Indigo is a budget airline based in India. It has emerged as one of the top carriers in the Indian aviation market. It had a passenger volume of 2.02 million till March 2022, making it the sixth-largest airline in terms of passenger volume in the world. It is a big achievement considering that it has only been in operation for about 17 years. To add a feature to the hat, Indigo is the only Indian airline to stay profitable for 10 consecutive years. The Indian aviation sector is said to be the graveyard of regional airlines but Indigo which started as a regional airline succeeded. So today we will look at how Indigo established itself as a leading Indian carrier.
It all started back in 2005 when Indigo placed an order of 100 Airbus A320s at the Paris Air Show. At that time, the Indian aviation market was dominated by Boeing jets and Airbus was desperate to enter the market. The total worth of the order is said to be 6 to 6.5 Billion Dollars. It is also said that Indigo availed a discount of about 40% to 50% is massive due to the bulk order and Airbus’s urge to enter India.
Indigo used a ‘SALE-AND-LEASEBACK‘ model. So Indigo purchases an aircraft and then sells it to a leasing company like BOC Aviation. So let’s say Indigo got a 100 million aircraft at the rate of 60 million, so it will sell it to a leasing company for about 65-70 million and have a leasing agreement for 6 to 8 years with them. This is a win-win situation for both, the leasing company gets a $100 million aircraft for just $65-70 million, and Indigo has a $5-10 million profit and does not have to take the headache of maintenance as it would be done by the leasing company.
When Indigo entered the market, even Kingfisher Airlines used this model, but it failed. So how did Indigo manage to succeed? Kingfisher and Jet were known for their sheer comfort and luxury provided to the passengers. This meant that their operating costs were really high. In India, the biggest cost of an airline is jet fuel, whose price is out of their control. It depends on the geopolitical situation. To get significant passengers, the ideal price of the ticket is about 5000 to 6000 rupees ( in 2006 and 2007). Therefore, Jet Airways and Kingfisher incurred losses. Indigo provided the bare luxury. No inflight entertainment, no complimentary meal, etc. Just a seat, with little legroom and pitch. And this is essentially what budget airlines do, particularly in Europe. I’ve covered this topic earlier, so if you wanna read more about it click here.
Also purchasing the same types of aircraft leads to savings. The crew will have to be trained for some particular aircraft only. For example, Indigo only has aircraft from the Airbus A320 family (A320, A321) and the ATR 72/42, and therefore have to train their crew for only two types of aircraft. Indigo also tends to keep younger aircraft in its fleet as younger aircraft are more efficient. It is evident as its average fleet age is just 3.2 years (as of writing).
The operational model of Indigo also aided their success. They used a hub and spoke model. In this model, an airline has a central hub and it has flights from its hub to the destination. This was relatively new in the Indian aviation sector as most of the airlines opted for point to point model. In point to point model each destination is connected to the other without a central hub. Both of the models have their own pros and cons. The hub and spoke model is efficient in connecting a country or the domestic market. It also eases the pressure of maintenance. It also operates in smaller airports on which the Indian govt. gives subsidies (under the UDAAN project)
Indigo also cuts any unnecessary costs. For example, the seat selection service is not essential so they’ll pay you for that. They also use the other budget airline tricks which I discussed in my previous post.
So this is how Indigo made profits. The strategies it executed made sure that it had enough cash flow while its competitors struggled. It believed in the strategy of providing the bare minimum. With Indian aviation being so competitive, passengers will choose low cost over additional services.
The Indian aviation sector is gonna change in near future. New airlines like Jet Airways (2.0) and Akasa will be immense while the TATAs will transform Air India. Akasa plans to take in Indigo’s footsteps and immerge as an ultra-low-cost carrier. For that, they have hired Indigo’s former CEO Aditya Gosh and we would see similar strategies. Stay tuned and subscribe to my blog as I would be covering all these topics in the near future.
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