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India’s largest airline IndiGo has approved a capital investment of $820 million, or around Rs 7,300 crore, in its wholly-owned aircraft and engine leasing services arm InterGlobe Aviation Financial Services IFSC (IndiGo IFSC) for acquiring aircraft as the carrier looks to progressively have more planes under its ownership and through finance leases, instead of having nearly its entire fleet on operating leases.
“The Investment will be made through combination of equity shares and 0.01% Non-Cumulative Optionally Convertible Redeemable Preference Shares (OCRPS), in one or more tranches. The funds raised by IndiGo IFSC shall be primarily deployed towards acquisition of aviation assets, thereby enabling ownership of aircraft,” IndiGo said.
“IndiGo has historically maintained a fleet structure predominantly reliant on operating leases. In recent years, the organization has undertaken a strategic development towards a more balanced ownership structure and diversified forms of financing. This move reflects IndiGo’s commitment to prudent capital allocation and sustainable value creation for all stakeholders,” the airline added.
In its nearly two decades of existence, IndiGo has primarily relied on operating leases—taking the aircraft on lease for a fixed period after which it is returned. The airline mainly relied on the sale-and-leaseback model, under which an airline sells the aircraft it has ordered to a lessor, and then takes it on lease. This model helps the carrier generate cash flow, free up capital, and remain asset-light. Sale-and-leaseback has emerged as the go-to model for low-cost airlines globally, allowing them to expand their fleets while remaining free of large debt.
But IndiGo is now a large airline and has plans to rapidly expand further, particularly in the international long-haul segment. The carrier has around 900 planes on order, and is looking to have a more balanced fleet with a mix of aircraft under direct ownership and on finance leases, as well as on operating leases in this phase of growth. The airline aims to have up to 40 per cent of its fleet on finance lease or under its ownership by 2030. As of September 30, IndiGo had a fleet of 417 aircraft, of which 14 were owned and 62 were on finance lease, while 333 were on operating leases. The share of owned and finance-leased aircraft in the fleet stood at around 18 per cent.
In finance lease, the airline has much greater control over the aircraft and is almost like owning it as the aircraft is also recorded as an asset on the carrier’s books. The lease periods are also typically much longer, allowing the airline to use the aircraft for a longer duration, and there is also the option to own the aircraft at the end of the lease period. IndiGo intends to take aircraft on finance lease from its GIFT City-based arm IndiGo IFSC, which would mean these planes would ultimately be owned by the company through the subsidiary, and the finance lease rentals would also remain within the group.
According to industry watchers, while operating leases have their obvious benefits in terms of flexibility and keeping the carriers asset-light and debt-free, finance leases and direct ownership help airlines build a stable core fleet and better control and stabilise costs over a long period. Having more aircraft on finance lease or under direct ownership also helps carriers shield against fluctuating operating lease costs and volatility in foreign exchange rates, as aircraft leasing is predominantly dollar-denominated.
