Indigo Airline: Cracking the Profitability Code

Hi All,


IndiGo, the country’s largest budget airline, has reported net profit of Rs 787 crore for the financial year ended March 31 — a five-fold surge from the previous year’s Rs 128 crore. I have been reading a lot about indigo and how its peers are still making losses while Indigo is flourishing day by day.

So I decided to do some research and analyze to find out what Indigo was doing right while others are missing

Let us look at some statistics:

  Net Revenue(in crores) Profit/(Loss) Aircrafts Destinations Flight per day
Indigo

9,458

787

70

34

447

SpiceJet

5,714.55

-191

55

54

370

Jet Airways

17,070

-480

120

75

620

Air India

16,130

-5,198

108

95

400

 

Km (‘000)

Passenger Carried

Hours

Indigo

112,523

14,769,454

204,122

SpiceJet

87,637

10,608,899

136,449

Jet Airways

125,804

15,826,347

294,551

Air India

89,213

9,279,713

157,889

On the basis of above two tables I have derived few numbers to better understand the differences among the airline

 

Load Factor

Average Km each aircraft flown

Average Hours each aircraft is airborne

Passenger traveled/ thousand Kilometer

Revenue per Destination

Flights Per day per destination

Profit Per destination
Indigo

80.8

1,607

2,916

131

278

13

23

SpiceJet

74.31

1,593

2,481

121

106

7

-4

Jet Airways

78.8

1,048

2,455

126

228

8

-6

Air India

64

826

1,462

104

170

4

-55

It is clear that Indigo’s each aircraft

–          Was flown more number of kilometers

–          More Passengers traveled Per thousand Kilometer

–          Was airborne for maximum number of hours

–          Has more flights per destination

Which resulted into highest profitability and revenue each destination traveled. Let us look at detail how indigo did it

1-      Power of Concentration: Applying your maximum resources where the maximum revenue can be generated: Indigo achieved numerical supremacy (as Sun Tzu said) on routes which have high traffic. Indigo has a fleet of 70 aircraft, yet it flies to only 29 domestic and four international destinations. In contrast, SpiceJet has 56 planes but it flies to 45 domestic and 10 international destinations. Thus, IndiGo’s strategy is to provide more capacity on select routes, rather than spread itself thinly over several. As each destination requires new investments (rentals, staff, ground-handling, equipment et cetera), this helps contain costs.

IndiGo 10 largest domestic routes (seats): 26-Mar-2012 to 01-Apr-2012

All the above routes are highly competitive however there is an existing demand for capacity in these routes which indigo realized and maximize capacity allocation in these routed.

Indigo also refrain from adding a new destination until it can fly from there to at least four different cities and amortize costs. IndiGo carried 27 per cent more passengers in the domestic skies last year, while the industry carried 5 per cent less, and added only one new destination in the whole year but flew more flights from existing cities

2-      Keeping planes airborne as much as possible: Indigo understands that a plane generates revenue as long as it is in the air. Indigo gets an aircraft ready for its next flight in 31 minutes compared to 35 minutes a few years ago. This has helped the airline achieve its target of keeping the plane airborne for 12 hours a day, despite the fact that it has been getting new aircraft on a regular basis.

  • Vendor management: Indigo has signed up “power by hour” agreements with vendors under which it pays for every hour the aircraft flies; in return, the vendors provide full spares and replacements whenever they are required. The strategy helps in two ways. One, IndiGo doesn’t have to maintain a large inventory of spares or engines. Two, its aircraft are not grounded because some spare parts are not available – that is something the vendors have to worry about. That is reflected in the fact that its technical dispatch reliability of 99.4 per cent is amongst the best in the world

3-      Keeping operational cost low: Indigo fleet consists of one kind of aircraft: the Airbus A-320. As a result, it is required to deal with one set of pilots, spares and engines. This simplifies the process of running the airline and also keeps costs on a tight leash. This is in contrast to a rival like SpiceJet which has two sets of aircraft which requires separate technical staffs and pilots as per the govt regulation

4-      Lease back deal with Aircraft manufacturer: IndiGo has six-year sale and lease back agreements for most of its planes. The leaser takes the planes back after this and the airline can induct a brand new one in its place. Though at a cost, this is effectively like a perpetual elixir of youth. The most important financial implication is that it never has to undertake the D check, where the aircraft is completely stripped down and airlines often discover the need to spend on major repairs. This check is usually done when the plane is about eight years old

5-      Managing fuel burden: Fuel can add up to 50 per cent of the operational cost and any savings here could make a large difference to operations. Pilots are put through training on how to save fuel, which includes details of the time they should take to climb to 32,000 feet. Indigo’s pilots switch off an engine when taxing the runway, thus reducing fuel cost. They plan the flight and airplane speed in such a way that fuel is not wasted in circling over airports, especially busy ones like Mumba

  • Indigo has ordered A-320 Neos which are 15 per cent more fuel-efficient and can make a substantial difference to the economics of the game

Indigo’s strategy offers an interesting insight on how the transport based businesses should be run. The most beautiful insight is that your strategy should be based on two things

  • How to make your planes run as much time as possible in 24 hrs with minimum running cost because it defines your revenue generating potential
  • And finding the right mix of profitable routes where you can generate maximum revenue

What indigo has done can be applied to any transport business such as railways, buses. The key is to assess each and every one of your flights, bus routes and train routes and assess how we can make it profitable

Thankyou for reading my post..:)

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3 thoughts on “Indigo Airline: Cracking the Profitability Code

  1. Thank you for a really neat analysis of Indigo. It would be nice to see the sources you gleaned data from.

    Though your touch points on their policies and models are on the money, but they are hardly new. Ryanair or EasyJet or Southwest Airlines has been doing it for a long time. However, what differs I think is the execution. Indigo has been able to execute their choices meticulously, which makes them better than their peers, comparably–albeit I will be curious to juxtapose international low-cost carriers with Indigo to evaluate the awesomeness. It is a great example for to the T execution of a tried and tested strategy. (Deccan was killed by Kingfisher, it was a harbinger for LCC)

    Just a correction or perhaps contention on your first point: they make revenue as long as it is airborne doesn’t make sense. Revenue is soon as the customer pays online or OTC; but you want to say is it is less expensive to be up in the air than to be on the port.

    I disagree on your suggestion on using this strategy on railways and buses. If the context is not India, then we have a case to talk. Note not many state railways are privatised, UK is the closest. Coming to buses and railways in India; privatisation of railways is a distant future. You cannot over ply trains or buses, the resources they consume, specifically rails and roads, are so limited. The microeconomic impact will be tremendous. Just a simple static sensitive analysis will result unwanted externalities. The point here is airline industry is not symptomatic to buses or railways. Far from it.

    To end, your analysis, nevertheless, is really good. Kudos.

    • You make revenue when you fly, Sure the customers sheds the dollars at the ticket desk, but that money is only realized once he has been transported to where he needs to go,

      Sir, an argument for the sake of an argument is never cool

  2. Hi

    Thanks for writing such a comprehensive feedback. I highly appreciate your suggestion on this post.
    The sources are basically publicly available news paper article and DGCA statistics.
    I accept that these strategies are not new and any low cost carrier should be highly efficient to be profitable.As you said, Indigo’s success lies in meticulous planning and execution.

    Regarding the second point, I wanted to say that earlier a plane is ready to be airborne, the more number of flights it can make and hence the more revenue.

    Coming to your last point, yes I have overlooked the microeconomic impact. But point here is applying only the startegies adopted by Indigo

    Thanks a lot again for posting your comment

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