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.