IndiGo continues to soar over rivals in the Indian airline industry
On Monday 26 October, InterGlobe Aviation (the operator of IndiGo Airlines) is due to launch its initial public offering (IPO).
Shares in the Indian airline will be listed on India's National Stock Exchange and the Bombay Stock Exchange, with the goal being to raise in the region of £260m, half from issuing new shares and half from the sale of equity by existing shareholders, ultimately to increase its current market share of 35%.
This will be the largest flotation in India since telecom group Bharti Infatel listed in 2012 and raised £500m.
IndiGo is the exceptional performer in a crowded – and troubled – Indian aviation market. It is the only domestic carrier to have been consistently profitable since 2009. In the past financial year, it made a record profit of Rs13bn (£130m) whilst its main competitors made large losses.
Jet Airways, for example, returned net losses of Rs41bn (£410m) and Rs21bn (£210m) for the fiscal years 2014 and 2015 respectively, despite carrying a quarter of India's air passengers.
SpiceJet was bailed out by its co-founder Ajay Singh earlier this year, whilst Kingfisher Airlines, once the country's second-largest airline, collapsed in 2012 owing debts totalling over £1.6bn to a variety of creditors.
The current combined debt burden across the industry is an estimated £13bn.
Perhaps the most significant difficulty facing Indian airlines is the enormous tax levied on jet fuel, which arguably is a result of a belief in India that air travel is a "luxury good" and an extravagance for the wealthy. Tax on jet fuel is not only high, but also varies hugely from state to state. The Centre for Asia Pacific Aviation (CAPA), an industry research group, reports taxes as high as 24%. Clearly this cuts into the profit margin of Indian airlines. CAPA has proposed a countrywide tax on fuel of 4%, to provide predictability in taxation which in turn will boost confidence in the sector and promote airline development. The government is yet to implement any such reform.
The second key difficulty affecting the industry is that Indian consumers are particularly price-conscious when purchasing air travel. This scrutiny should naturally lead to lower prices; however, competition in the Indian market is distorted by state-owned airline Air India, which undercuts rivals with slashed prices funded through government subsidies to maintain its 21% market share.
In the midst of these challenges, how is one carrier bucking the trend to such an extent that it is seeking finance from the markets to expand even further?
Aditya Ghosh, president of InterGlobe Aviation, says the answer is simple. Only IndiGo, he argues, has stuck to the basics of the low-cost airline model. Rooted in keeping aircraft flying as much as possible it only operates one type of aircraft, emphasises quick turnarounds and provides only a no frills service. This model can be contrasted to ill-advised attempts by rivals to offer a combination of premium and economy services across a variety of aircraft types.
In October 2014 IndiGo ordered a record 250 A320neo aircraft from Airbus worth a collective £17bn. With greater fuel efficiency and lower maintenance costs, the new craft should aid IndiGo's continued expansion. The airline is choosing to finance the planes via short-term sale and leaseback arrangements, which have been successful for it in the past. Given that Airbus, a European consortium, generates around 100,000 jobs in the UK, any further investment in IndiGo’s fleet following the IPO could have a huge positive impact on the UK economy.
The success of the airline industry, and wider aviation industry, is vital for India's future, and IndiGo cannot remain the only success story. Other transport options are not sufficient - roads are chaotic, trains are slow and overcrowded. To maintain India's economic growth rate (approximately 7%) the idea of air travel as a luxury should be consigned to history and aviation should be recognised as an economic enabler; a tool to connect a vast country. A sensible first step would be for the government to follow CAPA's fuel taxation advice. Equally, struggling commercial carriers should learn from the back-to-basics business model of IndiGo in order to avoid the same fate as Kingfisher Airlines.