Why an alliance with IndiGo is the best bet for any investor

Every other day now, there are reports in the Indian media about international carriers circling large Indian airlines for possible equity investments, now that the government has allowed foreign airlines to acquire upto 49 percent equity in Indian airlines. But till now, the name of IndiGo, India’s largest carrier by passengers, has not been taken in this context.

It was only earlier today that the Wall Street Journal carried a story about a possible interline arrangement between IndiGo and British Airways which would include ticketing and baggage agreements. The story does not speak of any equity investment and has been denied by both airlines involved.

[caption id=“attachment_598232” align=“alignleft” width=“380”] Not one single international airline will speak of its interest till it has sounded out IndiGo. Reuters[/caption]

But while IndiGo has been keeping quietly out of the hallabaloo over foreign airlines wanting to pick up equity in Indian airlines, it is actually the best pick of the lot. And this is the opinion of several large global airlines, who are keen to determine IndiGo’s asking price.

Not one single international airline will speak of its interest till it has sounded out IndiGo and neither will IndiGo admit to interest by these acquirers until it perhaps reaches some sort of concrete negotiations. So, there is no official confirmation of any deal or even talks between IndiGo and any other international airline for an equity partnership.

But, like I said earlier, IndiGo is the best placed to get an investor. It holds more than a fourth of the domestic market (market share at the end of December was 27 percent), has claimed in the past that its debt:equity ratio and manpower:aircraft ratio is the best in the industry. Besides, it has kept the business model absurdly simple: on time fights at lowest possible costs in a single configuration A 320 aircraft.

This airline, along with competitor SpiceJet, offers any potential investor the most extensive network within India connecting metros as well as small towns. This is what any international airline would covet, since it would be eying traffic potential from tier I and tier II Indian cities for feeding into its own global network.

A senior official with a legacy Indian carrier said he was not surprised about talk of IndiGo and BA alliance even if it turns out to be untrue. “Jet is already talking to Etihad Airways for an equity alliance, SpiceJet is also speaking to investors and Kingfisher is grounded. There are not many airlines left in India to talk with so it makes eminent sense for any large global player eyeing Indian traffic to open negotiations with IndiGo. But as I see it today, its not IndiGo which needs this alliance - its the suitor airline. What any such alliance would bring to IndiGo would not be very significant but IndiGo can offer a suitor tremendous connectivity within the country”.

An official of a large South East Asian carrier supported this view, saying IndiGo is the best placed to get investment among all Indian airlines at this point. The official of the legacy carrier quoted earlier said that if the specifics of a ticketing and baggage alliance are indeed being spoken of between IndiGo and British Airways, the issues on the table would be many: who willl bear baggae mishandling costs, who will transfer passengers and baggage from one terminal to another at Delhi etc He said these alliances are not uncommon and may not necessarily lead to an equity investment in the future. He also recalled a similar alliance that British Airways had with Kingfisher earlier.

As of now, IndiGo is not just the largest carrier of Indian passengers, it also has several firsts to its credit: the fastest growing airline anywhere in the world (it reached 0 to 61 aircraft fleet in about 5 years), the best on-time performance in India and the fastest turnaround of its aircraft. That there will be more such talks between IndiGo and potential alliance partners is not in doubt. But will IndiGo bite the bullet? That remains to be seen.