How Indigo Became the King of the Blue Skies

HOW INDIGO BECAME THE KING OF THE BLUE SKIES

1.  Simple Fleet (Single type of aircraft): 
   Indigo's whole fleet consists of a single type of aircraft which is A320-232 while other airlines use various types of aircrafts. This strategy decreases indigo’s operating ratio as they are able to cut costs of training and hiring of the employees because all of them have to be trained for a single model. This also results in greater flexibility as the crew can be used interchangeably.

1. Sale and leaseback arrangement- Indigo uses this mechanism to purchase aircrafts. Under this mechanism Indigo purchases the aircraft and sells it to a leasing company at a profit and then leases it back from the same company. This benefits the company in various ways:

1. The company’s capital is not tied up in an asset and they are able to avoid huge upfront costs.
2. Indigo is able to generate positive cash flow from the sale of aircrafts to the leasing company.
3. Now, the company has to pay lease for the aircrafts which is an expense so they also get tax shield (Tax deductions).
4. Cash flows are not hit hard and no debt is created.
5.  They save on depreciation costs since they don’t own the asset and this helps in increasing profits.

1. Debt:  The Company has practically no debt. They even used their IPO proceeds to retire Rs. 1166 crore of their debt. While other airlines like Jet Airways, Air India and Spice Jet have considerable amount of debt. Keeping debt manageable is important because downfall of airlines like Kingfisher was stemmed from their debt. Indigo’s low debt helps them to save their portion of revenue which would have gone to service debt.

1. Young fleet:  Indigo has a young fleet and the average age of their aircraft is 3.26 years. A younger fleet results in low maintenance costs. This improves their operating efficiency. Indigo is able to maintain a lower fleet age because its aircrafts are leased for a period of 6 years only. In this way they avoid the "Heavy maintenance visit” also known as D-check which takes place after 8 years of operation of an airplane. A D-check requires 50,000 man-hours and it may take up to 2 months during which the aircraft remains out of service and thus will not generate any revenue.

1. No Frills- The airline has only economy class and so they are able to reduce their human resource costs as the crew for the premiere classes require additional training and higher salaries. Moreover by having only the economy class they don’t need to maintain expensive lounges, counters or other facilities for business/first class passengers and this helps them in reducing their airport charges.

1. Humongous Orders - Indigo has been able to better leverage the price of the aircrafts by placing bulk orders. Bulk orders hand Indigo huge bargaining capability with the manufacturer while buying and better returns when the aircrafts are later sold to the leasing company under the Sale and Leaseback agreement. It is estimated that Indigo makes a profit of about $5 million per plane through initial sale to the leasing company and they use this cash (Profit) as working capital. Moreover the profits from these transactions get spread (amortized) over several years which allows deferring the payment of tax and ensuring high cash flows.

1. Effective Route Planning: Indigo covers less number of destinations but with higher frequency. This helps them to lower their turnaround time (time taken between landing and the next take-off) to 30 about minutes which is imperative in reducing their airport charges because an airline is charged according to the duration for which its aircraft stays at the airport. Having a single type of aircraft also helps in this regard as the time taken by the crew gets optimized.

1. Fuel:  Fuel is a major cost driver in the aviation industry as it accounts for about 40-50% of airline’s total operating costs. Indigo tries to save fuel by making use of software that optimizes flight planning for minimum fuel burning routes and altitudes. Indigo has also placed orders for Airbus A320neo family which claims 15% less fuel consumption and 8% lower operating costs.  Even if the NEO (New Engine Option) results in 10% fuel saving then it would bring down the total operating cost of the airline by 4-5%.