IndiGo mega-order: Where does India’s most successful airline go from here

IndiGo’s historic firm order for 500 aircraft of the Airbus 320 family Monday is not only the single largest purchase agreement in the history of commercial aviation in recent times but also serves to reinforce India’s position as the next big growth centre for the industry.

This comes within five months of national flag carrier Air India announcing its mega-order for 470 aircraft, and the order, therefore, not only eclipses that deal but also complements it.

Currently estimated to be the fastest-growing aviation market globally, India is expected to fly 450 million passengers from over 200 airports by 2030, a growth of 300 per cent over the current 145 million passengers. Furthermore, major home-grown carriers are projected to place mega orders for an additional 1,400 aircraft over the next five years, according to official data.

IndiGo’s order takes the total number of Airbus aircraft on order by the Gurugram-headquartered carrier to 1,330.

In an oblique reference to the carrier’s future growth strategy, CEO Pieter Elbers said, “The additional 500 [aircraft] would bring the orders well into the next decade and with that, it means these thousand aircraft which are going to be delivered will help the country move forward; will help IndiGo move forward, to make sure that we live up to our promise and continue to build our unparalleled network both domestic India and as well as internationally.”

Analysts felt that with the country expected to clock decent gross domestic product (GDP) growth, the deal had come at the right time.

“If the GDP in a developing economy like India with a lot of pent-up demand continues to grow at an average of 7 per cent, the growth in aviation would be double that to organically grow at 14 per cent. Till the time the country reaches the 2,000 aircraft figure, this 2 per cent growth to GDP can be easily managed,” an industry expert told Business Today requesting anonymity.

Aggressive international expansion

IndiGo would be leveraging the new order to develop new routes from tier-II and III cities within the country as well as expand internationally. Following an aggressive expansion through tier-I cities, it is now looking at organic growth by ramping up flights to secondary cities such as Shivamogga, Pantnagar and Bareily as well as enhancing international flights to destinations in countries of the Commonwealth of Independent States (CIS), Africa and South and Southeast Asia.

“International routes are opportunities that have to be cultivated. Initially, you would want to have 90 per cent of your routes profitable so that you don’t burn cash. But once you are in a fair cash situation, you need to experiment with new routes and develop them within three years. IndiGo has finally reached that stage,” another aviation expert observed after the announcement.

Moreover, the low-cost carrier (LCC) is reported to have once again hammered out one of the sweetest deals in global aviation for its newest aircraft order at a steep 55 per cent discount.

The missing pieces

However, IndiGo didn’t announce any orders for wide-body aircraft. As BT had reported in an earlier story, people familiar with the deal were expecting the airline to order up to 50 wide-bodies to operate long-haul flights to destinations in the UK, North America and Australia.

The carrier currently operates a fleet of B777 on a wet lease from Turkish Airlines under a codeshare agreement.

“They will stick to this stance of a wet or damp lease with Turkish Airlines and maybe ask the government to extend it further. The rule was that you couldn’t operate a wet lease aircraft for more than six months. IndiGo got that extended from six months to one year. But I have a feeling that they will get it extended further,” the first analyst said.

Similarly, IndiGo didn’t place an order for a narrow-body of the A220 family that has emerged as an even more efficient aircraft than A320neo and could be an ideal choice for offering both domestic and international connectivity from smaller airports. Experts, however, said that the humongous size of the deal provided the carrier enough legroom for manoeuvrability and it may reconsider the aircraft once Airbus offered the option of a CFM engine. The A220 family currently operates with P&W engines.

However, the most important takeaway of the order would be IndiGo’s transition from being a majorly domestic LCC to a global airline system operating with a hybrid model. This would be very similar to the evolution of companies such as Canada’s WestJet and Brazil’s Azul Linhas Aéreas Brasileiras that had similarly started out as LCCs but turned hybrid once they realised they needed to expand internationally to sustain future growth.

Also read: How staggering 500-aircraft order may redefine India’s largest carrier

Also read: Can IndiGo's new CEO keep India's leading airline ahead of its rivals?