It’s pretty simple why the airline wants to fly long-haul; margins are much higher than short-haul flights. The European market constitutes 13 per cent of total Indian passengers travelling abroad, and the UK alone accounts for a 5 per cent share. Besides, markets like Hong Kong have shown phenomenal growth in the last few years.
More importantly, IndiGo will likely be the first low-cost carrier (LCC) to fly long-haul and get the first-mover advantage, though Spicejet has also announced that it would fly to London with a to and fro fare of Rs 30,000, over 30 per cent lower than the going price.
IndiGo has been a cautious player in the international market with a modest 5.3 per cent market share, much smaller than Air India (10.4 per cent, excluding Air India Express), Jet Airways (14) and Emirates (9.5). It has been quiet about its long-haul strategy but, according to sources, it plans to offer fares that are 25 per cent cheaper than full service carriers’, fly point-to-point and travel at times convenient for Indian travellers.
But will that be easy? International carriers, supported by their governments have been quick to respond to lower tariffs from LCCs on the long-haul routes. For instance, when IndiGo started to fly from Delhi to Singapore some years ago, Singapore Airlines cut prices below IndoGo’s for flights with timings close to the Indian airline’s schedule. The airline eventually withdrew from that market and still does not have a service there.
Experts say there is no reason to believe that incumbents — British Airways, Jet Airways, for instance — will not respond. “The question is whether IndiGo will have the cash reserves to fight such a battle if it goes on for a long time,” says an aviation expert.
Gulf carriers with low operational costs owing to government subsidies have been able to woo Indian customers to use their hubs to travel to Europe with fares that are 50 to 100 per cent lower than direct flights to Paris, Zurich and London from Mumbai and Delhi.
Does IndiGo have the cash to combat them for a sustained price war? The airline is profitable but will require substantial investment to build long-haul infrastructure from scratch. And it will also have to take into consideration that any new international route in the long-haul business takes at least one to one and half years to become financially stable or viable. Its existing cash reserves of around Rs 140 billion will now be used for acquiring planes for domestic operations, and, according to sources, they are enough to buy six planes annually. So, the company may need a fresh capital infusion.
Of course, the airline also has to figure out how to serve customers who want flights from these cities to go onwards within Europe or in the US. IndiGo with its point-to-point service will find it difficult to woo them unless it opts for code-sharing agreements with LCCs.
Also, unlike Jet and Air India, IndiGo is not part of any international airline alliance — which helps both control costs (via bulk deals on fuel, for example) and offer customers seamless onward connectivity. That is what Jet Airways is aiming at after its recent announcement of an alliance with Air France-KLM and Delta. The alliance is expected to enhance traffic from India to multiple hubs in Europe — Paris and Amsterdam — from where passengers can then get connected through Delta Airlines to the US.
The equation will change dramatically if IndiGo wins Air India. Apart from getting control of lucrative slots — like on London-Heathrow (as opposed to London-Gatwick) — and existing routes, it will get over 40 wide-bodied planes (more than half are Dreamliners) and start with an over 22.3 per cent of the international skies, catapulting it as the largest player in this market by far.
Counteracting that, however, is the onerous task of turning it around as its international business is bleeding more than domestic, dealing with surplus employees, infusing a frugal cost culture and, of course, paying substantial money upfront to get the assets and take over some debt.
But even if IndiGo’s bid does not work out, the airline has to contend with a powerful competitor in whoever does win — the Tata-Singapore Airline combine or Jet Airways in combination with a Gulf carrier.
In the domestic skies, IndiGo has been able to keep its cost down by smartly ordering a large number of aircraft (its latest order is for 400 planes) which has helped it gain substantial discounts that no other domestic player has been able to match. Because of its sheer size in the country with 143 aircraft, it has been able to negotiate the best slots at airports in terms of maintenance, fuel costs and so on.
But that strategy is the norm for most airlines in international aviation. British Airways has over 273 wide-bodied planes, while Emirates just announced that it was buying 38 Airbuses for $1.6 billion. “For instance, in London, IndiGo will have two or three aircraft operating initially, so it is too small to get deals on ground handling or fuel,” says a competing airline executive. Being a big low-cost carrier globally demands charting a new flight path.