IndiGo follows copybook LCC model, wants profitable growth: CEO Aditya Ghosh

IndiGo today announced the largest ever order of 250 Airbus A320neo family aircraft which, at list prices, would cost $26.5 billion. The aircraft start coming in from 2018 but IndiGo will begin taking deliveries of a previous order of 180 aircraft later this year. So in all, it now has 430 aircraft on order apart from 97 operational aircraft in its fleet. IndiGo is already a market leader with close to 40 percent share of the domestic market but the latest aircraft order shows the airline’s forward fleet plan for a decade which is at once ambitious and sends a message to competition about its aggressive growth.

IndiGo president Aditya Ghosh spoke to Sindhu Bhattacharya in an exclusive conversation with CNBC-TV18. Excerpts:

On the order: We are a country of a billion people and less than 400 aircraft. India is a most under-penetrated market compared to, say, China, Brazil etc. We have 8.5 billion rail passengers and less than a percent of that number travel by air every year. If we take even 1 percent more of rail traffic and covert this number to air passengers, we will need 400 more aircraft tomorrow. In any business, when demand exceeds supply it is good. So we have a huge opportunity in India, this order for 250 aircraft has not just come out of our hat.

On delivery schedule: The aircraft start coming in from 2018 and continue till 2026. We have charted a 10-year roadmap. Of course, not all 430 new aircraft will be incremental, some will be used as replacements too. But what will be our ambient fleet going forward will depend on how the Indian market grows. If the market grows faster, we will keep more planes …..typically every aircraft stays in our fleet for about six years.

On market share: We do not focus on that. Frankly, the formula is simple: lower air fares, load factors (number of occupied seats on an aircraft) will rise and market share will increase. But profits will disappear. We do not want growth for its own sake, we want profitable growth. We have a long track record of profitability, announcing profits since FY09.

Financing aircraft order: The fresh order will be financed with a mix of options like sale and lease back, financial lease - all options are on the table. All aircraft will be on IndiGo’s books, will not be transferred to any subsidiary. We have a loan of about Rs 4,000 crore as on December last year but all of it is aircraft loan, we have zero working capital loans on our books. Criticism that sale and lease back actually accounts for our profitablity is incorrect - all airlines do this, some more than us, and if sale and lease back were to account for profits then other airlines would be profitable too.

On sustained profitability mantra: We are a copy book LCC, Everything we do is straight out of a business school case study about low cost airlines. We stick to the LCC model like a bible. We dont buy multiple types of aircraft, we don’t offer things like Business Class and airport lounges. Then, we have been lucky with a committed leadership team and a set of founders which has remained the same. Stability at the top helps. The other big factor is remaining lowest cost. Lots of people focus on improving yields but we focus only on reducing costs by sticking to just the basics. In mature, affluent markets like the USA and Europe, airlines like EasyJet, Ryan Air are also following this model and have been profitable for years.

On ATF price reduction: If any input costs in business can be lowered, we can pass on lower prices to consumers and this will mean more people can fly, it will help us grow the market. But will it help airlines become profitable? Any reduction in ATF taxation will benefit all airlines, not just one but it will also mean lower fares and lower realisations. It will not help airlines become profitable. The holy grail to profitability is managing costs. Apple is the lowest cost manufacturer of the iPhone.