IndiGo Airlines

ANALYSIS OF BUSINESS STRATEGY By Group 4 Section S1

Team Members: Gaurav Varshney (FT13127) Gajendra Sisodia (FT13125) Manshi Gandhi (FT13144) Pankaj Kamani (FT13152) Rishabh Baiswar (FT13159)

Introduction

IndiGo is a Gurgaon-based carrier launched in 2006. Set up by Rakesh Gangwal and Rahul Bhatia, of InterGlobe Enterprises. InterGlobe holds 51.12% stake in IndiGo and 48% is held by Caelum Investments, US based firm, run by Rakesh Gangwal. IndiGo placed a order of 100 Airbus A320-200 aircraft during June 2005. First international service was launched 2011 after completing 5 years as per state regulations. Placed the largest order in commercial aviation history during 2011, when Airbus won the US$ 15 billion deal for 180 aircraft. Awarded Skytrax, Central Asia's best low-cost airline award for last three years.

Trends in Indian Airline Industry

Trends Contd.

Indias GDP grew by 5.3% in the fourth quarter of fiscal year 2011-2012, recording its worst performance in last nine years. Indian aviation industry had a good year in terms of passenger traffic growth but one of the worst years in terms of profitability. All scheduled Indian air carriers except IndiGo, incurred losses in the year. Low cost carriers gained significant market share during the first six months of year 2012. IndiGo became the second largest carrier in the domestic market with a share of 26% while SpiceJet became third with a share of 18.6%. Together, the low cost carriers held a market share of more than 58%. Kingfisher saw substantive erosion in its market share and slipped to the sixth position, below GoAir. Outlook for Indian Aviation is stable as far as low cost carriers are concerned. The full service carriers will probably struggle to maintain their profitability and solvency.

Trends Contd.

High airport charges, deprecation of Indian rupee, expensive aircraft turbine fuel and low air fares were the main reasons cited by the companies for the successive losses faced by them. The combined debt of Indian airlines companies was around INR 831 Billion as of March 2012. All was not bad as Indian aviation witnessed growth, both in domestic as well as international passenger traffic in first six months of calendar year 2012. Domestic passenger traffic grew by 11% in calendar year 2011 And by 4% in first six months of calendar year 2012. International passenger traffic registered 8% growth in first six months of calendar year 2012 after contracting by 19% in calendar year 2011. The working group on civil aviation for 12th Five Year Plan expects the international passenger traffic to touch 60 million and domestic passenger traffic to touch 209 million by year 2016

IndiGos Success Mantra

IndiGo is the first low cost carrier in India to become the largest airline in India in terms of market share (27%), dethroning Jet Airways which had held the position for many years. It has achieved that feat just 6 years after it began operations. IndiGo is the only airline in India making profits. It has booked profits of Rs 650 crore in 2010-11 from Rs 551 crore in 2009-10. This success has been made possible by a differentiating model adopted by IndiGo thats discussed here.

IndiGo Business Model

IndiGo's low cost leadership through strong adherence to the low cost model, buying only one type of aircraft and keeping operational costs as low as possible. Currently in organic growth mode as well as international expansion mode. Heavy emphasis on punctuality; claimed to be the only domestic airline using a technological tool to monitor its departure and arrival times while others which keep manual records. Courteous hassle-free travel experience. People shouldnt feel cheap when they buy cheap. No frills and a single passenger class model. Single type of airplane reducing training and service cost. Focus on customer service. Calling customers by their first name thats usually a feature of international business class on reputed carriers like Singapore Airlines. Measured and Professional approach towards airline management.

Porters Five Strategic Forces

Bargaining Power of Buyers

IndiGo is a low cost carrier and price plays the most important role in attracting customers of this segment. Since there are at least 4 other LCCs (Jet Lite, Spice Jet, Go Air, Kingfisher) targeting the aviation space hence it gives consumers sufficient options to shift to another airlines if Indigo raises it air fare. So it can be concluded that consumers have a strong bargaining power in dealing with Indigo.

Substitutes
Threat from substitute is very less. TELECOMMUNICATIONS: Business meeting with the help of 3G and 4G devices are feasible. VIDEO CONFERENCING: Takes away from the personal aspect of the conversation and issue to schedule sessions in different time zones. HIGH-SPEED RAILROADS: Boarding and departure have stolen much of the time advantage conferred by higher point-to-point speeds but still rise in 2nd and 1st AC fair of train has reduced the price gap. Roads specially National Highways condition in India is still not good both in condition and in traffic

Threat from New Entrants

The major entry barriers could be: 1. Government Regulations - Some of the regulations are: Private sector is allowed to operate scheduled and non-scheduled services but the operator should be a citizen of India or a company or a body corporate which is registered in India and whose principal base of business is in India. As regards safety and security arrangements, the operators must ensure compliance with relevant regulatory requirements stipulated respectively by the Director General of Civil Aviation (DGCA) and the Bureau of Civil Aviation Security (BCAS). Foreign airlines are not permitted to pick up equity. Foreign financial institutions and other entities who seek to hold equity in the domestic air transport sector shall not have foreign airlines as their shareholders. 2. Set up costs It is estimated that venture capital of INR 556,300,000 or less is sufficient to launch an airline. An airline company bears the cost of purchasing an aircraft if it wants to start or expand its fleet. However, leasing allows the cost to be spread across several years.

Threat from New Entrants

3. High Aviation Turbine Fuel Aviation Turbine Fuel prices constitute around 80% of the total operating costs of Airline Industry. The industry has lately been plagued with high ATF prices that have demonstrated the inverse relationship between profitability of airlines and fuel prices. 4. Resource Issues In airline sector, finding appropriate labor-force is very costly. The aviation industry in India suffers a shortfall of pilots. Some of the reasons are: The aspirants could receive Commercial Pilot Licence (CPL) only if they undertake training abroad. There is a lack of dedicated flight instructors in India. There are decade-old aircrafts and poor quality training is offered at a price much higher than what is offered by flying schools in USA, Canada and Australia.

Threat from New Entrants

Switching Cost Customers can easily choose other low cost carriers as they are relatively less conscious about brand but primarily concerned about prices and on-time service. The switching cost of an airline company to other business/industry is high as the exit cost is high.
Product Differentiation In low cost carriers, much differentiation is not there in the basic service that is being provided to the customers. Differentiation could only be achieved by Value-Added Services. IndiGo provides check-in kiosks, stair-free ramps, QBusters, lowest cancellation rate among domestic airlines. All these services work in favor of IndiGo.

Rivalry among Competitors

Highly competitive industry Difficult to earn high returns Very high fixed costs Low marginal costs Switching costs very high as no brand loyalty Little scope of differentiation between products/services offered

Indigos focus is low-cost airline Major competitors SpiceJet GoAir Jet Lite Market leader in LCC segment since past few years

Market Share of Domestic Airlines

Passenger Load Factor

Indigo Advantage

Three tenets for success of Indigo Affordable fares, On-time performance, Hassle-free travel E.g. Indigo has roving check-in counters using handheld check-in devices Multiple short haul point to point flights Using only one type of aircraft to minimize maintenance overheads Minimum turnaround time, keeping aircraft in air most of the time

Indian Flyers : Customer Satisfaction

Rivalry among Competitors

All focusing on pricing factors. Differentiating factors can be easily imitated. Just started with international flights. Would have to focus on non-price factors, e.g., VAS to stay high.

Bargaining Power of Suppliers

Aircraft Manufacturers

Aviation Turbine Fuel

Labour

Primary Supplies and Suppliers

Aircraft Manufacturers

The airlines of the world have to face the oligopoly in this area. Few manufacturers enable them with the power to bargain and dictate prices and delivery schedules. IndiGo with its expansion plans feels the pinch. Indigo is a low cost carrier and has this as a non-negotiable condition to lead the market share. At Paris Air Show in Jan, 2011 IndiGo ordered 180 Airbus aircrafts, the biggest order in the history. Experts say that this is a strategic step to manage costs and fleet optimisation. Airbus has order books full of IndiGo deliveries as far fetched in future as the year 2025.

Aviation Turbine Fuel

Limited suppliers Because of limited number of suppliers, there is hardly any alternate choice for the airline industry, with these state owned oil companies fixing the ATF price on a mutually agreed common formula among them. This is an example of backward integration in suppliers. Almost all Indian carriers reeling under the pressure and are resorting to desperate measures like cutting routes and increasing fuel surcharge. ATF suppliers in India have the highest prices compared to other suppliers across the globe. To tackle such pressures IndiGo signed a deal with engine maker Pratt & Whitney for PurePower PW1100G-JM engines for the lowcost airline's 150 A320neo family aircraft. Benefits including doubledigit reductions in fuel burn, environmental emissions, engine noise and operating costs.

Labour
The dearth of skilled employees in Indian Aviation is being exposed increasingly as the industry is growing at a ever increasing pace. The stringent and demanding requirement of domestic pilot (According to DGCA norms,200 hours of flying are required for pilots to qualify) is making it difficult for the industry to cope with the increasing demand in pilot, crew cabin or Ground Staff. As per a study India currently has about 3,500 pilots and the industry is expecting to grow by another 400 airplane. Each plane will need more than 10 pilots and 20 engineers which come to as many as 4000 pilots and 8000 engineers. Thus giving very strong pull power to its current employee. A study done by Boeing shows the forecasted demand to be 12,000 pilots by the year 2025. The average domestic pilot salary is about INR 4,45,000 as compared to the INR 778,000 for foreign pilots. Therefore the percentage of Foreign Crew is reducing and consequently relying more and more on its Indian crew. Due to shortage of commercial aircraft pilots in India the supply of pilots is concentrated, hence increasing their power.

Conclusion

Success story of IndiGo can be attributed to its successful implementation of three generic strategies approach i.e. Overall cost leadership: Since its inception IndiGo has been providing the Low Cost Carrier services to its consumers and no other airlines has been able to challenge its price lines. Also it has the best in industry passenger load factor which makes it much more cost efficient. Differentiation: Though being a LCC , IndiGo has a best in Industry On Time Performance and quality and detailing are given the prime importance while serving customers. Focus: IndiGo has focussed on a single business model from the beginning and has always targeted only the economy class customers.

Thank You!!