IndiGo To Shift From ‘Sale And Leaseback’ Model
An IndiGo aircraft prepares to land at Chhatrapati Shivaji International Airport in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

IndiGo To Shift From ‘Sale And Leaseback’ Model

InterGlobe Aviation Ltd.-owned IndiGo plans to shift from its trusted ‘sale and leaseback’ business model to one where it will own aircraft, the company said in a conference call with analysts. The move will help the airline lower operating costs and result in higher profitability.

The airline so far worked with a six-year sale and leaseback model, which provided it a younger fleet through its first decade of commercial operations. Out of a total of 136 aircraft in the carrier’s fleet, only 18 are owned by the airline.

The model is one where an operator purchases aircraft, sells them to leasing companies and leases them back for operations. Apart from ensuring a younger fleet, the model also benefits operators as manufacturers typically sell aircraft to them at a a lower cost compared to leasing companies. A younger fleet also means lower maintenance costs.

While not offering many details about the plan to own aircraft, the company’s Chief Financial Officer Rohit Phillip said the company will not completely scrap the sale and leaseback model but shift to an owned fleet model in a phased manner. The airline will meanwhile operate with a mix of both models, he said. The plan to own aircraft, Phillip added, would result in long-term gains for the carrier.

Delivery Delays

The Gurgaon-based carrier currently operates a fleet of Airbus’  A320 and A320neo aircraft, and has placed an order for 50 ATR 72-600 turboprop aircraft. The latter, President Aditya Ghosh said, would start commercial operations before the end of 2017. The airline plans to add seven such planes to its fleet by March. It has also placed a firm order for 250 A320neo aircraft in 2015, of which it has received 22 so far.

This is well short of the airline’s plan to add 36 A320neo aircraft by June. According to Ghosh, there have been days when the airline has been forced to ground nine A320 neo aircraft due to the lack of spare engines. “While we do receive certain compensation from Pratt and Whitney for these groundings, the operational challenges are quite challenging and we are not happy with that,” said Ghosh.

The airline has plans to start low-cost, long-haul operations, a shift from its current model of domestic and short-haul international flights. IndiGo had sent its Expression of Interest to the government to buy stake in national carrier Air India, in which the State has plans to divest its stake. Speaking at a conference call soon after, co-Founder Rahul Bhatia had said the carrier was interested primarily in Air India’s international long-haul operations.

Follow-On-Offer

The airline is planning a follow-on-public offer in order to generate funds for purchasing aircraft and to meet promoter holding norms as mandated by the market regulator SEBI. The offer is likely to be a mix of a fresh issue and an offer for sale, said Phillip. Promoters of parent company held 85.85 percent stake as on June 30, above the SEBI-mandated limit of 75 percent.

Healthy Quarter

The country’s largest carrier reported a healthy 37.1 percent year-on-year growth in its April-June profit after tax at Rs 811 crore, accompanied by a 25.6 percent rise in net revenue to Rs 5,753 crore.

The airline expects to report a 20 percent year-on-year rise in capacity through 2019-20 (April-March), according to Ghosh. That’s likely to come on the back of fresh deliveries from ATR and those from Airbus, he added.

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