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

It’s a clear Thursday morning in Mumbai. The occasion: IndiGo’s inaugural flight to its 100th destination—Ras Al-Khaimah, in the UAE. Some employees, dressed up in traditional Maharashtrian and Emirati attire, wait at the check-in counter. Soon, Pieter Elbers, IndiGo’s new CEO, bounces in and goes around greeting the staff members. “Now with Covid-19 behind us, we can start to rebuild, and that’s already happening. Our staff is doing a wonderful job and getting a lot of positive customer feedback,” an energetic Elbers tells BT during a late-night interaction in Ras Al-Khaimah.

Before joining IndiGo, India’s largest airline, Elbers was the CEO of KLM Royal Dutch Airlines, the world’s oldest passenger carrier. Notably, KLM is a full-service carrier (FSC), while IndiGo is a low-cost carrier (LCC). So, the choice of Elbers to head IndiGo might initially surprise, but the rationale is to spread the airline’s wings globally. There are other priorities, too.

The airline industry is witnessing rising competition, and IndiGo itself faces a raft of challenges. From a competitive viewpoint, the Tatas are investing in making Air India a quality brand again, besides strengthening their other FSC Vistara, and newbie LCC Akasa Air is steadily increasing routes since its August launch. Jet Airways’ re-entry, although delayed, seems inevitable. Then, IndiGo has come off a pummelling from Covid-19 in FY21 and recovered its top line somewhat in FY22 but losses have climbed and margins have shrunk, and it fails to pass muster in the most critical metric—customer service. Not to mention a bruising legal and emotional battle between the company’s two founders that is now over, but the embers remain. The new CEO will surely have his hands full as he seeks to take the company forward in the coming months.

Co-founded by Indian entrepreneur Rahul Bhatia and ex-US Airways CEO Rakesh Gangwal, IndiGo is known for its unconventional approach. Over 16 years, the company has proven its detractors wrong through one of the lowest cost per available seat kilometre (CASK), slots at all metro and non-metro airports, a high aircraft-to-destination ratio, stable flight schedules, and a well-thought-out strategy of only fighting one battle at a time. “It has to be acknowledged unreservedly that IndiGo has built a formidable airline,” says G.R. Gopinath, founder of Air Deccan, India’s pioneering LCC that was acquired by the now-defunct Kingfisher Airlines. “A massive fleet of nearly 300 Airbus and ATR aircraft added at a scorching pace, and an immense network that connects… the far corners of the county. The airline has also made impressive inroads into international routes.”

The airline was born when there were no pilot training facilities available to private players; and no maintenance, repair and overhaul (MRO) facilities to provide engineering services for aircraft. Even ground handling firms were scarce. “This meant developing one’s infrastructure at a huge investment. IndiGo is now largely self-sufficient with its pilot training facility, its MRO hangar almost ready at Bengaluru to perform C-checks, and its well-developed ground handling. It can also use these capacities for servicing other carriers,” an industry insider tells BT, requesting anonymity. IndiGo also pioneered the sale and leaseback (SLB) model in Indian aviation. Under SLB, an airline buys an aircraft from the manufacturer at an attractive price and sells it to a lessor or lender who then leases it back to the original owner. “By placing bulk orders and adopting the SLB model, they have been able to get good discounts on equipment and generate liquidity, which is fundamental to the airline business,” says Ajay Kumar, Managing Partner at law firm KLA Legal.

Over the years, IndiGo has developed into a veritable ecosystem of aviation-related services. The parent, InterGlobe Enterprises, has seven verticals—the airline, hotels in India, a business unit providing travel bookings and travel agency management solutions, representative services for international airlines, a car rental company and a hotel bookings site, international hotels, and pilot training and aircraft maintenance—that work in synergy. IndiGo will need to leverage all this ammunition as it seeks to overcome a bunch of challenges it faces to its growth.

A newly-privatised Air India and the entry of Akasa Air are expected to put pressure on IndiGo’s thinning margins. “With increased competitive intensity, higher profitability would remain a question even if ATF (aviation turbine fuel) prices cool down. Historically, we have seen Indigo focussing on market share over profitability, which should benefit it in the longer term,” says Karan Khanna, Analyst at Ambit Capital, adding that the airline’s strategy to expand into Tier II and III domestic routes, as well as international routes would ultimately bear fruit as both yield higher revenues compared to metro routes.

Then, shares of InterGlobe Aviation have underperformed the benchmark indices on a year-to-date basis due to higher fuel prices and adverse currency movement. Its standalone net loss widened to Rs 6,171.03 crore for FY22 against a loss of Rs 5,829.79 crore in FY21. For the quarter ended June 30, it again reported a loss of Rs 1,065.42 crore, albeit lower than Q1FY22’s loss of Rs 3,179.27 crore. Agreeing that the past two years were challenging for the company, Sanjay Kumar, Chief Strategy & Revenue Officer at IndiGo, points to the recovery in the air travel market in the past seven months, especially from small businesses and visiting friends and relatives (VFR). “VFR and leisure travel will drive business for airlines... especially between metros and Tier II and III cities. We have also seen 100 per cent recovery in business travel in the past few months and are expecting the demand to soon exceed pre-pandemic levels,” says Kumar.

Market analysts feel IndiGo must do more. “Expanding presence in the domestic and international markets and working on cargo revenues should help the company increase its earnings,” says Deepak Jasani, Head of Retail Research at HDFC Securities. “With ATF prices moderating, higher capacity utilisation, cost rationalisation, higher yields and fuel-efficient aircraft, the margins could start improving. Average Q2FY23 yields have risen more than the ATF prices.”

A welcome development is the dismantling of the pricing caps on airfares in August, a legacy of Covid-19. “This will help airlines sustain with better PLFs (passenger load factors). We have witnessed a strong recovery this summer holiday season and we expect the trend to continue through the festive season as well,” says Kumar. Adds Jasani: “Air fares have increased sharply on the busier routes over the past few months, which helps the company to boost revenues.”

This February, co-promoter Gangwal announced his exit from InterGlobe Aviation’s Board following a three-year dispute. IndiGo also witnessed a semblance of industrial unrest after a large section of pilots, cabin crew and technicians proceeded on go-slow, demanding withdrawal of pay cuts announced in 2020 to manage falling revenues during Covid-19. After this severely affected IndiGo’s on-time performance, the airline restored full pay of employees in tranches.

Another weak area for the airline is customer service. The Directorate General of Civil Aviation recently levied a Rs 5-lakh fine on the airline for barring a child with special needs from boarding a flight from Ranchi. In late 2017, some ground staff members were sacked after they were recorded beating up a passenger on the tarmac at Delhi airport. “IndiGo, while efficient, has become arrogant and is no longer a much-loved airline. With competition snapping at its heels, passengers have a chance to choose from among its competitors,” says Gopinath.

Elbers says he is committed to changing that. “Even if you have a high market share but your service does not match that, your product is not on time and if passengers don’t feel happy, you will start losing that automatically. It is our ambition, drive and commitment to our customers to continue to deliver an excellent service,” he says.

Good intentions, but it will take more than that to surmount IndiGo’s challenges.

@manishpant22. With inputs from Rahul Oberoi