Rahul Bhatia and his IndiGo Airlines like to keep a low profile, yet other domestic airlines in India look at them with deep mistrust. Some of it has to do with what happened in mid-August last year, when Bhatia broke ranks with the rest. All the private airlines had decided to take on the government on high fuel taxes with a decision to stop flying for a day, and a threat of an indefinite suspension if demands were not met. Full service airline chiefs Naresh Goyal and Vijay Mallya led the move, saying that the airline business was becoming unviable in India.
Less than 24 hours after the stormy meeting, IndiGo backed out and started accepting bookings for the day of the strike. SpiceJet followed a day later, and the others were left with little option. The strike fizzled out and taxes remain unchanged. A year later, it’s clear why IndiGo was reluctant to ground its fleet.
In August 2009, while the other airlines were bleeding from mile-high debts and declining number of passengers, IndiGo was making money. Its results for 2009-2010, posted with the Directorate General of Civil Aviation (DGCA) and audited by KPMG, show a profit before tax of Rs. 550 crore on a turnover of Rs. 2,664 crore. For comparison, Jet Airways and Kingfisher, the two biggest private airlines, turned up a combined loss of Rs. 2,114 crore in the same period. Of those in the group that day, SpiceJet was the only carrier that ended the year in the black, with a profit of Rs. 61 crore.
IndiGo, an unlisted company, is on course to raise about Rs. 2,500 crore in the next six months, most likely through an IPO. However, the competition is treating the results with much scepticism. They point out that net profit margins are rarely above 4 percent for the best of airlines around the world. Numbers, they say, can be distorted by one-time incomes such as sale and lease back. IndiGo did two such deals in the period. “The results are to be taken with a big pinch of salt,” says the head of one rival carrier who would not go on record for obvious reasons.
Whether rivals believe the numbers or not, the newest of six airlines in the Indian skies is showing signs of breaking away from the pack. IndiGo had a shade over 16 percent of the market at the end of August, and is now within striking distance of Air-India domestic that has 18 percent of the market. It is also easily the most meticulous of the domestic airlines in terms of fleet and network planning with aircraft induction plans already in place for the next decade.
Consider this: Over the next five years, 70 more Airbus A320 planes, which were ordered before the airline even began its first flight, will join its fleet. For beyond that (2015-2025), IndiGo has government permission to induct 150 planes.
Airline fleet planning is typically done a decade ahead, but not many start-up carriers have the vision or resources to do it. Senior sources in the DGCA say IndiGo is gearing up to roll out international operations by this time next year. It is, in fact, poised to become a point-to-point operator connecting multiple destinations in Asia-Pacific and the Middle East by the time the new batch of 150 enters service. “If not for the government rule restricting airlines that are less than five years old from flying overseas, 6E [the IndiGo callsign], would already be doing it,” he said.
Over the next six months, IndiGo’s fleet will go up to 35 planes. The increased capacity will almost certainly catapult it to the third position, behind Jet Airways (27 percent market share) and Kingfisher (20 percent). But that is neither here nor there. Built as they are on a low fare-high load factor model, low-cost carriers (LCCs) do not find it too difficult to rapidly grab a chunk of any market. Capt. Gopinath’s Air Deccan opened new stations and grew rapidly, managing to overtake Indian Airlines for a brief period. But Deccan’s eventual inability to survive proved that a huge network and large number of passengers do not necessarily mean profits. Deccan connected 74 cities with 43 planes, while IndiGo is at 22 cities with 28 planes.
Two Men and an LCC
At its simplest, IndiGo is a story of how two extremely low-profile men, sitting 7,000 miles apart, are building an airline with a cost structure and profit margins that few have achieved. The two, Rahul Bhatia and Rakesh Gangwal, own 50 percent each of InterGlobe Aviation, the company that runs IndiGo.
As managing director of InterGlobe Enterprises, a $2 billion (revenue) group, with subsidiaries in the hotel, airline and travel technology business, Bhatia is the one in charge of operations. He has used almost two decades of experience of the travel business as well as, some say, his contacts in the government, to set up and run IndiGo.
The Kolkata-born Gangwal, an engineer from IIT Kanpur, had a long career in aviation with Air France, United Airlines and as President and CEO of US Airways. They met almost accidentally in the corridors of the United Airlines headquarters in Chicago in 1985, while Bhatia was doing IT work for the airline. The acquaintance grew into a friendship over the next decade and a half, before the airline was planned and launched.
In the US, Gangwal is remembered for bailing out of US Airways in 2002 with retirement benefits of $15 million, leaving the airline deep in the red in the aftermath of September 11. To be fair to him, old timers in the US airline industry say the airline had problems that preceded him and continued well after his departure. He left to join the private equity business and is currently advisor at Teachers’ Private Capital, which has a portfolio of $10 billion. Gangwal did not speak with Forbes India for this story.
Bharat Bhise, CEO and founder of Bravia Capital, a New York-based transportation advisory and investment company, has worked with Gangwal. “Gangwal brings in the global networking and the expertise that comes from running global airlines. He has made the mistakes and knows how to avoid them,” he says. Bravia’s affiliate company, Hong Kong Aviation capital (HKAC), has 10 aircraft on lease to IndiGo.
Not everyone agrees with this philosophy. Kapil Kaul, India head of CAPA (Center for Asia-Pacific Aviation) who has been studying the growth of LCCs very closely, thinks IndiGo is underinvested in branding. However, Kaul is full of praise for the way Bhatia and Gangwal have put in the systems and people and supported their business in the tough times. “IndiGo’s 100 airplane deal itself was the game changer,” he says. They had a great deal and suppliers credits that allowed them to operate with very low capital, till revenues slowly grew to present levels.
(This story appears in the 05 November, 2010 issue of Forbes India. To visit our Archives, click here.)
An absorbing read. Especially for the quality-starved Indian business reader. Way to go Forbes!
on Mar 10, 2013Thank you Sathya! Nice to see it being read and appreciated so many years later.
on Mar 10, 2013well a really nice and accurate one my aim is also airline business and i learnt a lot with it and also it clears that in every market lower segment is more so we got to concentrate more on it
on Nov 3, 2011Excellent article hope the other players learn from their mistakes.... Thanks
on May 31, 2011Quite interesting article ....makes a good reading ....being in the industry .... Thanks!
on Oct 27, 2010