Will Indigo Make History by Buying Out Air India?

Pallavi Mody

Author: Pallavi Mody

Date: Tue, 2017-09-19 11:43

History was made when Lenovo acquired mammoth IBM’s Personal Computer division in 2004. IBM, the pioneer in computers from US was of 82 years and Chinese Lenovo was only of 20 years at the time of the deal. Currently, Lenovo leads in the personal computer space with the largest market share of 21 per cent ahead of HP and Dell.

Indigo is dreaming a similar dream. Indigo, the young Low-Cost-Carrier that started its operations in 2006 has emerged as the first serious contender for Air India, a 70 years old government owned airline. As soon as the cabinet gave an in-principle nod to the strategic disinvestment of the government’s stake in Air India, within a span of less than 24 hours, Indigo wrote to the government of its intent to buy. Indigo is the largest passenger airline in India with market share of 41.2 per cent whereas Air India’s market share was at 13 per cent as of May 2017.

There are large numbers of issues that are not clear at the moment. Will the government bite the bullet and completely exit the Maharaja with 100 per cent sell-off? Or would the government sell only partial stake and exercise the option of a 74 per cent or a 51 per cent stake sale? How will the government handle the enormous burden of debt of ₹52,000 crore? Will there be some write-offs to make the deal sweeter for the buyer? The story will unfold in coming days but the focus of this article is to check whether Indigo’s dream is realistic.

Indigo’s ascent to the market leadership position is extraordinary. Indigo has successfully built its brand in the oligopolistic airline industry on three platforms; ‘low fares’, ‘on-time’ performance and ‘courteous service’. Indigo’s strategy was simple and customer centric. They sought answer to the question –‘What kind of experience do people see in air travel?' Research has confirmed that a traveler does not care for piping hot food or in-flight entertainment for short flights. Low-fares and on-time arrival remain the foremost priority. If the crew members were courteous, the people were more than happy. Indigo geared all the energies of the organisation towards making operations simple and has become synonymous with being on-time. Indigo has built its brand around ‘on-time’ theme with a very low marketing expenditure.

A small lesson in the history of Indian aviation is worth going through to set the context. JRD Tata had established Tata Airlines way back in 1915 and it was renamed as Air India in 1946. The Government of India nationalised Air India in 1953. Air India for international and Indian Airlines for domestic operations enjoyed monopoly over Indian skies during the period 1953-1991. With economic liberalisation of 1991, Government followed ‘open sky policies’ and the aviation sector was opened to private players. Several Full Service Players (FSA) viz. Jet, Sahara, Damania and Modiluft as well as Low Cost Carriers (LCCs) viz. Air Deccan, Go Air and IndiGo entered the aviation space. The aviation market witnessed tough competition between FSA and LCCs. Over capacity led to the price war. The sector witnessed consolidation of Air India & Indian Airlines, Kingfisher acquired Air Deccan and Jet took over Sahara. In the price sensitive Indian market LCCs could increase their market share among which Indigo emerged as the market leader.

Can Indigo turnaround Air India? The answer to the question is complex.

International access to the Air India network is the most lucrative aspect of this deal for Indigo. Though Indigo operates 900 flights daily connecting 46 destinations; 39 of them are domestic and only 7 of them are international. Air India connects to 89 destinations and about two third of its revenue comes from the international segment. Air India’s share in international traffic among Indian carriers is 44 per cent compared to 9 per cent share of Indigo. The intangible benefits of Star Alliance in the international operations would make the deal sweeter for Indigo. Air India joined Star Alliance with effect from 2014 which would provide global connectivity to the airline - 1269 destinations in more than 193 countries. Air India has prime slots for takeoff and landing at London Heathrow (LHR) and some other airports in the USA and Europe. Air India also has access to aircraft Parking/Hangars facility in most of the important domestic and international airports.

Indigo has been using a single aircraft, Airbus A320, with the same configuration to achieve operational efficiency. It saves the hassle of training the pilots and crew for different aircrafts. Indigo’s fleet size was 135 carriers as of May 2017. Air India on the other hand has aircrafts of Airbus and Boeing with different configurations. Air India’s fleet size was 116 carriers. A merger may add to the complexity as fleet management and thereby manpower management may become complex.

Indigo achieved lowest turnaround time and highest passenger load factor leading to higher revenue and higher profits. This enabled Indigo to offer low fares and increase the market share. Indigo has instituted some of the best practices in human resource management. Being courteous and hassle free starts with being a hassle-free place to work. Ten years in a row, Indigo continues to be amongst the best companies to work for in India and has been named Aon’s Best Employer, 2017. It is not surprising that Indigo has zero attrition rates.

Air India that has remained in the public sector for such a long period of time would differ in the work culture. More than the financial management it is people management and cultural integration that have proved to be the toughest aspects of mergers and acquisitions.


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Thank you, ma’am, for such a thought-provoking blog. It is imperative that Indigo’s intent of buying Air India is no less than a savior for the Indian government, which has time and again failed to justify its bailout packages for the already debt-laden national carrier. As pointed out by you, Air India offers a lot of lucrative options for any airline company which would like to venture inorganically into overseas operations. Its access to prime slots in few of the prime destinations across the world, membership of the Star Alliance, and fleet size compatible with international operations would interest a serious airline company to venture in. Thus, Indigo’s official intent of buying Air India’s international operations and low-cost carrier makes sense from the airline’s perspective which is aggressively trying to capture more market share in the international market. Though, Air India’s high level of debt, which if everything falls in place might make the government take a haircut, could potentially make the deal sour. I have a slightly different point of view when it comes to possible complexities in the merger because of Indigo having a standard fleet of the same aircraft. This is because even Indigo has recently changed its strategy of procuring its airplanes by modifying its airplane order of A320Neo with larger A321Neo and also, ordering 50 ATR turbo-prop planes to operate under UDAN scheme. This implies that the airline is ready to ditch its same plane operational strategy to capitalize on the growth opportunity that the aviation market is offering. Additionally, given its decade-long back-log of airplane orders, its best bet of venturing into the overseas market is by taking on someone else’s fleet. For Indigo, best bet would be Air India because the national carrier has one of the largest fleet of wide-body aircrafts which are suitable for international operations, with an experienced team of pilots and access to prime slots. However, Air India’s existing fleet is quite old and Indigo will have to incur a lot of additional costs to improve the fleet and increase its efficiency. I do agree with your point that the two airline majors might find it difficult to integrate their culture and management style. Indigo has been operating efficiently under its private management and on the other hand, Air India is a public sector undertaking, the misfits are bound to arise. This can be validated by the fact that part of Air India’s current dismal state is attributable to its merger with Indian Airlines in 2007. The airline major is still suffering internally because of the difference in the two companies’ culture and management style. This has resulted in Air India’s dismal performance since 2007 and there no signs of changing this order. There could be one additional glitch in the deal for Indigo as Tata Group is also interested in buying back Air India and this might lead to price war if both of the parties turn out to be serious contenders. This can make Indigo a little hesitant of going ahead with its plans.

Thank you, ma’am, for these amazing views and insights about Indigo’s future through this blog. This article clearly explains Indigo’s current position and pros and cons of this deal. This deal with Air India will help Rakesh Gangwal, founder of Indigo, accomplish his dream of realising Indigo as a long-haul low cost operator. He believes that acquisition of Air India would provide a similar results as that of acquisition of PamAm by United Airlines, which made them one of the largest international carriers. Also growing organically for international destination would be arduous task for Indigo. Keeping in mind the highly packed international airports, it would be next to impossible for Indigo to obtain prime slots and parking hangers in most of the international airports. As rightly put by you, this acquisition will provide Indigo easy entry into restricted and closed international markets, membership of the Star Alliance and also wide body air crafts suitable for international travel. Also, Indigo’s management displayed their interest in acquiring both domestic and international wings of Air India if purchase of only international wing wasn’t possible. Though Air India’s domestic assets wouldn’t add much value to Indigo, who is already a market leader with 41.2% market share, this deal would help in consolidating the market with 54.2% share and total fleet size of 283. However, I would like to agree with your point that purchase of Air India would pose many operational problems. Indigo has always advocated a single air craft carrier strategy to bring down operational and maintenance costs. Now, Indigo’s fleet would have a mixed fleet containing their own Airbus A320 fleet and Air India’s Boeing 737, 777, 747 and 787 jets. But at the same time they would have the advantage of 27000 highly trained pilots and professional work force of Air India. This would not only increase their experience across various air crafts, but also would provide an opportunity to leverage Air India’s experience to train their own crew. But I do strongly agree with the point that it would be an onerous task in integrating the cultures and working style of these organisations. Air India, which is still suffering from the cultural and management differences through their merger of Air India and Indian Airlines, this deal might present itself as serious threat to Indigo. Inability to manage this integrating would pose as real deal breaker and might also result in total downfall of Indigo. But on the contrary, Air India’s losses are also driven by their high fixed costs, employment costs, huge benefits to family members of employees and ex-employees. This is further aggravated by benefits to politicians, bureaucracies, government officials. Indigo can clearly cut down on these costs post acquisition. I believe, these advantages, combined with Indigo’s cost efficient history, if boosted by a partial write off of debt of Air India by government would appear as a sweet deal for Indigo to establish themselves as a successful International Low cost carrier.

A very well-written article indeed. This question has been raised countless times since June 29 when IndiGo expressed interest in buying stake in AirIndia, which quite evidently wasn’t taken well by the shareholders as share price tanked 8%. However, I do feel that the management at IndiGo has proved itself in the last 20 years and this deal could be a way for them to tap the lucrative foreign skies and become a global major. After all, “Great things never came from comfort zones.” There is a famous old joke in the airline industry: “How do you become a millionaire in the airline industry? Start as a billionaire and buy an airline” Well, things are clearly not as bad as they used to be, especially for Indian aviation market. With the recent developments in US and Middle East, one can expect the oil prices to be depressed in the near future. In addition, the market has been witnessing double-digit passenger growth for almost a decade now. The top three players in the Indian aviation sector (IndiGo, Jet Airways, and SpiceJet) command more than 70 percent of the market share. However, these tailwinds have not yet translated into pricing power, as firms continue to be at price-war vying for greater market share and growth. According to ICRA, the market share of the Indian carriers on international routes increased to a seven-year high of 37% in July 2017. IndiGo’s capacity on international routes increased by 76.1% in July 2017 YoY. Clearly, IndiGo is pushing hard in the international market and the testimony to this is its increasing market share – from 3.1% in July 2016 to 5.0% in July 2017 (ICRA) However, IndiGo’s management acknowledges that it would take many years to establish a footprint in the international market if it tries to go all alone. Therefore, inorganic route makes more sense to tap into these lucrative foreign skies. As mentioned in the blog, Air India derives almost 2/3rd of its revenue from its international segment. However, most of the international routes burn a hole in the airline’s pocket. For instance, flights to North America and Europe resulted in a loss of Rs 2,323.76 crore in 2015-16. Add to this, the aggressive approach taken by IndiGo to capture market share in International segment and you can’t see anything but a bleak future for AirIndia, even in its crowned segment. Acquiring AirIndia’s business and leveraging the benefits from its membership of Star Alliance could bring sizable benefits for the company in the future. The synergies that it can derive through expanded international operations and exclusive landing rights at prime slots at most of the global airports could bring sizable benefits in the future. With company’s image centred around low-cost, timeliness and courteous service, it might be able to turnaround AirIndia’s domestic business, which lately had become infamous for its disgruntled employees and delays. With this deal, Indigo would be able to establish a stronghold in both, Domestic and International segments with an overall market share of more than 45 percent in the world’s 3rd largest aviation market. If IndiGo can make-do with the human resource and inefficiencies related to the variety of aircrafts, as highlighted in the blog, this could turn out to be an inflection point for the company where it could leverage synergies and grow into a global aviation major.

Thank you mam for writing your views on this potential deal. As you have said, the most lucrative part of deal is international operations where Indigo market share among Indian carriers is 9% as compared to Air India’s 44%. Earlier in domestic market, we have seen the mergers of Air Deccan and Kingfisher, Indian Airlines and Air India, Jet Airways and Sahara. All the major mergers happened in Indian market were either between private players or government players. This potential merger of Indigo and Air India will be between Private and Government player, which we have not seen in the industry but it will throw more challenges in terms of adaptability. Moreover, none of the mergers in domestic market have reached their potential. Though we may not be 100% fair comparing Indigo Air India deal with the above listed deals but still it highlights a lot about the sector and its inability to adapt to changes. We all are not unaware of the low cost airline status of Air Deccan and its successful merger with then flamboyant airline Kingfisher. The outcome is what we all least expected. The very successful low cost carrier just got diminished. I am afraid that today's performing and customer friendly air carrier, Indigo is lurking at the similar fate (in case the deal gets through). Worthy to note the intention of the government on this deal. Is this being a drowning business needs to be deployed to someone else or is it real management decision of privatization for better customer service and revamp? Does this hold potential of increasing debt burden on the already successful air line? Air India is not a preferred airline by customers for national travel in the presence of private players which are decent performing. Does Indigo need Air India for international presence in next two years or it can sit and relax for revamping international travel gradually and not through merger? There are serious concerns over work culture, manpower engagement etc. The customer segments are different which need equally different expertise. Is it the right time for Indigo to look at anything like a merger with a loss making PSU? Will Indigo able to manage high frequency international operations post-merger with management style changed to that of its. Will it be able to manage the fleet which it has never used in the past? Will it ensure that domestic operations will not be affected in its race of capturing international share? Will Indigo consider and deliberate if they still need more time to solidify on domestic market share. What if in-expertise in international operations both with crew and aircraft does not bring the customer to Indigo? Indigo should move carefully and first understand the vision and mission of the company, its expertise in handling changes and managing new fleet. Honest answers and carefully drafted vision statement can only help take the right call.

Thank you Ma’am for an insightful article about Indigo’s plan to buy Air India. Your article takes us quickly through the journey of Indigo from its establishment year to its current market position. We could understand how the three USPs of Indigo helped them gain the position of market leader in the price sensitive LCC market in India. The article also helped to get a deeper understanding into the advantages and complexities that Indigo would inherit through the acquisition of Air India. I cannot agree more with points that you have put forward to answer the question ‘Can Indigo turnaround Air India’? I would like to add a few more points to suggest why Indigo might be the best among the competition to acquire Air India and also about some other complexities at hand that Indigo need to consider. If we look at the financials of Indigo, Indigo is the only airline showing profits consistently for last 9 years. In addition to this, the most important point to be noted is that it also a very cash rich company. Their total cash as on March 31, 2017 is Rs.93,423 million which has increased by a staggering 54.2% compared to last year. This consists of Rs.44,326 million free cash, which can be immediately utilised. Total debt has reduced by 20% down to Rs.25,961 million as of March 31, 2017. It is not only the revenues but also the cost which drives the financial strength. Cost per available seat kilometre (CASK) has reduced by 2.5% from Rs.3.12 to Rs.3.04 since last year. This makes Indigo financially very strong as it can pay off its debts immediately, if required. Indigo is the only airlines among all other major and minor players delivering consistently strong financial results and hence, seems to be the most capable of buying out Air India. Market targeting and positioning by Indigo seems to be perfect as they have identified a vacant area within the current offerings. Today nobody provides a long haul low cost flight options. This reminds us of JRD Tata’s vision for Air India. He was very clear that on time arrivals and customer service in flights cannot be compromised at any cost. JRD Tata also identified a gap in the market: ‘Customer Service’. Air India was one of the world’s finest airlines amongst its giant global competitors because of the kind of service that others spoke about with either admiration or envy. JRD Tata’s microscopic management was the main reason for Air India’s success. Similar level of innovative leadership is required for Indigo to achieve success through this buy out. United Airlines acquisition of Pan American Airlines is a great success story which happened in similar circumstances that Indigo and Air India are facing today. I believe that Indigo’s co-founder Mr. Gangwal has great capability to guide Indigo based on his rich experience with United and American airlines in the past, to guide Indigo to the same heights of success as Mr. Tata did for Air India. Indigo’s simple and customer centric strategy for domestic market has made it successful. Their USPs of low fares and on time arrival are a result of a simple question they asked: “what kind of experience do people seek in air travel?’. People are not concerned about food and inflight entertainment for short distance flights. I believe they should ask the same question again before finalizing on their strategy to buy Air India. According to Indigo’s statement, they want to modify Air India’s business model and turn it into a nimble low cost airline flying long haul routes without burden of premium service. The critical point to consider in this scenario is whether people will be willing to sacrifice comfort, good quality food and in-flight entertainment for long distance flights? When we move to long distance flights, people tend to rate comfort, food and entertainment on much higher level. So, the cost model that has worked marvels for Indigo in domestic circuit may not fetch the same level of returns in the international circuit. Increased level of complexities along with additional working capital and a debt of at least Rs.50,000 crores will not be easy to resolve through funding from internal accruals. Winds of change are already visible at Indigo with it scrapping its single type aircraft fleet strategy by ordering 50 ATR-72s. It has also placed a big order for aeroplanes, largest for any airlines in the world. These actions suggest Indigo’s seriousness about buying out Air India. Indigo must worry about the huge debt pile for Air India and put a robust strategic model to deal with it. I would love to see Indigo succeed in this venture.

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A well-structured and thought provoking article madam, I would like to put forward my thoughts on the same. Indigo sees this as an inorganic growth opportunity which in a way will increase the reach, operation and presence in international market. The government see this as a way to increase efficiency, quality of service but majorly as a way to let go of a loss making business. But will this be a win-win deal for the parties, the customers and nation at large? If this deal does go through, only time will reveal the outcome. There are a lot of grey areas that needs to be addressed. Air India operates flights to many destinations to connect them to our country, rather than to operate profitably. Air India is the show runner during emergencies, evacuating Indians out of inhabitable country. Will Indigo take over these humanitarian responsibilities? Will it cut services to non-profit making destinations? Indigo has been successful in the LCC business, by keeping its services simple and direct. It operates only one single type of aircraft to reduce on operation and training cost. It leases and operates young aircrafts from leasing companies on a ‘sale and lease back scheme’ to reap the benefit of high fuel efficiency and low maintenance and low capital investment. It doesn’t offer business class to keep margins high and keep service uniform. All the In-flight meals are in use and throw packaging, keeping cleaning and turnaround time low. Can the same operation philosophy be implemented / improved upon if the deal goes through? Many have been revelling over the fact that Air India is doing better lately. Looking at the financials of FY 15-16 vis-à-vis FY 14-15, it is evident that the losses have reduced as an effect of reduced fuel cost caused by reduced fuel prices. There are still inefficiently managed inventory and staff to be dealt with. All the flights are old with low fuel efficiency. There are variety of air craft models being operated making it difficult to reduce maintenance time and lower inventory and skill requirement. Indigo will have to start owning fleet if it sees to reduce operating costs on account of higher leasing cost due to larger fleet requirement. What will happen to the debt burden of the national carrier? Will it be transferred to the buying company or will it be written off? How is Indigo planning to tackle these hurdles? Has the majority of the variables accessed before showing interest for purchase, or was it an impulsive decision? Prime slots in airport attract high Airport charges. Providing full service in international routes is not the same as Low cost operation in domestic market. Will Indigo deliver high quality, better and reliable service, and still be price competitive? Indigo can capitalize on the already established international network, prime slots, membership with star alliance and readily available fleet. But the acquisition can be profitable only if the each of the inefficiencies is addressed. The market in general sees this as a risk, but for Indigo Airlines this is another challenge that they will have to overcome if the deal goes through.

Ma’am, Thanks for the insightful take on the merger of the two giants in the aviation sector. I do agree to the notion put forth in your blog that Indigo would be more interested in the international fleet of Air India. The fact was confirmed after Indigo opted out at the last moment stating that they were primarily interested in the acquisition of the International Operations. The news came out as a dampener for the government which was looking to sell 76% of their stake. In my view, Indigo’s steps were prudent as the acquisition of the entire fleet would have made the operations very complex. It would have further led to the monopolistic situation. The action would have stressed Indigo’s balance sheet and cash flow. Indigo works on the sale-and-lease-back model, the debt-laden Air India would have made it very difficult for them to continue with the same business model. From the government perspective, the breaking of the airline in pieces to meet the requirements of the interested parties doesn’t make sense. The Expression of Interest didn’t find any interested parties coming in. As of now, the government doesn’t look like going out for disinvestment again in immediate future. Air India does need to have a very hard look at their operational efficiency. As per the government sources, the muted response on the auctioning has not put the whole idea on the backburner and they shall look into the disinvestment again after the market is more conducive. At present, the market is volatile owing to the increase in crude rates and fluctuations in the exchange market. Better said than done, the government needs to make the whole process more inviting and have to come up with the really smart and captivating idea if at all they want the disinvestment to be a success.

“We do not believe that we have the capability to take on the task of acquiring and successfully turning around all of Air India’s airline operations,” Indigo President Aditya Ghosh Hello Ma’am. I would first like to congratulate you on the wonderful and insightful post. Since you wrote this blogpost, a few developments have transpired. Indigo, along with Spicejet, Jet Airways have all opted out from the race to buy Air India. Indigo, as quoted above, have said that they believe that they do not have the capability to take the risk of trying to turn around the fortunes of Air India by acquiring them. This is not consistent with their own magnificent growth story. I believe, more than their under confidence, the fact that the government plans to divest only a part of their stake in Air India and they intend to hold on to 24% equity is the real reason for their changed stance. This particular idea is not working well with Indigo. They have reached so far so quickly, with their unique ideas and efficient management. Government influence and interference in policy making would curb them off their freedom. Indigo adopted the “Sale and Leaseback model”, this helped them outsource the entire maintenance and repair department to the makers like Airbus. This idea was unique in the airline industry. Companies like Jet Airways and the debt ridden Air India owned their flights and carried out extra responsibilities like maintenance and repairs. Indigo carried a relatively lighter balanced sheet with robust operational results. Acquiring the debt ridden Air India would take a heavy toll on its balance sheet. Air India has a total debt of 52,000 crores out of which 22,000 crores are aircraft loans. The burden of debt coupled with the lack of freedom to take its own decisions would make it difficult for Indigo to turnaround Air India story in line with its own. It would be difficult for the government to find a buyer for the loss-making Air India unless they give up the idea of holding back 24% stake or they agree to write off a considerable amount of debt to woo the investors. They should break up the different operations (domestic, International, the maintenance subsidiary) and look for individual bidders for each of them and use the cash it receives from the sale proceeds to pay back some of the accumulated debt.

The article is really intriguing! Comparatively a new airline going to acquire the age-old Indian carrier is indeed a hot topic. But, despite all the temptations, Indigo has stepped back from closing the deal. There are a few factors contributing to Indigo’s retreat. The philosophy of operations of Indigo and Air India have visible differences, which Indigo is unlikely to cater to. As a govt. carrier, Air India operates its flights to less lucrative destinations also, which is not going to appeal to the taste of a private carrier. Indigo is particularly interested in the international sector of Air India, which has a staggering 44% market share. In addition, Air India had a debt burden of 52000 crores. Another aspect to mention is, contrary to a single fleet type of Indigo, Air India has a mixed fleet. That would pose a challenge to Indigo in terms of skilling their staff. Essentially carrying a legacy of 70 years of operations, the work culture of Air India would significantly differ from a new operator like Indigo. Government, on the other hand, would always vie for a holistic deal which would not affect the interest of its existing staff. Segregating the international sector from the domestic sector for going ahead with the deal will be straightaway abandoned by the govt. Would Indigo fly to less lucrative destinations like in the north eastern regions? That is also a big question to answer. Though the international sector is separated for the deal, there is every reason for the domestic wing to languish badly. That would pose another challenge to the govt eventually. There is enough scope for both the parties to fine tune their terms and conditions so that differences are narrowed down. While Indigo flies to less lucrative destinations, govt may go for subsidies to make the deal attractive to a private operator. Govt has to come out of all its bureaucratic prejudices to go ahead with the deal at least in the greater interest of the country.

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