Low cost airline IndiGo bets big with $40 billion aircraft buying spree

The sum total of money discussed over these meals? About $40 billion at catalogue prices, and the bill was for 430 jets, all sold to the same Indian airline — IndiGo, the low-cost carrier which has grown to become the country’s biggest airline in eight years of operating.

Represented according to insiders by co-founder Rakesh Gangwal and President Aditya Ghosh, IndiGo has now made aircraft industry history twice in four years — each time by placing record orders for Airbus planes, including last Wednesday’s announcement that it will buy 250 A320neo jets.

The largest order in India’s aviation history is IndiGo’s most aggressive bet yet that Indian air travel is on the cusp of a huge expansion, and that the model that made it the nation’s only profitable carrier will keep working as competition intensifies.

“IndiGo is showing us the level of confidence it has in its own sustainability, in the long-term growth of aviation and in the future performance of the Indian economy,” said Harsh Vardhan, chairman at Delhi-based Starair Consulting.

Airline industry executives are hoping India’s weak economy will rebound under new Prime Minister Narendra Modi and that the government will press for cuts to jet fuel tax and build more airports, slashing costs and opening up new markets.

Higher disposable incomes, an expanding middle class and rapid urbanisation have made India one of the world’s fastest-growing domestic aviation markets, where passenger numbers are expected to grow by more than 75 per cent in the next six years to exceed 217 million.

According to Airbus executive vice-president and the president of its India operations Kiran Rao, optimism about growth in Indian aircraft demand is rising.

But few airlines have translated that optimism into new orders on the scale of IndiGo’s since most are losing money.

“People are too focused on India’s negatives. IndiGo is aware of the challenges and it is adept at steering itself around them. That is how it became India’s largest carrier,” said one source familiar with the airline’s thinking.

“There is, however, a great deal of optimism about the future within the airline and that comes right from the top.”

Ghosh said last week India was a “highly underpenetrated market” and that a lot of the new planes would be for growth rather than replacing older aircraft.

IndiGo’s ascent is not without its risks, however. An end to the era of cheap borrowing to finance its plane orders would raise its costs, and should India’s fragile economic recovery wilt IndiGo would be left facing delivery of 250 Airbus planes from 2018 that it would struggle to fill.
Increased competition in a notoriously cut-throat Indian market plagued by overcapacity could throw up the biggest hurdle to IndiGo’s ambitions, analysts say.

“The biggest risk for IndiGo is how the competition behaves, whether AirAsia and others respond more aggressively now,” said Starair’s Vardhan.