Will IndiGo Have A Happy Flight Abroad?

Over the past decade, starting international flights has become more about pride than profits for Indian carriers. It means added sophistication, Royal Doulton china, fine wines and cabin crew that speak foreign languages. Entering this airspace on September 1 will be IndiGo, India’s second largest airline by marketshare. In doing so, the country’s largest low-cost carrier (LCC) will be flying in the face of stiff competition from established LCC players — AirAsia, Air Arabia and home-grown Air India Express — on the same routes.

What it is banking on is its successful desi formula: Clean, fresh airline product, great on-time performance and cheap tickets. Promoter Rahul Bhatia is certain that his formula, which has seen IndiGo grow steadily in the past five years — it was even profitable in the bad years of 2008-2010 — will prove effective for international operations as well.

The fortunes of IndiGo’s predecessors, however, have not always soared when they crossed the seas: Some achieved outstanding results; others floundered. The Indian government has been stringent about permitting domestic airlines to fly abroad: Jet Airways had to wait for nearly 12 years, while Kingfisher promoter Vijay Mallya, a man in a hurry, acquired Air Deccan (which had been around for longer) to piggyback on. Kingfisher’s decision proved disastrous, as its international debut coincided with the global economic slowdown and the airline has lost Rs. 2,700 crore in the past two years.

Old Formula, New Tests
Speaking to Forbes India, IndiGo CEO Aditya Ghosh says a lot of effort goes into keeping it simple. Efforts had begun in 2010, as IndiGo had hoped the government would allow it to fly overseas before it completed five years. Though the approval didn’t come, insiders say the network planning, marketing, training and product definition began in earnest.

With flights to Dubai, Singapore and Bangkok, IndiGo is expecting a large percentage of its customers to be first-time fliers and expat Indian labour. Crew training is, therefore, crucial. “The idea is to anticipate all their needs, so that the passengers feel comfortable while flying with us,” says Ghosh. The crew are encouraged to speak in Indian languages and those who raise an eyebrow at first-time fliers are not welcome.

The planning is also reflected in the flight timings. IndiGo flights to Singapore and Bangkok coincide with the notoriously strict check-in times of hotels in these two cities. Departures from Dubai are in late evenings, to let people spend the day there.

IndiGo plans to continue with its no-frills philosophy on international flights too. There will be no hot meals or in-flight entertainment. Passengers will have to pay for food and alcohol. “In many ways, the new flights are extensions of things we are already doing well. Mumbai-Kolkata or Ahmedabad-Kolkata are routes with flights over three hours, which is longer than Mumbai-Dubai,” says Ghosh.

Flying overseas could have major ramifications for the airline. It has grown at a slow but steady clip, adding about eight planes every year to its fleet. Of its 39 aircrafts, eight will start flying on international routes. This will increase as the network grows.

Bhatia is also leading an aggressive rollout for his hotel business, through his other venture InterGlobe Hotels. He plans to put up 200 Ibis hotels by 2015, as a part of his joint venture with French hotel major Accor. Yet, in terms of volume, revenue from the airline will remain the larger part of his business.

IndiGo is an unlisted company and its revenues and profits are not made public, but analysts estimate the company’s profit at about Rs. 600 crore on revenues of Rs. 3,500 crore in 2010-11.

International flights have higher fares and the top-line will grow in this financial year. But, for Bhatia, the major challenge will be finding the right balance between fares and costs.
 
Fight for the Skies
IndiGo’s biggest disadvantage over carriers such as Air India, Emirates, Singapore Airlines and Thai Airways — all rivals on its launch routes — is that it is a point-to-point carrier. “Large network carriers have built their fortunes on carrying onward traffic from their hubs to dozens of cities around the world. IndiGo does not have this luxury and hence will never get the passengers who want to fly onward to say Europe, Africa or Australia,” says Nachiket Oza, proprietor of Blue Star Travels, a Mumbai-based ticket consolidator. The advantage that IndiGo has, at least for passengers flying into India, is its network within India: Fliers can connect with 26 India cities.

Raja Natesan, CEO of online travel agency Yatra.com, thinks Indian LCCs could make large foreign airlines sit up and take notice. Natesan, who was regional manager (South-East Asia) at Kingfisher Airlines in 2008-2009, when the airline was about to begin international operations in the region, says full service airlines have not succeeded in competing with LCCs. “They can never be truly low cost; they can only be low fare. The LCC philosophy has to be ingrained in the planning and operations of an airline right from the time the aircrafts are bought,” he says.

IndiGo’s biggest challenge is likely to come from established rivals such as AirAsia and Air Arabia, which operate on the same routes. AirAsia, a well-capitalised airline, operates with the same equipment (Airbus A320s) and has already fired the first salvo with one-way tickets between India and Bangkok/Singapore/Kuala Lumpur at Rs. 4,000 to Rs. 6,000 to compete with IndiGo’s inaugural fare of Rs. 9,999.

AirAsia’s advantage is its extensive network in South-East Asia and Australia, connecting more than 10 cities each in Indonesia, Malaysia and Thailand. It has begun building up AirAsia X, which connects to Europe, and also flies to India. AirAsia’s promoter Tony Fernandes has announced his intentions to increase flights into India from the seven cities he currently connects to. Over the years, international carriers have been more aggressive than Indian ones and most of them have reached their entitlements limits while Indian carriers have only reached 35 percent to 40 percent of their entitlements, says Ghosh.

“IndiGo is starting small and filling up the planes should not be much of a problem,” says Oza, who is the top-selling agent for several international carriers. Rahul Bhatia, Oza adds, began his career in the travel business and understands the importance of a good distribution network.

IndiGo has kept travel agents happy, with turnover-based incentives, and sells only 20 percent of its tickets through its portal. By contrast, AirAsia has been focussing on driving traffic to its Web site airasia.com, thus saving on commissions to agents.

Bhatia’s long-term plan is to link more Indian cities to Dubai, Singapore, Muscat, Bangkok and Kuala Lumpur, to start with. With his $16 billion order for 180 planes this year, he sure has enough planes to fly these routes right up to 2025. What remains is the small matter of filling them up.