The story of successful Indigo Airlines

~ “Chance favours the prepared mind” ~

Aviation space is one of the toughest spaces to do business. In the past 2 decades, airlines such as Kingfisher, Jet Airways, Sahara Air, and Air Deccan have gone bankrupt. The problems faced by the industry are many - firstly, fuel expense, the major part of companies' expenses depends on oil prices which fluctuate drastically based on global cues and geopolitical situations. Moreover, the staff needs to be top-notch and premium. Also, the companies need big loans for Aircrafts, adding up to Capex. Despite these problems, Indigo remained profitable for 10 consecutive years. It had good revenues as compared to its peers. 

Let us study how Indigo achieved this. 

Firstly, the Indian Aviation industry faces some hard truths - 1. Even though the airline industry in India is capital-intensive, the cost of Airline Travel is on the borderline of affordability for most Indians. (Means, usually, capital-intensive industries provide mass products at an affordable cost to the consumers, BUT – it is not the same in the Aviation Industry!) So, companies cannot raise ticket prices beyond INR 6000 to attract customers. 2. The flying market in India is in the baby stages (2002-2021 era). It is difficult to pull off a profit. Almost 50% of the Operational Cost is Fuel Expense. Hence, the only way to increase margins was to do it without increasing the cost of tickets. (Companies cannot push the cost to customers). Indigo was an absolute master at it! Being Aware of the Aircraft supplier’s (Airbus) situation, and its desperation to enter the Indian market after fixing safety issues, Indigo placed a single order of 100 Aircrafts at dirt-cheap prices. It was a deal worth USD 6 Billion - one of the biggest deals in aviation history! That was a genius deal at a strategic time. For managing operational costs, it made use of the "Sales and Leaseback Model." Here, the company sells the purchased aircraft to another entity - making profits and leases back (on rent) from the same entity. By doing so, a massive amount of cash is available for smooth operations. (Capex money saved and utilised for Opex!) Even Kingfisher used the same technique, but failed, as the fundamental truth of the Indian flyers market is – 3. “Customers love living king size, but they don’t like paying king size”. Indigo discarded unnecessary perks and provided what was necessary – a seat and a bit of legroom. As more perks equal more equipment and thus, more cost of operation. Indigo opted for the Hub and Spoke Model of Operation. (Connects people from anywhere and everywhere in the most efficient manner – easy maintenance, more occupancy of planes, etc.)

Everything was running smoothly as planned. Then came the 2008 Global Financial Crisis – Fuel Prices shot up. While other airlines bled money and incurred losses, Indigo started posting profits as the Operational Costs were low and it could rotate the cash better. 15 years down the line, today (2021/22/23), it is a market leader – with a market share of more than 54%. It even pulled talent (Pilots) from its competitor (Kingfisher), as it had decent cash reserves. (June 2012 - news link here.) This saved the cost of training and onboarding of pilots. Unlike other competitors, Indigo had stable leadership. It became an absolute monopoly. 

LEARNINGS: 

1. If you are in the business of serving the common man of India, remember: “Customers love living king size, but they don’t like paying king size.” Think twice before pampering your customers too much! No matter how noble your work is, service to mankind, you CANNOT sustain in the market without Cash Flow!

2. While good brands learn from their own mistakes, great brands learn from their competitors' mistakes. (The operating models were learnt from global peer leaders – RyanAir, and SouthWest Airlines).

3. “Chance favours the prepared mind” – The low cost of operation and cash reserves of the company helped it turn the tables as the 2008 global financial crisis happened! Baby Company 🡪 MONOPOLY!

Happy Learning!

-Parth

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