IndiGo's order for 300 A320neo family aircraft will secure future supply of aircraft for carrier into next decade, assure sustainable cash flow
The new order will also bulk up IndiGo’s ability to create a sustainable network in the region and expand further
The airline inducts an aircraft a week on an average, so this new order of 300 aircraft should not come as a surprise
IndiGo has also been at the forefront of opening new routes and markets, and has a route planning department which is like none other in the country
The new order will also bulk up IndiGo's ability to create a sustainable network in the region and expand further
Just last week, as we entered the Diwali weekend, IndiGo announced their results, announcing a loss of Rs 1062 crores for the quarter ended 30 September 2019. What stood out in the results was the ballooning costs of maintenance of aircraft, which spiked about 88 percent from the corresponding quarter last year. This cost was attributed to the older aircraft in the fleet, those called the ceo by Airbus. Each aircraft requires a detailed inspection at pre-defined milestones, and in the case of these older aircraft, the engines are heading back to the workshops for maintenance. This cost will be significant until the airline retires these older aircraft and has a fleet largely composed of the newer and more efficient neo engines, i.e., till 2022.
An airline business has a lot of moving parts, but to break it down simply: You buy aircraft, pay for fuel and all other monthly costs such as employees, airports, systems and so on, and the money left after is profit. However, in the case of IndiGo, which always makes big orders, there is one other factor at play, which is the income they generate from sale and leaseback.
An airline is supposed to pay a small token deposit when they order an aircraft. The bulk of the payment is made on delivery. By placing massive orders, IndiGo manages to get large discounts on the list price of the aircraft. For instance, the 2018 list price of an Airbus A320neo was $110.6 million, but IndiGo might even get it at 50 percent less. At the time of delivery of the aircraft, IndiGo sells the aircraft to a leasing company, making a profit of a few million dollars on the aircraft right at the time it is inducted in the fleet. It then pays a monthly amount to the aircraft lessor it just sold the plane to, for the use of the aircraft. IndiGo has built a massive cash chest of Rs 18,736 crores, with ticket sales supported by sale and leaseback of aircraft.
On Tuesday [29 October], Airbus and IndiGo announced the airline’s order of 300 A320neo family aircraft. The A320neo family includes the A320neo, the 180-186 seater aircraft which is the workhorse of IndiGo, as well as the A321neo, the 222 seater aircraft which can fly further than the A320neo as well, enabling the Delhi-Istanbul flights of IndiGo at the moment.
Another model to join IndiGo's fleet would be the A321XLR, the longest range variant of the A321, which was very successfully launched at the Paris AirShow 2019 and will be made available to customers in 2023. The new aircraft will be able to fly from Delhi to London non-stop, opening up new options for the airline in the coming years.
IndiGo’s current fleet has 128 Airbus A320ceo and 97 A320neo aircraft operating, and before this new order, already has an order of 430 aircraft (A320neo/A321neo) being filled right now, with about 335 aircraft to be delivered in the beginning of October 2019.
The airline inducts an aircraft a week on an average, so this new order of 300 aircraft should not come as a surprise. These older aircraft are supposed to go out of the fleet from 2022, so as many aircraft are required as replacement of the current fleet.
IndiGo has also been at the forefront of opening new routes and markets and has a route planning department which is like none other in the country. This enables the airline to spot opportunities to enter markets and apply a winner-takes-all approach, by providing enough flights at every airport it opens up at.
Take the example of Gorakhpur, a small airport in Uttar Pradesh which the airline entered just a year ago. The airport was only connected by turboprop aircraft of Jetlite, Air India and SpiceJet at various points of time to Delhi with expensive airfares of about Rs 7,000 per head one way. IndiGo launched Delhi-Gorakhpur flights with their A320 aircraft, taking up capacity and comfort while reducing costs. The airline followed it up by launching direct links to Bangalore and Hyderabad as well from Gorakhpur, with Rs 7,000 being the average round trip cost now to these centres. Such is the democratisation of air traffic with the entry of IndiGo in a market. Clearly, IndiGo will need a lot more aircraft to sustain adding point-to-point connectivity between airports across India.
The new order will also bulk up IndiGo’s ability to create a sustainable network in the region and expand further. The airline has already taken on the usual markets of the Middle East and is now focussing on connecting India and China, as well as South-east Asian markets.
The XLR adds to IndiGo’s ability to fly further out to markets all the way to London and Tokyo on the narrow-body aircraft. But this could also add a vast tool in IndiGo’s arsenal to fly to many other markets such as into North Africa, and deeper into South East Asia such as Indonesia. The airline has already made a public statement about its intention to take a greater share of the international traffic from India, and it needs longer-range aircraft for these missions.
At the same time, till the time IndiGo does not figure out the passenger experience to be offered on flights longer than 4-5 hours, such as the addition of a more comfortable cabin, ovens on the aircraft for hot meals and so on, it will not move forward with the plan to induct wide-body aircraft. There is a 50 percent chance that it may never happen, so it would be wise of IndiGo to get in line for the XLR for the economics it offers on long-range flights, and the fact that it can be used on shorter segments while it is not performing the 8-9 hour flights an airline would induct it for.
For IndiGo, this order secures its future supply of aircraft well into the next decade, and also a sustainable source of cash flow, making it somewhat like Amazon, which continues to want to plough back its profits into keeping prices low, and yet take as many markets in India without having to worry about locating an aircraft in the leasing market to launch a new route.
(The writer is Mumbai-based business travel and aviation journalist and the founder of the Indian frequent-traveller website Live From A Lounge (www.livefromalounge.com.) He tweets at @LiveFromALounge)