Brokerages Take Heart From IndiGo’s Insistence On Low-Cost Model
InterGlobe Aviation Ltd.-owned IndiGo’s assurance to continue with a low-cost model even after it starts long-haul international operations seems to have appeased analysts tracking the stock, for now. The company’s founders held a conference call on Thursday, aimed at addressing queries raised by investors on the airline’s plans to acquire Air India. Rajeev Bhatia and Rakesh Gangwal, have ruled out the possibility of a joint venture with the government to run Air India, adding that their main interest is in Air India Express and some of Air India’s international operations.
JPMorgan which came out with a report on Friday, said it was willing to give “IndiGo benefit of the doubt, especially given its track record of executing a best-in-class low-cost strategy.”
Arvind Sharma of Citi said that IndiGo has the ability to gain market share in international routes on the back of low cost model.
IndiGo does have the wherewithal to gain market share in long-haul routes, driven by low fares and vast domestic feeder network.Arvind Sharma, Aviation Analyst at Citi
JPMorgan in its note also mentioned that any deal conclusion related to Air India would take at least 18 months given the complicated structure of the company. But, given the assets and opportunities that Air India brings Saurabh Kumar of JPMorgan expects more domestic bidders to show interest in the national air carrier.
Given the opportunity Air India presents, we would not be surprised if at least a few other operators rethought their positions despite their balance sheets, as an acquisition would accelerate growth plans for most.Saurabh Kumar, Aviation Analyst at JPMorgan
IndiGo had expressed interest in the loss-making national airline shortly after the government announced its definitive intent to divest its stake in Air India. The state-run carrier faces legacy issues and has a debt of over Rs 52,000 crore. It is surviving on a Rs 30,000-crore bailout package announced by the government in 2012.
Key Takeaways From The Conference Call:
- IndiGo is not looking to acquire all of Air India’s businesses, and is only interested in its international operations, and low-cost subsidiary Air India Express.
- IndiGo may also be interested in some of Air India’s domestic operations, if the government were to fragment it and sell.
- Air India’s international operations, would bring a very important element to IndiGo’s network, as it planned to start its own low-cost, long haul operations.
- IndiGo had no plans to follow the ‘Air India model’ if it acquired the airline, but would run it based on its own business model. The founders of IndiGo believed they could dramatically bring down costs of Air India.
- IndiGo felt it was time for a long-haul, low-cost airline as airline technology had advanced a lot over the past decade allowing the same. The market it saw in long haul operations was one where it planned to snatch long-haul flyers from airlines offering expensive tickets.
- IndiGo plans to go ahead with low-cost, long-haul flight operations with or without Air India, but said it was aware of the fact that the latter would take very long.
- Air India’s biggest assets were its staff and its routes, IndiGo felt, adding that the losses of the airline couldn’t be blamed on its employees.
- Irrespective of which airline ended up buying Air India, IndiGo didn’t see the transaction go through in under a year, considering the complexities associated with such a diversified entity being offloaded.
- IndiGo said it was against the idea of a foreign airline buying out Air India, saying the airline would use the national carrier’s bilaterals and slots to its own benefit, and not to the benefit of India.
- IndiGo didn’t want to buy any of Air India’s assets that it would eventually look to monetise, and only its flight operations interested the carrier.
- IndiGo planned to operate as an asset-light entity even if it ended up buying Air India, and had no plans to go full service. The carrier didn’t wish to go asset heavy on issues around ground staff, maintenance, and catering.