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Indigo blues

Ashwini Phadnis | Updated on February 07, 2020 Published on February 07, 2020

The IndiGo story: Time was when IndiGo was the Indian passenger’s preferred carrier: It ran on schedule   -  The Hindu

The tag line said ‘Go IndiGo’ and the Indian air traveller heartily obliged, making the low-cost airline with a penchant for keeping time a blockbuster success. But that flight has now run into turbulence; its once-close promoters have fallen out and are facing off in court, and its bid to grow fast has left the carrier with many a faulty engine

The year has not begun well for IndiGo — or at least not for some of its passengers. Last month, an Airbus A320 Neo flying from Pune to Jaipur was diverted to Mumbai — after the plane began vibrating midair. Behind the sudden shudders, it is believed, was the plane’s unmodified Pratt & Whitney (P&W) engine, which has been creating serious problems for its fleet.

This wasn’t all. Last week, the airline hit the headlines for causing another kind of turbulence. It banned a stand-up comedian from flying for six months after he heckled a television anchor on a flight. The ban, described as arbitrary in some quarters, led to widespread criticism. This came on the heels of an IndiGo pilot allegedly threatening a passenger who had asked for a wheelchair.

IndiGo, indeed, has been in the news — and not all for the right reasons. Yet, time was when it was the Indian passenger’s preferred carrier: It ran on schedule, was handled by a competent and cheerful crew, and was a success story in a sector known for financial failure.

Happy on board: Boasting a competent and cheerful crew, IndiGo quickly became a success story in a sector known for financial failure   -  Reuters

 

But its numbers tell a story — IndiGo’s journey so far has actually been a blockbuster. The Delhi-based low-cost airline, which started with a single aircraft (and legend has it that its then American chief executive officer, Bruce Ashby, offered to stitch the crew’s uniforms for the first flight in 2006), today operates 1,500 flights a day. Run by InterGlobe Aviation Ltd, it has over 250 aircraft and almost five out of 10 passengers who flew domestically in 2019 took an IndiGo flight.

The airline, which started from a small room above China Club, a Chinese restaurant in Gurugram, today has offices not only across India but also in several countries abroad where it has added hitherto unknown destinations. Cities such as Chengdu and Guangzhou in China are now on its flight map.

According to some analysts, IndiGo today has enough capacity (in terms of aircraft) to keep it going for the next 5-10 years. Says Nripendra Singh, industry principal, Aerospace, Defence and Security Practice, Frost & Sullivan, “The airline has been adding 10-12 aircraft in each quarter over the last two or three years. In a year it might induct, for example, 40 instead of 48 aircraft, but the number inducted would never go down to 30.”

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Reaching this position was not easy though. The airline took some decisions which, in hindsight, proved to be detrimental to the path it wanted to follow. When Kingfisher Airlines, the other initially low-cost and eventually full-service airline that came into being after India opened its skies to private players, started facing financial problems, IndiGo saw it as a huge opportunity and decided to order more aircraft. It wanted the aircraft in a hurry — in the next 12 to 18 months, so that it could cash in when Kingfisher folded up, which it did in 2012.

Many hailed IndiGo’s move as a bold one. Some called it a far-sighted approach by the two co-promoters, Rahul Bhatia and Rakesh Gangwal. There were, however, some murmurs of dissent — the airline, a section felt, was growing too fast and would not be able to keep up with the increased business — but these whispers were largely ignored. The airline was on its way to success, garnering a greater market share every year. Today, it has close to 50 per cent share of the domestic airline market.

Shaky ride: Rahul Bhatia flanked by IndiGo co-promoter Rakesh Gangwal (right) and Bruce Ashby, the airline’s first CEO   -  BusinessLine

 

Looking back, the critics were right — though not for the reasons they had cited. Since IndiGo was in a hurry, it made what turned out to be a costly mistake — it shifted to P&W engines. Years later, this very engine is giving the airline trouble with its aircraft getting grounded due to safety concerns and raising doubts about its efficacy in the minds of the flying public. IndiGo has said it expects to replace all the faulty P&W engines powering its A320 Neo jets by May-end, adhering to the deadline set by the Directorate-General of Civil Aviation.

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Besides the engine trouble, the last two years have not been kind to the airline on other fronts, too. First came the news that the two promoters — once close friends — were not getting along. Soon they were engaged in a full-fledged war fought in the media, with Gangwal equating IndiGo to a paan ki dukan ( paan kiosk). He accused Bhatia of indulging in Related Party Transactions — deals struck with parties related to the company.

Some changes were introduced to mend the rift: A woman director, for instance, was appointed to the board as part of an agreement reached after Gangwal complained that the airline was not following corporate governance norms. But the feud persisted, with Gangwal absenting himself from the Annual General Meeting in August last year.

He also skipped an Extraordinary General Meeting that he and other stakeholders supporting him had called for in January this year to seek an amendment to the company’s Articles of Association — which define its purpose and regulations. The resolution for the amendment was defeated.

The two are at present fighting it out in the London Court of International Arbitration, which Bhatia approached in October last year, submitting a request for arbitration against Gangwal.

Tarun Bhatia, a specialist in corporate risk mitigation, fraud investigations and due diligence, concedes that the ongoing dispute between the promoters is problematic. “It is a competitive industry and others will try and eat into your pie if you let your guard down,” the managing director of risk consulting firm Kroll says. “These things (the promoters’ squabble) are a distraction. Litigation and arbitration are costly affairs and keep the focus away from the real business,” he adds.

Old-timers at the airline rue the growing rift, recalling the time when IndiGo was like a dream come true for both India Inc and the Indian passenger. During the first few years, they stress, the going was great. IndiGo successfully took up the challenge of low-cost flying, added more aircraft to its fleet and increased the number of cities it flew to. Within years, it was as much a household name as Air India, which has a history of over 60 years of flying.

An eye for detail helped build the airline. Some former staffers remember how Ashby and his core team, which came down from the US to set up the airline, even looked at some of the most minor aspects of the would-be carrier’s operations.

“Bruce would go into minute details such as the size of the glass and water in the flush tank. The airline industry was in his blood. During his time, the water and food being provided on flight often became a huge discussion over every gram adding to the weight of the aircraft,” recalls a former staffer.

Ashby also understood the mentality of the Indian consumer. “One thing he learnt was how Indians always rushed to get the best seats. One day while driving, Bruce noticed how a Vikram tri-scooter [a public conveyance vehicle], which is supposed to carry 10-15 passengers, was jammed with several more than its capacity. This sight settled things in Bruce’s mind: Passengers travelling on IndiGo would be allowed to pick and choose their seats. He did not want anxiety or insecurity in the minds of IndiGo travellers,” the former staffer says. This, of course, changed with time and competition and, today, as with most other low-cost airlines, passengers have to pay extra for certain seats such as those with more leg-space or by the aisle.

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The last two years also saw IndiGo make losses for the first time. In the quarter ending in September 2018, it reported a net loss of ₹652.1 crore — the first since it started operations and became a publicly listed company in 2015. The airline cited higher fuel costs, depreciation of the rupee and intense competition for the losses.

Balance sheet: IndiGo reported a loss for the first time in September 2018   -  Reuters

 

In the September 2019 quarter, the airline reported a net loss of ₹1,062 crore. It however quickly recovered to report a profit of ₹496 crore in the seasonally strong Q3 quarter for the period ending December 2019.

During the course of its journey, other changes too were made to cash in on the airline’s success. When IndiGo started, the promoters were clear that they would operate afleet of Airbus A320s but along the way the strategy changed and the airline inducted ATR aircraft. However, it is not clear whether this decision was a business one or driven by the changed government policy that required it to fly to smaller cities too. IndiGo, which had all along looked at profitable routes, became a part of the government’s UDAN scheme — flying to smaller cities by bidding for routes such as Bengaluru-Agra.

The increasing fleet and network led to other problems. People flying on IndiGo from Mumbai often complained that there was such a rush at the airport that it felt like boarding a train at a congested railway station in interior India. In Delhi, too, the airline faced space constraints and requested the airport operator to give it exclusive rights to fly from the T2 terminal. It was turned down.

There were a few more problems too, all leading to bad press. An IndiGo captain piloting a Bengaluruflight allegedly abused a passenger when she asked for a wheelchair for her mother last month, and her tweet about the incident soon went viral. This was followed by the decision to put comic Kunal Kamra — a staunch critic of the government at the Centre — on the “no-fly list” for six months after he accosted Republic TV editor Arnab Goswami on an IndiGo flight late last month. Three other domestic airlines also banned Kamra, but the issue took a twist after the IndiGo pilot operating the flight criticised the airline’s move, contending that Kamra’s behaviour “while unsavoury was not qualifying of a level 1 unruly passenger”. In a letter to the IndiGo management, he said, “...We pilots can all attest to incidents similar and/or worse in nature that were not deemed unruly.”

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The recent controversies, however, are unlikely to matter to the airline as long as it continues to give value to its shareholders and service to passengers. “Fuel price issues, over-expansion and engine issues that IndiGo has faced are not isolated instances but have been witnessed globally,” Nripendra Singh says, adding that it is more important now for IndiGo to be profitable than to increase its market share.

Singh points out that fundamentally an airline does not make money only by capturing market share. It has to ensure high yields and give returns to the shareholder as a listed company, which IndiGo, he points out, is doing.

Other experts, too, are bullish about IndiGo’s future despite the hiccups of the last few years. The company expects to use its fleet more efficiently by June 2021. This will help reduce unit costs, says SBICAP Securities, the capital markets arm of SBI advising institutional investors (domestic and foreign) on investments in listed securities/equity in the Indian stock market. It adds that despite the current challenges, the airline managed to increase aircraft utilisation by about 5 per cent sequentially.

The challenges it refers to are engine and pilot problems. When Jet Airways ceased operations, IndiGo hired several of its pilots. But the pilots had to be retrained for Jet was largely a Boeing aircraft operator whereas IndiGo is an Airbus operator. This meant that the pilots were unavailable for flying with IndiGo despite being on its payrolls. This retraining issue cropped up when the airline was grappling with the engine problem.

IndiGo has a combined fleet of CEO (Current Engine Option) and NEO (New Engine Option) engine aircraft. The initial plan was that with the induction of new aircraft fitted with NEO engines, the airline would return the CEO-fitted aircraft. However, with NEO aircraft facing issues, the airline has been forced to retain the CEO aircraft longer than it had planned. This has meant that the CEO engines have to undergo various checks, something that was not part of the original plan.

However, what’s working in IndiGo’s favour is the fact that after giving the impression that it was floundering with the model it had started with, it is now adapting to a changing environment and meeting new challenges. As CEO Ronojoy Dutta recently told analysts, “International (operations) is a bright spot in our system and both capacity and margins continue to expand simultaneously.”

Published on February 07, 2020
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