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Full Text: IndiGo co-founders say Air India would provide rapid entry into restricted international markets

The owners of IndiGo, the only airline that has made a formal offer to acquire loss-making Air India, held an hour-long conference call on Thursday to calm the nerves of jittery investors.

BT Online | July 7, 2017 | Updated 14:30 IST
IndiGo co-founders say Air India would boost international network

The owners of IndiGo, the only airline that has made a formal offer to acquire loss-making Air India, held an hour-long conference call on Thursday to calm the nerves of jittery investors.

Speaking on the rationale behind their pitch to acquire debt-ridden carrier, IndiGo owners Rahul Bhatia and Rakesh Gangwal emphasized IndiGo's need for Air India's international operations to gain access to several restricted and closed overseas markets.

"Air India's international operations would bring a very important element to our network," IndiGo co-founder Rahul Bhatia said during the conference call.

According to Bloomberg, IndiGo's bid for Air India had earlier wiped out more than $500 million in the market value of country's most profitable airline.

IndiGo, which commands a 41 per cent market share of India's airline industry, is keen on expanding to long-haul destinations. The airline is already operating its flights to seven international destinations like Dubai, Singapore, Sharjah, Bangkok, Doha, Muscat and Kathmandu.

Untapped International Market

India, currently the third largest aviation market, is witnessing domestic traffic growth of 15 per cent to 20 per cent every year.

"India represents one of the largest untapped international air transportation market opportunities that is out there, and the country certainly lacks its fair share of long-haul international flights," Bhatia said in his opening remarks.

Stressing that IndiGo's interest in buying Air India is mostly limited to its international operations Rakesh Bhatia said, "IndiGo is not looking at acquiring all of Air India's businesses and subsidiaries. we are interested in the airline operations of Air India. And more specifically, we are focused narrowly on Air India's international operations and Air India Express."

Bhatia also highlighted United Airlines decision to buy Pan Am's Pacific and London operations as the critical factor in United becoming world's largest airline.

Former US Airways CEO and IndiGo's cofounder Rakesh Gangwal said middle-eastern hub cities of Dubai, Abu Dhabi and Doha have significantly benefited from the traffic that India provides to their operations.

Here's the full text of the investor conference

Ankur Goel: Good Evening, everyone, and thank you for joining us for this discussion on IndiGo's potential future plans and strategy on long-haul, international flying.

Participating on this call are our two founders, Mr. Rahul Bhatia and Mr. Rakesh Gangwal.

Before  we begin, please note that today's discussion contains statements regarding certain elements of our business plans, strategy and/or financials which will be construed as forward-looking. Our actual plans and results may be materially different from these forward-looking statements.

The information provided on this call is as of today's date and we undertake no obligations to update the information subsequently.

A transcript of today's call will be archived on our website. We will upload the prepared remarks within an hour and the Q&As will be uploaded within a week after Chorus Call has translated the Q&As.

With this, let me hand over the call to Mr. Rahul Bhatia

Rahul Bhatia: Thank you, Ankur. A good day to all of you, and thank you for joining us.

Let me speak to the recent flurry of news regarding IndiGo's interest in Air India. There has been a lot of press coverage and commentary on IndiGo's interest in acquiring the airline operations of Air India. Regrettably most of that reporting and commentary has missed the mark largely because we, at IndiGo, were constrained and not able to provide more clarity to the investor community and the press about our plans. We should have done a better job at this.

We are close to announcing our quarterly results at the end of this month and being mindful of the quiet period as well as the materiality of the issues, we could not, on an individual basis, reach out to the investor community as well as the press to share our thoughts regarding Air India. Now with all the misunderstanding that is floating out there, we felt it best to publicly elaborate and spell out our vision and potential plans regarding long-haul international flying, through this conference call.

India is the third largest aviation market, and the second largest country in terms of population. It is going through significant economic growth, and prosperity is on the rise. The country continues to be dramatically underserved in the domestic aviation space, and that is why we are witnessing domestic traffic growth of 15% to 20% every year. On the international side, we believe that India represents one of the largest untapped international air transportation market opportunities that is out there, and the country certainly lacks its fair share of long-haul international flights. In reality, India's international air transportation hubs reside outside India.

Air India is a massive organization. They employ more than twenty thousand people and operate various subsidiaries ranging from maintenance, to charter operations, to ground handling, to hotel operations, and so on. It has lost thousands of crores of rupees over the last five years, carries a debt load of more than 50,000 crore rupees, and continues to be a significant financial challenge for the Government.

First and foremost, IndiGo is not looking at acquiring all of Air India's businesses and subsidiaries. In our view, that would be a herculean task which would at best be a very challenging proposition and at worst an impossible task, unless an organization is willing to fund large losses for a very long time.

So what are we looking at within Air India? Quite simply, we are interested in the airline operations of Air India. And more specifically, we are focused narrowly on Air India's international operations and Air India Express. That is what we have communicated in our one-on-one discussions with Government officials.

Let me digress for a moment and address a few news reports stating that IndiGo may be rethinking the scope of what it is looking at with respect to Air India. Quite to the contrary - our thinking is clear on this issue, and it has not changed. When we were asked by the stock exchanges to comment on reports that IndiGo had expressed interest in Air India, we decided to disclose the letter that we had submitted to the Government. Now it also became important that we share some details with our employees. Consequently, concurrent with the filing with the stock exchanges, we sent an email to all our employees about what was transpiring and elaborated to them that our interest was primarily in Air India's international operations. So from day one, it is mainly about international operations.

Now some of you may be wondering if such a carve out of Air India's international operations is even possible and practical. To which we would like to point out that this is not a new concept. A few decades ago, United Airlines acquired Pan Am's Pacific operations. Based on the success of that transaction, United then followed up by acquiring Pan Am's London routes in 1990. Today, United Airlines is one of the largest international carriers and it is questionable if that would have happened but for those acquisitions. United was able to do with those international routes and route authorities what Pan Am was unable to do principally because United had a large domestic feed network. As a matter of fact, American Airlines followed that same model by acquiring TWA's London routes.

So there is a road map out there that has worked very successfully. Today, IndiGo serves seven international destinations and Air India's international operations would bring a very important element to our network. It would provide rapid entry into restricted and, in some cases, closed international markets. So instead of being a small international player, IndiGo would have a path to becoming a major player in the international market. Importantly, we believe that IndiGo has the ingredients to significantly grow and unleash the true growth and earnings potential of Air India's international operations, and Rakesh will speak to that issue in a few minutes.

Understandably, an acquisition of Air India's international operations would require significant restructuring and management oversight. A task that we are quite comfortable taking on. However, we simply do not have the ability or for that matter, the desire to take on debts or liabilities that could not be supported by a standalone restructured international operation of Air India.

On the other hand, if the Government of India decides to sell all of Air India's airline operations and, I emphasize "airline operations", to a single entity and not carve out the international operations, we would still be interested in exploring that option. As the largest domestic carrier, it would not be prudent, if not irresponsible, on our part if we did not look at and explore all the opportunities that may or may not exist from the Government's divestiture plans for Air India. However, acquiring all of the airline operations of Air India brings with it a lot of other issues and many more challenges and complexities. We would evaluate that option and assess if it is economically feasible for us to go down that path. At the end of the day, this exercise is not about becoming bigger for the sake of being bigger - it is all about profitable growth and that is a bedrock principle at IndiGo borne out in our performance of the last ten years.

Thank you, and let me now turn the call over to Rakesh

Rakesh Gangwal: Thank you, Rahul. This is an interesting call with financial analysts and investors since we are only sharing our thoughts and vision and not numbers. It's like going to a corporate board meeting in a swim suit.

In broad strokes, let me spend a few minutes on some interesting analytical work that has been going on at IndiGo regarding long-haul, international flying. Today, a large number of Indian citizens and visitors to India arrive or depart on connecting international flights due to the lack of non-stop flights into and out of India.

Historically, most of these connections were over European hubs such as London, Paris and Frankfurt and over South-East Asian hubs like Singapore and Bangkok. And, of late, a vast amount of international traffic from and to India flows over the middle-eastern hub cities of Dubai, Abu Dhabi and Doha. These small middle-eastern cities near India have built huge airline hubs even though they lack the essential and fundamental ingredient of a hub -- which is the presence of a large local traffic. The massive hubs that these airlines have built have significantly benefited from the traffic that India provides to their operations.

Over the last ten years, IndiGo has established a significant domestic presence and now has a little over 40% of the domestic market share. In doing so, we have also been able to build meaningful operations at all the large metropolitan cities of India. And, in the years to come, we expect to keep up our pace of rapid growth in the domestic market. In fact, during Fiscal Year 2018, between the A320s and the ATRs, we expect to add almost 50 aircraft - a remarkable number and we have built the internal capability and muscle to execute on that plan. On the other hand, our internal work shows that IndiGo is a natural player to take advantage of the significant and lucrative international market opportunity that India offers. Specifically, because of our large domestic network, we are well positioned to capture this massive and growing international traffic. It is about time that IndiGo enters the long-haul, international markets and takes advantage of this lucrative opportunity. And, just to state the obvious, we would not attempt to enter the international long-haul market but for the fact that we have this large domestic feed network.

So, irrespective of how the Air India story plays out and based on all our internal work, we are generally of the view that it makes fundamental economic sense for us to enter the long-haul, international market. Our original plan was to begin this discussion and share our thinking with all of you during our upcoming quarterly analyst call at the end of this month. However, that got pre-empted due to the Government's in principle decision to divest itself of Air India. So, in summary, our long-haul operating plans are being guided by the following principles:
First: The Indian market is significantly underserved in non-stop international destinations

Second: A large and lucrative opportunity exists uniquely for IndiGo to take advantage of this market segment

Third: Success is not dependent on developing these international markets. In fact, we would take passengers from connecting international hubs and also from high-cost, non-stop operators and fly them on our non-stop, low-cost flights

The market thesis is no more complicated than that and the issue for us is to figure out how best to go about doing this profitably? Let me take a few minutes and share our perspective and for obvious competitive reasons we will only share some very high-level thoughts on this issue.

If we enter this space, we will do so with a low-cost model. Just like the low-cost model disrupted the short-haul, full-service legacy carriers starting a few decades ago, we believe that international long-haul markets are ready for the right type of low cost operations. In fact, there are quite a few examples of low-cost, long haul operations that are starting to take hold across the global aviation space -- airlines such as Norwegian and Wow Air. At the other end of the spectrum, Lufthansa, British Airways, Air France, Singapore Airlines, etc. are all trying their best to build their own long-haul, low-cost operations and time will tell if a legacy carrier can successfully launch a true low-cost operation.

I do wish to emphasize two fundamental ingredients for success that makes IndiGo's potential plans very different from that of other long-haul, low cost operations in the market
First: Our massive domestic feed network is a big plus

Second: Passengers will mostly come from foreign airlines that are today connecting over their hubs or flying at high fares on non-stop flights. Just for a moment, think about the value proposition to the passengers that IndiGo would offer. On average, the passengers will arrive at their destination three to five hours earlier - and for a lower fare - and without all the hassles of connecting over hubs, going through multiple security checks, worrying about their connections, losing bags in transit and so on.

Interestingly, last week, while we were expressing our serious interest in Air India's international operations, Ryanair expressed serious interest in Alitalia which is also going through major financial stress. With tongue-in-cheek let me say, our compliments to Ryanair for understanding the fundamentals of the airline business. Jokes aside and in all seriousness, Ryanair is a very smart and formidable airline and it certainly is comforting to see that we are on the right track with respect to our thinking and strategy. Yes, the long-haul business as we know it, is changing just like the short haul, full service segment changed over the last few decades. In our view, this change and transformation will be a World-wide phenomenon with many such operations sprouting up globally and will ever so slowly encroach in to the current format of full-service, long-haul flights. This will be quite unlike what happened in the short-haul, low cost segment where it first took hold in North America. This then gave confidence to European start-ups and then to Asia and South-East Asia start-ups to launch similar services. One of the principle reasons for this is that the smarter low-cost carriers have perfected their art and, over the last ten years, aircraft technology has changed allowing for this potential transformation in long-haul, low-cost flying.

Our journey of building an international, low-cost operation will be gradual - a journey that we would take thoughtfully and deliberately. To be clear, whether we do some limited transaction with Air India, or launch our own long-haul, international operations or a combination of both, the business case would need to be EPS accretive for us to go down that path. To underscore that point, with respect to Air India, let me just say that we are not looking at replicating the unfortunate scenario that unfolded when the Brazilian low-cost carrier Gol merged with Varig.

In closing, let me suggest that we reflect for a moment on what has transpired at IndiGo in the last ten years. The Company has placed 50 billion dollars in firm aircraft orders at list prices - built an impressive domestic network representing more than 40% of the market with reliable, on-time and a hassle free travel experience - has been profitable for the last nine years in the brutally competitive Indian market - and distributed almost 900 million dollars in dividends over the last five years. We now have critical mass and let's now see what the next ten years bring.

Hopefully, we have been able to paint a clearer picture of our plans and thought process regarding long-haul, international operations with or without Air India.

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