InterGlobe Aviation - Indigo

(Abhinav Mehrotra) #81

Excellent point Abhishek. The fundamental difference between a Southwest Airline and Indigo is that even though IA can copy SWA’s business model they cannot replicate their advantage of earning and spending in dollars. All Indian airlines have to deal with an additional fluctuating currency risk. They have to purchase or lease the fleet in dollars, purchase the ATF in dollars but earn in Rupees. This is why I personally feel no airline in India will ever be a SWA in terms of returns and profitability unless the burden of dollar purchases goes away. Please correct me if their is any flaw in the thesis. Would love some counter arguments.
Disc.- Not invested.


Analysing airline stocks is very tough given all the noise around yields, load factors, fuel prices, currency etc. My bet on Indigo for the long term is simple. This is a 20% growth market for the near future. Currently weak competitors like Jet and Spice Jet are able to compete by pricing at marginal cost given benign fuel prices. However, operationally they are not set up anyway near how Indigo is set up - Single plane model, free warranties on plane purchases, lease and buyback model. So over a reasonable period, could be 3-5 years Indigo will be the inevitable winner in this space.

The only thing going wrong for Indigo right now is the pricing pressure due to competition and prices are pretty low right now, nearing or sometimes below 1st AC fares (flew Mumbai Baroda last weekend for 3300 return price, booked 1 day before travel) . Once that corrects, as it inevitably will, you will see the irritants disappear.

(Aman Vij) #83

Interesting insights on Airlines Industry dynamics by Chief Commercial and Strategy Officer, Vistara

But, aren’t low fares necessary to avoid wastage of seats?

Suppose an airline’s capacity is 85 per cent and wants to make it 90 per cent. It will need to price attractively to sell the extra seats, but those should be sold in advance, and not at the last minute. Attempts to build advance base loads are not working anymore, as passengers now expect fares to drop close to the date of travel. As a result, a virtual bank run happens close to departure as all airlines try to dump excess seats at steep discounts, given the less-than-normal advance build-up. Also, there is no incentive for passengers buying tickets.

There was sufficient ability in the past two or three years to stimulate the market to fill empty seats and to add capacity at major airports such as Mumbai, which were not fully slot-constrained. The growth in the sector that has occurred is due to the pent demand and capacity addition, stimulated by low fares. But, I think demand has been taken to its limit now.

Even if you drop prices below a certain level, you cannot increase demand. You are not going to make more people fly; you are only going to reduce your yields. What we are witnessing is a fare war to steal share to fill up the planes, with all airlines fighting for the same pool of passengers. In a lean season, it will only lead to destruction of yields and it is difficult to recover operational costs with such low fares. Airlines need to bring in some pricing discipline. A flyer is not going to change his mind about flying from Delhi to Bengaluru tomorrow if the fare changes by Rs 500 or Rs 1,000. If he has to fly, he will fly. It has come to such a pass that sometimes even a meal at the airport restaurant might be costlier than air fares!

There is something called consumer surplus — pricing below what customers are comfortable paying. Airlines in India are taking the concept of consumer surplus to an entirely new level.



(manomagg3) #85

Hi anyone tracking Spice jet along with Jet and Indigo, just look at the link and most of the ratios seems to be in favour of Spice jet at this price, this is now becoming the second best airline after Indigo on most of the operational and financial parameters, and with Jet into financial troubles, a re-rating of Spice could be a possibility
any comments !
holds 5% of portfolio and may increase

(Aman Jain) #86

Totally agree! Spicejet is indeed doing much better, infact if you look at operational matrices and not just financial matrices Spicejet is beating Indigo quarter after quarter. If the industry does not turn bad, and Spicejet continues to do as well as it’s doing, I see significant re-rating from curent levels too. Disclosure: invested since 2015, and doubled the position after Q3-Fy17 results.

(Aditya) #87

Forex risk is there no doubt, but it is not always a headwind, it can be a tailwind as well. Depends on the view one takes on USDINR. With inflation differential narrowing, the differential in real interest rates has moved in favor of the INR past few months and hence we no longer see the INR depreciate significantly against the USD. I think in the foreseeable future, unless crude oil prices flare up, USDINR could be stable to appreciating. To look at it through the rear-view mirror may distort the true picture.

(Aditya) #88

With Indigo, what I worried most was that most companies tend to bloat up their profitability pre-IPO to make them more attractive to investors. I think now that we have settled down, we are looking at the fair profitability of the business with all its constraints and pitfalls. Also a lot of initial euphoria has settled down with many multi-billionaires tempering down their enthusiasm for this company.

The real reason to worry about the industry in general and Indigo in particular is their capacity addition plans. We all know capacity addition is lumpy in this business and tends to squeeze profitability and rationality of all players. Almost all players have announced strong capacity additions over the next 2-3 years and unless these capacities are deployed in profitable routes, we may yet see a repeat of the follies of the past - massive discounting, poor service, losses and bankruptcy. Besides, ground infrastructure addition is lagging woefully capacity additions and is likely to be a key impediment to utilize the expanded fleet in an efficient manner.

(manomagg3) #89

Spice jet is really getting re-rated by Mr. Market and I feel there is still some juice in it,

It is a business which is now in the fancy ,Japan with a population of 13 cr. people has almost same number of domestic passenger as we in India with a population of 125 cr.( even if I consider only middle class then also we are talking about 25 to 30 cr. people, there should be a huge increase,

Spice Jet has run up more than 50% in last few months, I am still expecting further increase and will increase my allocation,( I can not understand why EV value of Indigo should be 7 times more than Spice Jet)
Jet Airways does not seem to be in a position to challenge and looks will keep loosing market share

any comments

I am invested and views are biased

(Saurabh Maheshwari) #90

While valuing spicejet do account for 24% stake that should ideally go to Marans.

Invested in Spicejet

(manomagg3) #91

Sorry did not understand is there any agreement for dilution of equity

(Saurabh Maheshwari) #92

When the control of Spicejet was transferred from Marans to Mr. Singh, Marans were supposed to get some stock warrants and preference shares in lieu of an investment of some 550-650crs in tranches. I don’t remember the exact figures right now. Broadly speaking, Marans had deposited 300crs+ in the bank account of SpiceJet towards the same. However Spicejet has not issued any warrants to Marans so far. Spicejet has put this on hold claiming some technicalities from Sebi. For the amount already received Marans should get 24% equity in the company post conversion.

(Mehul Shah) #93

24% equity to Maran is not possible and denied by SEBI. It hurts investors interest. The case is still in the court about returning money back to Maran.
So overall it is ok, not to consider the dilution. Spicejet can’t dilute stake without closing Maran issue hence there was no fancy.
Now, there is a rumor that the case is settled outside the court.

My 2 cents.

(nikhilbora) #94

I want to make a comparative report of indigo, Spicejet and Jet airways. Can anyone pls suggest if anyone has any inputs. Please share any details and help me.

Please also recommend me a website where I can find such comparison.

(vivtho) #95

Indigo has indicated they they are interested in buying Air India - primarily for their overseas route network. I have some knowledge of the airline industry so I thought of sharing my take on this with the forum

What I like

  • Indigo would instantly leapfrog its competitors and get a well established international route network
  • Slots at airports that don’t match Indigo’s strategy (e.g. some long-thin routes to Africa) can be monetized by selling to other airlines.
  • Air India has a lot of property which can be sold to reduce debt

What I don’t know

  • Air India Transport Services: This is a very attractive (and profitable) ground handling subsidiary. They provide ground services (baggage trucks, aircraft stairs, crew and passenger shuttles, aircraft tugs) to other airlines which don’t have bases in India. There’s no word on whether this and other profitable subsidiaries will be included in the divestment or hived off separately.

What I don’t like

  • Debt. Air India has a mountain of it. 52000 cr. Some of it can be recovered by selling assets, but that will still leave a lot to be serviced. Most of the aircraft fleet has already been through the ‘sell and leaseback’ cycle, so there’s not much scope to reduce debt by selling off aircraft.
  • Fleet - Part 1: Indigo has been very diligent about maintaining a fleet of aircraft from the same family. This is very important to their ability of keeping costs down. A diverse fleet ties up capital (you need to keep a larger variety of spares in stock - each engine can cost several million USD) and increases operational costs - DGCA/FAA compliances, training (each aircraft family requires crew to be certified on them at >$25000 per person) etc. By only operating aircraft from the Airbus A320 family, Indigo is able to keep these costs in check. On the other hand Air India operates the A320 family, Boeing 747, Boeing 777 and Boeing 787.
  • Fleet - Part 2: While the large A320 fleet (which includes the A319 & A321 aircraft) with Air India looks compatible with that operated by Indigo, about half the fleet is composed of A320-200 aircraft that have reached or will soon reach the end of their useful lives. Aircraft have strict overhaul schedules that need to be maintained for continued certification. This schedule is based on calendar years or number of take-off+landing cycles (1 TO + 1 landing = 1 cycle) or flight hours - whichever comes first. As aircraft get older, the scope of the overhauls increases and the cost of overhauls exceeds the paper value of the aircraft. The A319 which forms the next biggest chunk of the AI fleet is compatible with the A320 (i.e. pilots and ground crew don’t need to be recertified and they share a large percentage of spares) but is designed for medium-range low volume routes which doesn’t match Indigo’s preferred high-volume short-range strategy.
  • Labor Relations: Air India has a bloated, top-heavy workforce that is highly unionized. I have very strong concerns about how Indigo will manage this issue.
  • Government Interference: Will the Government and our elected representatives let go of all the perks they have got used to? I doubt it. I believe there will be several conditions placed on the buyer ‘in the national interest’.

All in all, I believe that while taking over AI might boost the ego of Indigo, it will have an adverse effect on the company value.


  • I am currently invested in Interglobe Aviation (8% of my portfolio purchased at 800 levels) but will be looking to sell if the takeover looks like it might happen.
  • I do not have professional experience in the airline industry, but the sector is one that I have analyzed and tracked for over a decade.
  • This is not a recommendation to either buy or sell shares in InterGlobe. It is intended to provide some clarity on the subject to others who might not have the knowledge of the airline industry.

(vivtho) #96

Article on Bloomberg-Quint
Indigo shifting away from a sale-and-leaseback model

My analysis

  • Will drastically increase debt. At present, incoming aircraft are sold to a leasing company (usually at a small profit - value of brand new aircraft is higher than that of an aircraft booking which might take years to deliver). Where previously the leasing company would carry the asset and debt on their books, now both would be carried on Indigo’s B/S.
  • The article also mentions in passing that Indigo is acquiring a fleet of ATR-72s to service routes on the UDAN scheme. This is a diversion away from their all A320 family fleet which we can expect to have an impact in increased maintenance and spares acquisition costs.
  • If effectively utilized, the new UDAN routes can lead to increased load factors (passengers from small towns will connect to the mainline routes). However, I don’t expect this to have an immediate impact since load factors are already 85+% (I don’t have the exact current figure handy). These connecting routes will however benefit the airline when the industry enters a downturn - passengers will prefer travelling by the same airline to reduce the hassle of separate tickets, transferring luggage etc.

I was invested, but have now exited. My reasons for selling include

  • Changing fleet structure. I liked the company for its discipline of sticking to best-practices (single fleet) at the expenses of immediate gains (UDAN routes).
  • I am aghast that the company is even considering taking over Air India
  • I am wary of the airline industry, which is currently doing well on the back of low oil prices. Any change in this will have a severe impact.
  • I have come to believe that in the market Indigo services (low-cost carriers) no airline can be said to have a moat. When times get tough, increasing fares is difficult since they basically sell a commodity (getting from A to B) customers will either choose a cheaper airline or alternative modes of travel.

(eyesice) #97

I am not too sure whether it would make sense here but I have been learning to apply Data Analysis and here is my attempt at mining International Aircraft Data from 2015 - Q1(Jan-Mar) to 2017 - Q1. Please ignore the code and read the charts and inferences -

Some insights that I found which many of you might already know -

  1. JET Airways and AIR INDIA are the undisputed leaders in international flights
  2. Emirates comes a close third. Top 4 operators make up 50 % of the total share.
  3. The top 10 operators is dominated by middle east flight operators.
  4. Indigo is current at 6th position with a market share of 4.2 %
  5. Q1 is undoubtedly the best quarter for air traffic in India
  6. There is not much difference when we look at other quarter numbers.


Great set of numbers from Indigo, though I won’t read too much into the 4X jump in net profit - might be driven to a large extent by credits from Pratt & Whitney. They haven’t disclosed the exact amount in the filings. However, steady consistent / performance across most parameters

(Nolan) #99

Sorry for shareholders, but if a company is constantly coming into focus for all the bad reasons with customers, then I see bad days ahead for them. The video of manhandling of an elderly man was an eye-opener after only days of PV Sindhu flagging for it.

(Jose) #100

Jet was focussing on their international operations for some time,at the expense of domestic operations. They have lost domestic share ,but have ramped international operations. And they have good codeshare agreement with many international their international operations are well poised for growth.but the worst part is operational expenses are pretty high leaving out fuel costs.but the stock is cheaper compared to indigo.jet has given a road map as to how they intend to reduce this miscellaneous costs like engineering, maintenance costs etc.
Not invested in any airline stocks as of now