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Indigo targets 20% growth every year; move towards owned aircraft

IndiGo Airlines, India’s largest airline by far, is in no mood to go easy on its rapid expansion in coming years, the company said.

The company, which accounted for 85% of the total capacity added in the country in the last five years and grew its seats at 24% per year on average, plans to grow at 20% on average over the next three years.

It will also tweak its business model by moving more and more towards owning its own aircraft, and this could have an impact on dividends, the company said.

“Historically, free cash was allocated between corporate needs and dividends. Now, corporate needs will also include aircraft ownership costs.”

Indigo, promoted by InterGlobe Aviation Ltd, is considered a model company due to its unrivalled record for financial discipline and growth.

The company has remained profitable for the last nine years even as the aviation sector went through its own ups and downs due to the global financial crises and rising fuel prices.

During this period, it went from a market share of 12.5% to now account for over 41% of all domestic air travellers in the country.

Starting at No.4 in 2008-09, it is now ranked No.1, with closest competitor Jet Airways way behind with a market share of just 17.6%.

The company said it plans to modify its existing leasing model to one with a higher proportion of owned or financed aircrafts.

Around 87% of IndiGo’s aircraft are leased on an operating basis, which means that the ownership of the plane remains with a third party, and IndiGo pays a rent to the owner of the plane every month.

This allows IndiGo to increase or decrease the number of aircrafts quickly, but from a financial point of view, is more expensive than owning its own planes. In case of most global low-cost carriers, about 80% of the planes are owned by the company, and only 20% are taken on operating lease.

It said it plans to “complement the sale and leaseback (agreements) with aircraft ownership to lower overall costs” going forward.

“Unencumbered aircraft create future financing flexibility and stronger balance sheet,” it added.

CHALLENGES

The company also highlighted challenges that it is likely to face as it tries to continuously increase the scale of its operations.

The Mumbai airport, it said, is “largely closed” as it is almost full up from a capacity point of view.

“Delhi, Bengaluru, Chennai, etc. will become issues in a few years,” it added.

Part of the problem can be addressed by introducing the extra-capacity Airbus A321 Neo aircraft, it said.

Unlike the 185-seat A321 Neo that IndiGo uses at present, this one will have 232 seats, and can therefore take more passengers.

“Their introduction.. starting in 2018 will help slot maximization,” it noted.

The company has also faced reliability problems with Pratt & Whitney engines used in Airbus Neo aircrafts.

The engine reduces fuel usage by about 17% by relying on a Geared Turbofan design.

However, the advanced design of the engine has also resulted in a lot of downtime for customers like IndiGo.

“The engine issues are expected to be resolved by late 2018 or early 2019,” the airline said. “In the interim, we are working to secure additional spare engines to reduce operational disruptions.”

INTERNATIONAL EXPANSION

The company said it plans to expand capacity from Indian cities to international hubs such as London, Frankfurt, Paris, Singapore, Dubai, Abu Dhabi, Doha and Bangkok.

“We will enter the market by leveraging IndiGo’s low cost operations,” it said, adding that it will target traffic from the above international hubs and from high cost non-stop operators.

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