Indigo of India is an interesting textbook case of an airline which has scaled up to be India’s largest domestic carrier. They make massive airplane orders, keep a young plane fleet with an average age of 5.4 years, and take planes out of service just before the first major checks happen, saving themselves the cost of having to do heavy maintenance on a plane. Not just that, they have homogenous aircraft, all from the Airbus 320 family, and all the same configuration so it makes it easy to swap planes if something goes wrong. Finally, when they open a station they don’t just want to test the waters but often open more than one frequency on a route to ensure they can dominate the route.

With this playbook, this almost 11 year old airline has grown from nowhere to commanding over 40% of domestic market share in India with the legacy carriers such as Jet Airways and Air India losing market share to Indigo in an expanded marketplace. Beyond that, the carrier has an outstanding order book now of 458 planes including ATRs which they recently ordered, apart from 138 planes in the air.

Indigo International operations started in 2011, and now Indigo flies to a host of regional destinations which can be covered by their A320 family planes, such as Singapore, Qatar and Dubai. However, what came as a surprise was Indigo’s interest in buying out Air India’s international operations last week.

Indigo addressed interested parties on a conference call today, after making this expression of interest last week. As per them, they were already exploring a long-haul international growth plan when the Air India privatization plan came up from the Government. So they threw their hat in the ring, trying to see how far would it get them.

Indigo wants to fly long haul

Long haul flying is roughly flights over 2500 nm, technically speaking. Indigo is now considering entering that segment. It is no secret that Airbus looks towards them to buy some of their A330s or other long-haul planes as well, but for the moment the airline hinted it was happy with the A320 family aircraft.

Today, on a conference call, the airline’s founders addressed their recent interest in buying the international operations of Air India, and essentially hinted to the effect that if they got Air India International (the original Air India before the merger with Indian Airlines), and Air India Express (the low cost arm of Air India which flies internationally, they would be happy to have an accelerated path to international long haul flying, while otherwise, they would still continue to work to bring the Indigo model of no-frills flying to long-haul routes. Per the airline founders,

Irrespective of how Air India story plays and based on our internal works, we are generally of the view that it makes fundamental economic sense for us to enter the long haul international market.

Indigo would like to take away traffic from regional hubs

The founders hinted on taking traffic away from the regional hubs such as Singapore, Hong Kong, Dubai and Abu Dhabi in favour of non-stop flights to India. They also want to take away traffic from high-cost non-stop operators and create a cost advantage, which they stated could be a strategic advantage for them, as compared to getting into the frills of a full-service carrier.

The expect various new low-cost carriers to spring up in all parts of the world, and referred to the current success of Norwegian who is mounting flights across the pond between the US and UK and other parts of Europe right now. As per Indigo, the fundamental way of doing business would move to low-cost new generation carriers where people would come to them to save a pretty penny, and moving away from the full-service carriers in the process.

Indigo wants to make Air India operations Low Cost

The airline’s founders stated in clear words, they would want to turnaround Air India’s International flying operations, and would instill them into a low-cost business model. In the airline’s words:

Full service will just not work for us, if we just parody other guys, other things come into play like legroom, frequent flyer program, the comfort of the blanket and how well the flight attendant smile- that becomes a difficult game and we are not quite interested in playing that game.

Indigo only wants to acquire Air India International and Air India Express

Indigo founder Rakesh Gangwal, who has previously worked at United as well as American Airlines, and Rahul Bhatia, both gave examples of how these airlines bought carveouts of other airlines to support his case of selectively buying Air India. In their words,

Today, United Airlines is one of the largest international carriers and it is questionable if that would have happened but for those acquisitions

Why is Indigo so confident?

I will just qoute the founders on this:

Our massive domestic operations is a big plus, passengers will mostly come from foreign airlines that fly through hubs at a higher cost. Just for a moment think about the value proposition that Indigo will offer with a hassle free, non-stop low-cost flight.

All they are interested in are Air India’s routes and slots?

For howsoever loss making Air India is, they are still India’s biggest international carrier. They have preferred slots across the world, given they came up eons ago, and have prime time slots at Heathrow, which go for millions of dollars at a slot constrained airport like that. On the other hand, you just have to see their set of routes, for example a fifth freedom route between Newark and London, which I hear is doing reasonably well being the last departure from Newark to London for the night. They brought it up after so many years out of nowhere. To any airline who manages to lay their hands on the routes and slots of Air India, they can have a force multiplier overnight.

With a great route network comes great responsibility towards people

Indigo also hinted they wanted Air India’s experienced international staff, and that they would be able to hopefully mold them into their own management style. Indigo said,

We see Air India as a canvas with its routes, slots and its biggest strength- the employees who know many good things.

Indigo also played the nationalist card

Indigo put another card on the table today, where they hoped that Air India would not be sold of to another arm operated by the government, or to an international carrier. The first one of course, beats the purpose of divestment, but moves public wealth into the Government’s pocket. For instance, the Life Insurance Corporation of India buying AI. The second one came out of nowhere. Airlines across the world are usually looked at as prized assets, and not given up too easily to foreign entities.

Bottomline

Indigo wanted to reassure everyone that they won’t buy into the mess of Air India if they were not sure if it was the right fit. Having said that, their intention to buy parts of the airline looks about right from their perspective. I am happy if the airline is stripped down piece by piece and each piece sold to the highest bidder. For instance, Heathrow slots to someone, the B77Ls to someone else and so on. This would bring in the maximum value to the divesture in my view. Otherwise, everyone is just trying to cherry-pick and the government has too many deals to cut to make this work. And they still risk being called corrupt if everyone gets a piece of their liking.

As for Indigo, I wish them luck with their quest for Air India, however, I don’t think I am in for a 13 hour plane ride while trying to buy everything piecemeal. What about you?