Why IndiGo has signed a lopsided deal with loss-making Qatar Airways?

Recently, IndiGo announced a codeshare agreement with Doha-based Qatar Airways. The agreement is one-sided that gives Qatar Airways the privilege to place its code (QR) on IndiGo's flights between its hub Doha and three key cities for IndiGo (Delhi, Mumbai and Hyderabad). IndiGo, however, is deprived of reciprocal rights to place its code (6E) on Qatar Airways' flights.

The question arises as to why the market leader IndiGo has agreed to sign a deal with Qatari carrier, which has been posting net losses for the past two years. At the official presser, IndiGo's CCO (chief commercial officer) Willy Boulter told Business Today that the agreement is the first step to their partnership, which he hopes would expand in the times to come.

The deal seems to favour Qatar by giving it access to additional capacity through IndiGo. The Doha-based carrier has reportedly (almost) exhausted its bilateral seats with India (24,292 per week), and since the Indian government is unwilling to give additional seats to Qatar - which is asking for about 42,000 additional seats per week - IndiGo deal would instantly increase its capacity to the India market.

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This is a big boost for the Middle-eastern carrier that is battling blockade from a coalition of Gulf countries such as Bahrain, Egypt, Saudi Arabia, and the UAE since June 2017. These countries have banned Qatari aeroplanes to use their airspace which has resulted in the airline taking longer time -about 25 minutes more than their previous flight schedule - to avoid certain blocked airspace, and thereby jacking up their fuel cost. In March 2019, the carrier posted a net loss of $639 million, up 826 per cent from a year ago.

"It's a simple seat selling arrangement. What's surprising is that it's not a bilateral agreement. Since 2009, the bilateral seats for Qatari carrier have not been increased by Indian authorities. The deal gives Qatar ability to add capacity indirectly," says an aviation expert.

But what's in it for IndiGo? There are perhaps two reasons why IndiGo signed this deal. In a codeshare agreement, Qatar will possibly guarantee a minimum number of passenger traffic (or seats) every week to IndiGo which is doing direct flights from seven domestic airports - Delhi, Mumbai, Hyderabad, Chennai, Kozhikode, Kochi and Kannur - to Doha at the moment.

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"Selling seats is a tough thing. IndiGo has found a partner to sell its seats on the Doha route; its net share would go up," says Devesh Agarwal, an aviation blogger.

IndiGo is going to benefit from the large frequent flier programme of Qatar Airways. Gulf countries have huge Indian diaspora; some of those are frequent fliers of Qatar Airways. If they are travelling to India, especially to Delhi, Mumbai and Hyderabad, they would prefer IndiGo's flights (coded with QR) as they could redeem the mileage points earned with Qatar Airways. IndiGo is also ramping up its international capacity with an aim to grow the contribution of international segment revenues to the overall topline, which stood at 17-18 per cent in 2018/19.

Last December, IndiGo signed its first codeshare agreement with Turkish Airlines to tap European destinations such as Amsterdam, Athens, Paris, Prague and Brussels. Experts say that due to diplomatic challenges between India and Turkey, this partnership can offer only limited upside. Hence, there was a need for IndiGo to look for another partner. IndiGo has recently ordered 300 planes of various types from Airbus, including the long-range A321XLRs, which would help the airline reach some European destinations on its own.

The other reason for IndiGo to join hands with Qatar Airways is that it could perhaps be a precursor to a bigger deal between the two carriers. IndiGo sees Qatar Airways as an equity partner in the long term. Although Group CEO of Doha-based carrier Akbar Al Baker said that the airline is keen to take a stake in IndiGo but it will wait until issues at the promoter level get resolved. IndiGo's founders Rakesh Gangwal and Rahul Bhatia are engaged in a legal battle in the London Court of Arbitration over the allegations of corporate governance slippages levelled by Gangwal camp against the Bhatia camp.

Currently, Indian FDI (foreign direct investment) regulations allow 49 per cent stake in domestic airlines and Qatar Airways has reportedly shown interest in acquiring about 10-15 per cent stake in IndiGo which controls 48.2 per cent of the domestic market.

Qatar is also buying stakes in airlines across the globe, be it International Airlines Group (IAG), Cathay Pacific, LATAM Airlines Group, and Air Italy. Last year, the Gulf carrier acquired 5 per cent stake in China Southern, and the two airlines have already announced plans for a codeshare agreement that will begin in January next year. Much like India, China is one of the fastest-growing aviation markets in the world. Global aviation body IATA predicts that China will replace the US as the world's largest aviation market by 2024 whereas India will displace the UK for third place in 2025.

"It seems that the idea behind these investments is to get hold of the board, the operations of these airlines, and have some influence. This is unlike Etihad Airways' strategy, which had integrated its investee airlines into Etihad Airways Partners, which is not the case here," says an aviation consultant.

Codeshare agreements are common in the aviation industry, more so with airlines that are part of global alliances. The details of IndiGo-Qatar Airways' agreement are still sketchy, but it seems that both partners have more to gain and less to lose from the deal.