Indian Aviation Industry: Who’s leading the Pack? (Part II)

This part of the blog delves deeper into the operational metrics of Indigo which is India's largest airline and one of the world’s leading low-cost carriers with a dominant position in the Indian airspace (60%+ domestic market share and 17%+ international market share) with an exemplary management team. It offers passengers a simple brand promise of providing “low fares, on-time flights, and a courteous and hassle-free service”.

The company has a mega fleet of 360+ aircrafts with an average age of 4-4.6 years, almost half the average age of Air India and Spicejet. Further, it is undertaking aggressive capacity expansion by almost doubling its aircraft fleet in the next 5 years.

The lower the average stage length, the more cost-effective the airline is for short-haul flight operations (<4 hours flying distance). A lower average stage length also means a greater number of departures. For long-haul operations (>6 hours flying distance), higher stage length usually leads to cost savings which lead to improved profitability.

Over the last 10 years, Indigo’s domestic average Stage Length (Average Distance flown) has reduced from 947.5 Km in 2016 to 868.4 km in 2023. During the same period, the international average stage length increased from 2,219.8 km to 2,493.5 km. With the introduction of long-haul flights, the international average stage length is expected to increase further in the coming years.

While Air India and Spicejet have struggled with volatile Yield Per Passenger km, i.e. fare charged to a customer per km flown, Indigo has maintained a stable yield range over the years. It has kept its pricing strategy very clear – “Affordable”.

Although sounds simple, in light of the aviation industry it is very difficult to maintain stable fares. This industry has always been troubled with pricing wars. However, Indigo’s strategy has been very clear – avoid price wars. Indigo maintains a fair airfare which is slightly higher than its competitors sufficient enough to pose to customers as if they are getting Indigo at almost similar fares (or at a very nominal premium).

Strong management acumen with years of experience in operating airlines, strong business fundamentals and tactics like sale and leaseback model, maintaining lower aircraft weights, maintaining a passenger load factor at 80-85% levels, etc. leads to improved cost efficiency.

Whilst other players have struggled with maintaining their Cost per Available kms, Indigo has maintained a clear strategy to keep its operations efficient. The RASK-CASK spread has remained healthy over the years at Rs. 0.30-0.40 per passenger-km.

Indigo has managed to maintain a stable cash conversion cycle with the lowest in the industry conversion cycle of 3 days. Further, with a cash and cash equivalents balance of over Rs. 13,063 Crores as of 30 September 2023, the company appears well-prepared for capacity additions. This liquidity also aids in better credit ratings and therefore, lower lease finance costs.

All these strong fundamental metrics combined with tailwinds for the industry should lead to multiple benefits for the pioneer of the Indian aviation space, Indigo.