The largest low-cost carrier IndiGo has posted record net profits of Rs 1,304 crore for the financial year 2014/15. Not just IndiGo, most airlines have done operationally well in the last one year due to lower costs (lower fuel costs, to be precise) and high passenger traffic. In a recent interaction with Business Today's Manu Kaushik, IndiGo's president Aditya Ghosh discusses the details of IndiGo's operating performance, its network strategy and a host of other issues. Edited excerpts:
Q. IndiGo's profits are coming from non-operational activities, right?
A. Let me start off by saying we are a profitable airline. We have been profitable for seven years in a row. Mind you, we are only nine years old. IndiGo is no longer a start-up trying to find its footing. We have built a track record of profitability through India slowing down, through spikes in fuel prices, through global recession and through crisis in the aviation world. We have shown consistent profitable growth combined with cash flows.
Now coming to non-operating income. It is nothing but our treasury function. We are a profitable, cash-generating airline and we have a regular treasury function like all companies have and we invest that cash like any other business. Non-operating income is the interest that we earn from our regular treasury investments. People are mistaken that this profit is from the sale or lease back gain. That is incorrect. Sale and lease back is nothing but a financing mechanism. It is part of our business model. It is part of who we are and how we run our airline.
Q. Do you actually make money from sale and lease back?
A. It's not a question of making money. A sale and lease back on a monthly basis is actually more expensive than a finance lease. Why do we do it? Because [of] our newer and younger fleet delivers a lower maintenance cost and finally a lower CASK [cost per available seat kilometer] as compared to others. A lower cost of production than others is all that matters.
Q. One of the achievements of IndiGo is that you made a jackpot when you placed the 2005 order because you got a very interesting deal at that point of time and you were able to sell those planes at a very hefty profit to the lessors. Now the new planes that you will be buying will be bought more or less at the market price. There will be very less scope to sell them to the lessor at the hefty profit. So now the pressure comes will come on an operation side rather than a non-operation side?
A. Let me answer this in three different ways.
First, I assume that anybody who placed an order for a similar number of airplanes in 2005 had exactly the same opportunity as we did. If you notice most of the airlines in India started in 2005-06 and some of them with large number of airplanes. The second point is that, as you said, everybody flies these planes and we are also buying the same. The lessors are common for everybody. And if sale and lease back was the Holy Grail towards profitability, then whoever has more airplanes should be more profitable. As you know, it is only now that we have become a slightly larger airline. For the longest time, many of our loss-making competitors had many more number of airplanes than us. They were selling and leasing back many more number of airplanes. They ordered the airplanes at around same time like us. Therefore, this is not the reason.
Second, any lease and sale back gain; we account for such a gain in the most conservative manner. Indian accounting actually allows that you can take the entire gain to the P&L [profit and loss] in the first year itself but we actually don't do that. We actually take that gain and amortise it equally throughout our lease term. So we take the most conservative view and say that this plane will be here for, say, the next six years and then we take the gain and amortise it equally along the entire life of the lease.
Third, the success of IndiGo is because we have chosen the right business model and sticking to it. We think that a low-cost carrier is fundamentally suited to be far more profitable than a legacy carrier or a full service carrier which was observed in the last 10 years in India. We feel that being a pure low-cost carrier sets you on the path of success. Almost every other low cost carrier has either ordered different types of airplanes or introduced some quasi business class and moved away from the business model that has made us successful.
We have just been using the same model and we are doing exactly what our model tells us to do, which is one type of aircraft, one type of engine, one type of training, one type of inventory, quick turnaround, best on time, clean efficient aircraft, consistently one type of pricing policy and it is the discipline with which we have executed to this model that has made us successful.
Q. Your focus is again on the profits rather than bringing fares down...
A. Being profitable is what helps us grow and provide more choices to the customer with more flights, better frequency, newer planes laden with the latest technology and a happy workforce that delivers the best customer service. At the same time by consistently bringing our cost structure down, we will be able to bring fares down. But we cannot bring our cost structure down if we cannot invest in newer technology and training and that cannot happen unless we are consistently profitable.
Q. What was the idea [behind buying] 250 planes? What was the issue in between?
A. We had signed the term sheet in October last year. However, the term sheet was time bound and therefore, it technically expired. But as disclosed in the DRHP, we remained in active discussions with Airbus. These agreements are complex in nature having impact for a long period of time into the future. Therefore, these discussions took time and we were eventually able to conclude it. The latest order for 250 aircraft will start getting delivered from 2018 all the way to 2026. Now we have a firm aircraft order. So 430 (180 plus 250) more Airbus A320s Neos to come.
Q. Do you plan to stick to Airbus?
A. We have another 430 more airplanes to come under the current order. And if you see that most of the successful airlines in the world, whether it is Southwest Airlines, Jet Blue, Ryanair, Jet Star, easyJet, they all use only one type of airplane and that is a key element of the pure low-cost model. We believe in sticking to the business model that is the most successful. It provides us with efficiency and lowers our cost structure. The A320 is a very mature and well-proven airplane. We are very happy with it.
But A320 Neo is expected to be a game changer. Where airlines are fighting for 1 per cent margin by doing all sorts of flying techniques like sharklets and winglets… because of the two new engines, it suddenly burns up to 15 per cent less fuel. You can imagine the impact it will have on bottomline.
Q. Are you expanding to smaller cities?
A. India is a large country and it's under penetrated in terms of the aircraft market. There are a lot of opportunities in cities which have the capacity to land the A320 aircraft, but as of today we are not operating in them. So a huge amount of potential is untapped.
There are 65 cities in India which are capable of landing A320 aircraft. As of the week ended April 30, 2015, we were only flying to 33 destinations within India. The only problem is that India does not have enough aeroplanes. So, in the long run we not only want to increase the frequency of cities where we are currently operating , but also plan to commence operations in new cities over the next decade.
Q. People think IndiGo is charging too much for cancellation and it's gone up recently. Why do you do that?
A. Earlier there used to be a flat rate for cancellation irrespective of whether you cancelled in six weeks of advance or you cancelled on the last day, you had to pay the same amount. We actually learnt this from Railways. In railways, if you cancel a ticket, few days in advance, you actually get a reasonable refund. But if you cancel right at the end, your money is gone. Keeping this in mind we changed the cancellation policy, if you cancel a few weeks in advance, you are actually paying lesser, but if you are cancelling closer to the date of travel as the plane has become full or fare have risen then the cancellation charge also goes up. From a customer's point of view, we have tried to create something of a convenience.
From financial point of view, all this contributes to the ancillary revenue that everybody is talking about. As long as we are able to gradually, as a country, move more to more towards ancillary revenues, the actual fare will start coming down.
Q. What are those ancillaries [revenue]?
A. It is cargo, passenger related fees, selling food on board, advertising, selling insurance, selling holiday packages. All of these things contribute to ancillary revenues.
Q. How much does it contribute in your case?
A. In the first nine months of 2014/15, we got 11 per cent as ancillary revenue which was earlier around just under 10 per cent a year ago. Therefore, our ancillary revenue has grown. But if you see some mature low cost carriers around the world, IndiGo has a potential to grow ancillary revenues by unbundling fares and providing a menu of services for the consumer to choose from.
Q. [But the] government is not in favour of unbundling...
A. I think the government is in favour of unbundling. It is doing it in a calibrated manner. They are focusing on the aspect that the customer should be crystal clear about what the customer is paying for or what he is not paying for.