The most refreshing aspect of IndiGo airline’s spectacular purchase of 250 Airbus A320 neo aircraft is the collateral reflection of the enormous confidence and optimism that the airline’s owners have in the future of the Indian economy. Of course the airline must have got a huge discount while placing what is said to be Airbus’ largest order ever in terms of number of aircraft. The cost of the 250 aircraft is said to be Rs 1.55 lakh crore ($25.5 billion). The first of the aircraft is scheduled to enter its fleet in about seven to eight years after 2015, and the rest by 2026.
The company is expecting travel and the aviation business to expand as the economy improves under Prime Minister Narendra Modi. And if fuel prices continue at current prices, or thereabouts, the airline could continue its profit-making path. While it is the only profit-making domestic airline in the country, its profits for the year just concluded had reduced considerably over the previous year because of tough competition and suicidal gimmicks like Rs 1 fares. This competition is expected to increase with more airlines coming in. But IndiGo has a sustainable and sophisticated financial and marketing model — namely Rahul Bhatia’s “no frills” model — that no airline has been able to match. It also has the best punctuality record.
The Washington-based Rakesh Gangwani, whose shareholding in IndiGo is substantial, knows the art of buying aircraft and, according to those knowledgeable about the aircraft-selling business, many airlines abroad purchase aircraft on a sale and lease-back basis.
In this model, countries that are flush with funds and have strong currencies purchase aircraft from the airlines and then lease it back to them. It’s a win-win situation for the aircraft manufacturer, the airline and the third party. One does not know the details of IndiGo’s purchase deal and whether it would be following such a system. At present it has a fleet of 83 Airbus aircraft which, according to reports, are on lease.
But IndiGo has obviously done its homework when placing such a large order. It will also at some point of time start flying to international destinations and will need long-haul aircraft to remain competitive. Some of the new aircraft will also replace old aircraft that would have to be phased out. The life of an aircraft is said to be about 12 years.
IndiGo is on to a flying path. It is reportedly preparing for an IPO and has already started the process. Now, like everyone else from corporates to the people of India, IndiGo has to wait till its enormous hope in Mr Modi kick-starting the economy for real takes off.
