Key Takeaways: -
- If you’re in the business to serve the common man of India, then always remember people are willing to live king size but they don’t like paying king size.
- If we want a decent number of customers, applying the cost filter is the only thing that matters the most.
- Indigo Airlines was a baby company in front of the business giants like Kingfisher Airlines, Jet Airways, and Air India.
- Indigo had stable leadership while its competitors were lacking it.
- Indigo also had some of the lowest numbers of employees per aircraft in the industry.
Introduction to Indian Aviation:
The Indian aviation space is one of the toughest places to do business in the past 10 years. India saw the downfall of giants like kingfisher airlines, jet airways, Sahara air, and even the iconic Deccan air and even while existing airlines have been struggling to make a profit. Indigo Airlines had been insanely profitable for 10 consecutive years till 2018 and even if we draw a ticker dip comparison, we will see that in 2015 while jet airways were still a dominating player and generated a net loss of 2097 crores and SpiceJet generated a loss of 687 crores. Indigo was way ahead with a profit of 1300 crores and today indigo is so far ahead of its competition that if we look at India’s non-stop domestic market share while spice jet stands at 11.7 percent, Air India stands at 10.2 percent, Go Air stood at 8.8 percent whereas indigo was way ahead with a 52.7 market share, it is more than their other five competitors combined.
Commencement of Indigo’s era in Indian Aviation: -
The question is with Indian aviation being such a tough market to operate in with giant competitors like jet airways, Kingfisher airlines, decan Air and Air India, how did Indigo airlines become such a strong monopoly, and most importantly how on earth had this company been profitable for 10 consecutive years. In 2005 when indigo airlines just entered the market the Indian aviation space was being dominated by the flights of jet airways Deccan air and Air India.
This is when both kingfisher airlines and indigo airlines started their operation but if we look at the growth of these companies after 2005 there is something very interesting to note. Until 2007 all these companies were operating with losses that were proportionate to their scale. Kingfisher airlines incurred a loss of 408 crores, spice jet airways stood at a loss of 132 crores and jet airways stood at a loss of 423 crores whereas indigo entered a loss of 234 crores.
But suddenly after 2008 something crazy happened and out of nowhere kingfisher’s losses shot up by four times to one thousand nine hundred crores, spice jet losses shot up to 340 crores, jet’s loss was relatively stable at 400 crores, but somehow indigo managed to pull off a profit of 82 crores and after that shock while kingfisher and jet are started failing indigo’s profit again shot up by 400 to 484.7 crores and from there onwards Indigo’s market share started increasing rapidly eventually turning it into a monopoly in the Indian aviation business.
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Truths about Indian Aviation
Now the question over here is how did these giant players like Kingfisher airlines suddenly fall and how did a baby company like Indigo airlines end up becoming a monopoly. well, that is because indigo very carefully avoided the mistakes made by these airlines and on top of that it deployed some game-changing business strategies that changed the Indian aviation space forever.
To understand this let’s try to understand the three fundamental truths of Indian aviation:
1. Despite the airline business is an extremely capital-intensive industry, needing thousands of crores of investment. The cost of flying in India is already at the borderline of affordability for most people. So, if we want to survive in the Indian aviation space, we cannot raise our prices beyond say 5000 or 6000 rupees if we want a decent amount of customers so the filter of cost is the only thing that matters to most customers as in even if the flight is carried at 1 am if it’s 1000 rupees cheaper people will still opt in to lose their sleep rather than paying more.
2. The flying market in India is still at the baby stages despite having more than three times the population of the USA as of 2017 while India’s air traffic stood at just 161.5 billion the Us was way ahead at 632 million.
3. And lastly, despite the charges being at the threshold of affordability, it is very difficult to pull off a profit in India. Why? because the most expensive element in the balance sheet is completely out of control which is the fuel cost that is around 35 to 45 sometimes even 50 percent of the operation cost and this price keeps fluctuating based on the geopolitical situations.
So, the only way one can make money in the Indian aviation space is by increasing the margins without increasing the cost of tickets and indigo was an absolute master at it.
Surprise by Indigo Airlines
The first thing indigo did was that it surprises the entire industry by ordering 100 aircraft with airbus in a single order in the very first year of its operation and this deal had an order value of 6 billion dollars which was one of the biggest aircraft deals in aviation history.
Most people thought it to be crazy but in reality, it was a genius deal made at a strategic time and Mr. Rakesh Gangwan the co-founder of indigo made this big decision for three specific reasons.
1. Back in 2005 airbus almost completely lost the Indian market and the Indian companies started buying from Boeing this was because airbus aircraft met with a series of accidents in India and this including the air crashes in 1988, 1990, and 1992. But after fixing all these problems and the safety issues airbus was desperately finding a way to come back to the Indian market and during this time when indigo placed such a huge order of 100 aircraft’s airbus was by default willing to sell them at a dirt-cheap cost now although the exact prices are not revealed. According to some data it is said that the discount could have gone as high as 50 percent.
2. Secondly, the airbus aircraft was way more efficient than Boeing aircraft.
3. Indigo used some strategies like the sale and leaseback model that drastically reduced its cost of operation and the question arises of how this model worked out. So, this is the technique wherein the airline buys the aircraft from the manufacturer and sells its asset to another party, and then rents it back from the same buyer.
For Indigo it’s an amazing deal because it gives indigo three incredible benefits over its competition. First of all, the company generates an upfront profit of 5 million dollars which could be used for cash flow and indigo can stay cash rich while other players struggled during crunch times.
Secondly, under the sales and leaseback model, indigo airlines stated that not all these aircraft will arrive at once but with a gap of 6 to 8 weeks. So that they can steadily accommodate the flights as per the market conditions. On top of that, any technical glitches or issues with the engines were to be taken care of by either airbus or the engine supplier. This way indigo neither had to pay the cost of maintenance staff nor did it have to pay for the maintenance cost of the aircraft.
And finally, indigo could easily use way more air cars with very little capital compared to the competition now the fun fact is that even kingfisher used the same sales and leaseback model as airbus but even then, kingfisher failed miserably and indigo succeeded at the same time in the same market.
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Why did it all happen?
The question is why did this happen? That is because of a fundamental truth of the Indian flyers market and that is customers love living king size but they don’t like paying king size. Kingfisher airlines and jet airways both airlines wanted to give a king-size life to their customers so they gave out in-flight meals in-flight entertainment, Kingfisher was providing free headphones at that time, whereas indigo decided to eliminate all these perks and decided to give the customers only what was needed to travel and that is a seat and a little bit of legroom. This continued from 2006 to 2008 and then came the most horrific time in Indian aviation when the oil prices started shooting up from July 2007 to 2008 the oil prices skyrocketed from just 76 dollars per barrel to 132 dollars per barrel and when this happened every single airline started bleeding money.
Strategy and Opportunity
This is where indigo became an opportunist and while every other airline was bleeding money indigo went from a loss of 234 crores to a profit of 82 crores which then shot up by 400 to 480 crores and then touched an insane mark of 700 crores all of this happened because indigo’s operational costs were low and they were able to rotate their cash better because of which they were able to pull off a profit when every other player was bleeding and from here. onwards for the next 10 years, indigo reached record levels of profit and today it stands as a market leader with a market share of more than 54 and in addition to its models of operation.
While kingfisher was bleeding, indigo used it as an opportunity by directly poaching the kingfisher pilots this was because kingfisher was not able to pay its pilots due to its losses, and indigo all thanks to its cash reserves offered the pilots a bonus that was almost equal to the pending salaries at kingfisher. This way according to the reports somewhere between 200 to 300 pilots joined indigo in just 6 months this is how indigo saved a ton of money on training and onboarding of pilots and became even more profitable in the coming years.
Similarly, they also did not make the mistake of unstable leadership while SpiceJet has been sold and bought many times, jet airways at one point didn’t even have a full-time CEO for 15 months whereas Mr. Aditya Ghosh led indigo for 10 long years from 2008 to 2018 and the result of all these strategies is as astounding as it could be. Indigo also had some of the lowest numbers of employees per aircraft in the industry. In 2010-11 while jet needed close to 180 employees per aircraft kingfisher needed 110 SpiceJet needed 120 whereas indigo needed just 96 employees per aircraft. The fun fact is that Air India needed 250 employees in 2012
When it comes to customer service and hospitality indigo has been extraordinary with the lowest complained percentages and cancellation rates in the industry. This is the reason why from 2012 onwards if we draw a comparison of all these airlines while kingfisher went out of business, indigo started achieving record levels of profit and by 2015 while jet generated a net loss of 2097 crores SpiceJet generated a loss of 687 crores indigo was generating a profit of 1300 crores now although jet tried to come back it sunk by 2019. Indigo kept going and going and today it commands a market share of more than 50 in the Indian aviation space with an absolute monopoly in 194 routes out of the 531 routes that it operates. Eventually indigo remained profitable for 10 consecutive years which is remarkable in an industry that is considered to be a graveyard of regional airlines this is the iconic story of indigo airlines.
There are three very important lessons that we need to learn from indigo:
Lesson number one: If you’re in the business to serve the common man of India always remember people are always willing to live king size but not pay the king. So always think twice before pampering the customers too much and as much as it is important to provide the best quality service to mankind. Always remember no matter how noble your work is if there is no cash flow you cannot sustain in the market and we saw that in the case of jet airways and kingfisher airlines.
Number two: While good brands learn from their mistakes great brands learn from their competitor’s mistakes in this case while indigo learned the cost of flamboyance from kingfisher and jet airways. It also learned from Deccan air that there is a difference between cheap and affordable because Decan often messed up with timings and customer service in the race of keeping costs low, similarly indigo airlines learned the hub and spoke and sales and leaseback model from American European legends like southwest airlines and Ryanair Airlines.
Last and most importantly, it was the ultra-low-cost of operation of indigo and the cash reserves of the company that helped it turn the tables as soon as the 2008 crisis happened and this turned indigo from a baby company to a monopoly in the Indian aviation space.