Recently, the Directorate General of Civil Aviation (DGCA), India’s air safety watchdog ordered IndiGo to replace all Pratt & Whitney (P&W) engines of almost 100 twin-engine Airbus A320neo with new P&W power units. This comes after recent incidents of in-flight shutdowns. In its statement, the DGCA said that these incidents have caused “serious concern” and the decision to order replacement of the P&W engines was taken after “considerable deliberations”. The air safety watchdog has stated, “You will appreciate that four successive events have not happened ever before and therefore, we call for urgent and effective action. We regret the inconvenience but we need desperate measures to put things in order.”
It is important to mention here that while the Patt & Whitney engines boast of greater fuel efficiency, there have been issues with these engines since that entered service in 2016, compelling the airlines to ground its planes several times. IndiGo had to lease aircraft in order to replace aircrafts that were grounded with engine issues. This obviously led to higher operating lease liabilities for the airlines. The company reported the biggest quarterly loss of Rs. 1,062 crore last month.
It is clear that the engine issues and the biggest quarterly loss have come as a setback for the low-cost carrier, IndiGo. However, notwithstanding the recent turn of events, IndiGo remains the largest airline in India in terms of the number of passengers carried. It boasts of a mind-boggling market share of 48.2% as of September, 2019. While it posted a loss in the last quarter, IndiGo performed exceedingly well in the first quarter, that is, the quarter ending June 30, 2019. It had reported the highest-ever quarterly profit of Rs 1,203 crore.
While IndiGo might have suffered a setback, its success story has been unbelievable. Its rise coincided with the time period when most of the premier airlines- Jet Airways, Kingfisher and Air India, encountered a catastrophic downfall.
British businessman, Richard Branson once said about the airlines industry- “If you want to be a millionaire, start with a Billion dollars and then start (buy) an airline!” seemed pretty much relevant in India’s case. However, till now IndiGo has been phenomenally successful when it comes to survival in this competitive industry.
Remember the quote: “If you want to be a millionaire, start with a Billion dollars and then start (buy) an airline!” https://t.co/dYRdwup3kK
— anand mahindra (@anandmahindra) June 29, 2019
At the core of IndiGo’s success story is its strategy of operating only one category of aircraft, the Airbus 320. As per its official website, IndiGo has a fleet of 247 aircrafts including 89 new generation A320 NEOs, 129 A320 CEOs, 22 ATRs and 7 A321 NEO. This is in sharp contrast to the fleets of other airlines which consist of several categories of aircrafts. Operating a single class of aircrafts helps the IndiGo in its cost-cutting efforts, which is critical for the success of a low-cost carrier. Operating a single category has resulted in two major benefits for IndiGo. Firstly, better purchase prices. Take, for example, its first 100-aircraft deal with the Airbus in the year 2005. At that time, the French aircraft maker, Airbus was looking to counter Boeing’s dominance in India. Owing to this factor, IndiGo was able to purchase the 100-odd aircrafts at a favourable price, and this led to profitability in the first few years of its operations. Secondly, owning a single category leads to a drastic reduction in costs of hiring, training and upgradation that explains the profitability of the low-cost carrier.
Another factor that has paid off pretty well for the IndiGo is its sale-and-leaseback model, wherein a lessor purchases the aircraft from the airline and then leases it back. As per an October 2018 report by Business Standard, 143 out of 169 aircrafts were being operated under this model by IndiGo at that time. With this, the company is able to remove debt from its balance sheet, and gives it greater room when it comes to investing equity for other purposes. This also relieves the airline of the burden of ownership costs in its operations. Experts claim that such transactions help IndiGo boost its profit. It is important to mention here that the airline has made some big purchases. Recently, it has placed an order of 300 aircrafts consisting of different versions of the Airbus. It is also looking to acquire 150 A321neo to its fleet which will help the airline in realising its ambitions of expanding its operations to fly medium-haul international destinations. It is clear that economies of scale would be attached with such massive orders. But when the airline sells some of these aircrafts to a lessor, it might be able to sell the aircrafts at the market price because similar economies of scale are no longer a factor. This contributes greatly to cost-efficiency in the company’s operations.
Finally, it is the vision of IndiGo that helped it sail through at a time when most of the airlines were not able to survive. According to Kapil Kaul, regional head, Centre for Asia-Pacific Aviation (CAPA), IndiGo’s success is a result of its sharp focus- “on-time performance, clean, neat aircraft, and good service”. The company has made it clear that it is a low-cost carrier but it does not mean that it is going to render low quality service to its passengers. Aditya Ghosh, President, IndiGo, has time and again reiterated, “Low cost does not mean low quality.” It is this commitment and vision which has been the biggest reason behind the airline’s phenomenal success. IndiGo started as a low-cost carrier and has stuck firmly to this model till date. Unlike most of its competitors, IndiGo does not serve hot meals on board. By avoiding heavy equipment and cutlery, IndiGo has been able to lighten the aircraft and reduce fuel burden, yet another effective cost-cutting method without inconveniencing the passengers. IndiGo understands that on-time performance and punctuality matter more for the passengers than on board meals and other such facilities. One opts to fly rather than traveling by road or rail because of the time-saving factor. No amount of luxuries in the form of serving hot meals on board, etc. can compensate for punctuality and efficiency. This is why IndiGo has been able to churn profits out of the airline industry, at a time when most of its competitors have met a catastrophic decline.