on its 'wonted' travel experience, says
the person familiar with the airline's operations. "IndiGo will rely on its core
propositions to differentiate itself." That may not be enough, according to experts.

"The timings allotted to IndiGo are going to be crucial because these routes are stopover
destinations for foreign tourists," says Chheda. "So connectivity is going to play a big
role here." IndiGo currently depends singularly on a web-based distribution system,
overlooking the so-called global distribution system, a reservation system that travel
agents use. Full-service carriers have an edge over budget airlines thanks to a vastly
superior distribution network. A key example is the Star Alliance, which allows airlines
to cooperate in marketing their routes and pricing to the public.

"Distribution is a key challenge in any new market, especially for a low-cost airline,"
says Bird Group chairman Ankur Bhatia. Starting international operations is as good as
starting an airline, experts say. So it would take IndiGo at least 18 months to build its
brand in the new markets.

"Expect lower revenues until operations stabilise," says Martin. "Flying international is
not for the faint-hearted."

Source: Adapted from the story published in the ET on 26.6.11

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Questions for Case Analysis:

1. List down the external environmental factors given in the case. Classify the factors
and using the Global/Local Response Grid, comment on the Domestic and International
segments of Passenger Aviation Industry.
2. Draw a value chain for indigo and indicate the activities which are
performed/outsourced by them based on the facts given in the case. Also comment on
the integration strategies of Indigo.
3. Use the Global Strategy Framework and discuss the elements of the framework in the
light of INDIGO.
4. Given the distinguishing nature of domestic and international markets, what should
be the changes in their corporate and business level strategies. Give reasons for the
same.