Forbes India 15th Anniversary Special

Air India will provide rapid entry to restricted, closed international markets, say IndiGo promoters

IndiGo promoters Rahul Bhatia and Rakesh Gangwal said a JV or joint ownership with the government was a very difficult proposition

Published: Jul 6, 2017 08:45:17 PM IST
Updated: Jul 7, 2017 10:31:15 AM IST

Air India will provide rapid entry to restricted, closed international markets, say IndiGo promotersImage: Reuters
Rahul Bhatia and Rakesh Gangwal, the two elusive promoters of India’s largest airline IndiGo, spent 60 minutes on Thursday evening via a conference call with investors clarifying the airline’s expression of interest to the Indian government in acquiring the international assets of Air India.

“Air India’s international operations would bring very important elements to our network. It would provide rapid entry into restricted and, in some cases, closed international markets,” Bhatia said. “So instead of being a small international player, IndiGo would have a path to becoming a major player in the international market.” Bhatia said in the investors’ call, to which Forbes India had access to.

Bhatia said that there have been successful examples in the past where an airline has divested its international operations to the benefit of the buyer. “A few decades ago United Airlines acquired Pan American’s specific international operations.

Based on the success of that transaction, United followed it up by acquiring Pan American’s London routes in 1990. As a matter of fact, American Airlines followed the same model by acquiring Trans World Airlines’ London routes.”

Air India and its international budget subsidiary Air India Express carried 2.4 million passengers to and from India in the January to March 2017 quarter, accounting for 17 percent of the overall international air passenger traffic in India. Besides, Air India operates direct long-haul flights from India to major international hubs in the US, UK, Europe and Australia. 

IndiGo commands a 4 percent share of international air passenger traffic in India.

“If we were to acquire the international operations of Air India, for sure we will not continue to operate it in the same way. By definition, it would require us to redo whatever was going on before,” said Gangwal.

While he admitted that he did not know if Air India’s international operations was profitable, he said, “you would have to assume that there would be fundamental structural changes (in terms of fleet and routes).”

IndiGo reported a 25 percent fall in profit at Rs 440 crore for Q4FY17 due to rising fuel costs. It had reported a profit of Rs 584 crore in the corresponding quarter a year earlier.

For the fiscal year ended March 31, IndiGo posted a profit after tax of Rs 1,660 crore as against Rs 1,986 crore reported in the previous fiscal, a decline of 16.5 percent.

Despite the decline in profit, this is the ninth straight year of profitability for IndiGo. Revenue in the 12-month period increased to Rs 19,369.57 crore as compared to Rs 16,655.03 crore in the previous fiscal. 

The promoters emphasised that IndiGo’s interest in Air India was part of the airline’s larger vision to commence long-haul international operations.

“The Indian market is significantly underserved to long-haul international destinations, and a large and lucrative opportunity exists for IndiGo to take advantage of,” said Gangwal.

IndiGo’s success, he said, would come from grabbing a fair share of the existing international air passenger traffic from international carriers.

“Passengers will mostly come from foreign airlines that are today connecting over their hubs or flying at high fares on non-stop flights. Just for a moment, think about the value proposition to the passengers that IndiGo would offer.

On an average, passengers will arrive at their destination three to five hours earlier – and for a lower fare – and without all the hassles of connecting over hubs, going through multiple security checks, worrying about their connections, losing bags in transit, and so on.”

But the question is whether the government would split up Air India and sell it in parts or look for a buyer willing to buy it in its entirety. “If the government decided to go down the path of divesting itself of all the airline operations of Air India, we will certainly give it a close look,” said Bhatia.

Hypothetically speaking, Gangwal presented an option by which the government could divest Air India’s domestic operations. “They could take all of Air India’s domestic operations and put it in three to four baskets based on certain types of flying and present it to smaller airlines. We may participate in something like this.”
Gangwal, however, was categorical in stating that IndiGo would not consider any joint venture or partnership with the government in running Air India. “A joint venture or joint ownership with the government is at best a very, very difficult proposition. And we would not go down that path.”

In the same breath, he made a case as to why Air India should remain in the hands of a domestic operator. “If the international assets of Air India get acquired by a foreign state-owned entity, it could potentially play out as a Shakespearean tragedy.
The idea that a foreign nation would control a large part of India’s international air transport network is very difficult to warp one's head around.” He then added: “From a policy perspective (of Make In India), we would like to believe that the government would be very interested in having a homegrown international operator.”