Months of speculation was building up in Indian aviation. The topic in question was a new aircraft order by India’s largest airline, Indigo. And sure enough with the announcement of 500 firm orders, Indigo brought the crescendo to a climax and firmly signalled its belief in the India market potential. Not to mention its intention to continue to be a player of significance for years to come.
This order builds on previous orders and now puts Indigo in the enviable and perhaps critical position of being the largest client for Airbus. The order also positions Indigo to continue to leverage its strengths including being at the right market, with the right product and the right costs. But with 3.6 aircraft on order for each aircraft that flies, how Indigo will deploy this capacity is a hotly debated topic.
Given market growth, the capacity will fit right in. In 2005 when Indigo placed an order for 100 aircraft there were several critics. Arguments against the voluminous order included the nascent nature of Indian aviation, the infrastructure challenges and the fact that the market was effectively a duopoly. But how things change. Less than two decades later, not only the manufacturer but the entire ecosystem has taken the order in its stride.
Presumably because of the exponential growth of aviation where India went from 17.5 million passengers in 2000, to more than 3X the volumes by 2010. The volume again doubled within a decade and 2022 saw domestic passenger numbers alone at 121 million with another 49 million international passengers. By the end of this year India would have set a new record for domestic passengers flown. Flown on a fleet of 650 odd aircraft and in an industry that is tending towards a duopoly with 2 large airlines scheduled to carry more than 80% of all traffic. With the largest airline being Indigo. Forecasts call for 1200+ aircraft, 400+ million passengers, 200+ airports and 500 billion dollars of capital commitment by the end of this decade. All trends point upwards.
On the market front, macro-economic factors are aligned whereby the growth will continue. This includes the favourable demographic, the GDP composition, a growing middle class and a core focus on infrastructure and connectivity. Either way one looks: connectivity is improving, labour and capital flows are increasing and air-travel is a natural choice (albeit at the right price points).
Thus the absorption of the aircraft orders is no issue. But will necessitate strategic planning in and around the unique constraints that the market poses. In the years ahead, an overseas base for Indigo is most likely. As is significantly more capacity deployed on international operations.
Economies of scale and competitive costs
The aircraft order by Indigo includes the A320, the A321 and the A321XLR variants. Specific numbers of each type will be worked out keeping in mind market constraints, growth patterns and also customer adoption. Evenso, by staying true to a single fleet type, Indigo can leverage economies of scale and deliver on competitive costs. Which then translate to competitive fares.
What will be of particular significance as the orders come in is the ability to airports to handle the aircraft – both on ground and in the air. The A321XLR which is an acronym for extra long range enable the airline to fly farther thereby helping Indigo to service points as far East as Japan and as far West as London. On a nonstop basis. And at a cost significantly lower than competitors.
The aircraft order factors in both replacement capacity enabling Indigo to replace its fleet of 269 aircraft flying and growing the fleet by a factor of 3X – 5X. Interestingly, with these orders, Airbus has taken a call where it now has a fair degree of geographic risk tied to the success of Indigo. Perhaps this will give way to full manufacturing and assembly of airbus aircraft in India (in the decades ahead).
Complacency is just not an option
The aircraft order means the culmination of months of negotiation and planning. The order means an induction of 50 – 60 aircraft per year for several years to come. And preceding this is the financing, the induction and the operation of these aircraft in a manner that is cash accretive and delivers above the hurdle rate. Indigo, has delivered on these fronts but there are challenges starting to emerge which will have to be managed. These include items such as interest rates, the cost and availability of talent, the cost of capital, airport capacity constraints and regulatory landscape - to name a few.
Then there are competitive dynamics which are intense as ever. On the domestic front Indigo has to face the well capitalised and ambitious plans of Air India which is gradually improving each day. Add to that exponentially better road and rail offerings which at some point will surely impact passenger flow. On the international front, there are well capitalised, well managed and well entrenched competitors. Competing not only for the premium demand but increasingly for the “value conscious” traveller. How behavioural patterns for these segments may or may not change remains unanswered for now.
Finally, there is curse of success. Indigo as it doubles or even trebles in size may very well see an increase in process times and changes in culture. That is, it may not be able to continue to make decisions as decisively and deftly as it does at present.
On the talent front, Indigo has become poaching grounds for domestic and overseas competitors alike. And already many elements from its business plans are being replicated by competitors leading to erosion of margins. Its size and success has also lead to a majority market share that was 61.4 percent in the month of May. This has regulators keeping a watchful gaze and weaker competitors ready to call foul every chance they get. And the competition is only going to get more intense in the years to come. At all times. On all fronts.
For now, the aircraft order has firmly positioned Indigo in a league of its own. Creating aviation history. Squarely putting itself on the global aviation roadmap. India is on the go. And for now, all credit is to Indigo.
—The author, Satyendra Pandey, is Managing Partner of the aviation services firm AT-TV. The views expressed are personal.
Read his previous articles here
(Edited by : C H Unnikrishnan)
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