Will not sell stake to any foreign airline, says IndiGo President Aditya Ghosh

The country's biggest carrier IndiGo, which is awaiting Sebi nod on its plans to tap the primary market in order to retire some of its debt and fuel its future growth strategies, has posted a phenomenal bottomline for the year ended March 2015. IndiGo president Aditya Ghosh in a conversation with Soumonty Kanungo shares his focus to keep a low-cost structure while remaining tuned to the big India opportunity.

You made a fourfold profit in the last fiscal and this is the 7th straight year when you continued to be in black. How did you do it?

If there is one thing we feel good about, it is the fact that we have been able to create a track record. It's not a year here and there, but creating a track record of 7 years. We added capacity this year. While the previous financial year we ended with 77 airplanes, this year we ended with 94. The economy kick-started, passengers grew. The yields have also improved over a period of time. The dollar went against us, but what helped us was the drop in fuel price. It is a combination of added capacity, more passengers at a higher yield and a lower cost. All of these helped to deliver the number, and yes, this is our best year ever.

How much of your profits are coming from sale-and-leaseback model?
Sale-and-leaseback is only a method of financing. We have some aircraft on sale-and-leaseback and some aircraft on finance leases. It is very much a part of operation of the airline.

But at a time when others are suffering, how did you manage to remain profitable continuously?
We picked a particular business model, which is a low-cost carrier (LCC) model, and we have not wavered from that business model ever. So, it is one-type of aircraft, high-density sitting, high aircraft utilisation, quick-turnarounds, high employee productivity – all those things that you expect from a typical low-cost carrier. We have done that and we have executed that plan. In contrast, when you look at some of the others, you see multiple-types of airplanes, 2-3 different type of classes of services, low aircraft utilisation, high-turnaround times, a lot more number of employees than us – and that you can see in the result, because our cost of production is lower than anybody else. If you have a lower cost of production, then you are bound to deliver. We just stuck to that and this is what made us successful. We are not interested in flying long-haul international, we are not interested in having business-class configuration, we are not interested in buying 3-4 different types of airplanes as it will not make us successful.

So that means you would continue to fly with narrow body aircraft?
Yes, absolutely. On the revenue side, anybody can be low-fare but the trick is in being low-cost. If you are high-cost but low-fare, that's when the disaster starts to happen. You can see how often that mistake is made. Rather than focusing on order and making sure that the cost structure comes down, people start focusing on dropping fares, dropping yields and things like that. And so, it is not a surprise at the end of the year when one airline makes money and consistently so, there is everybody else who are faltering of for their own reasons. We are also paying the same fuel price, we are also going to the same airport, we are also paying the same airport charges and so on and so forth. Then, why are we different? We are different because we are not selling below our costs and making sure that our cost is low.

You are now also importing ATF. Does it account for 5% of your total ATF requirement?
We are importing ATF to some extent. It is difficult for me to put a percentage to that, but it's a small percent.

Will that share go up in the future?
Well, it depends on what happens with domestic taxes as well. In the domestic market, a lot of airports are gradually bringing their fuel taxes down, whether it is Bagdogra, or Vizag, or Jaipur, or Dimapur. There are several cities in India which are gradually bringing their tax on ATF down and if that continues to happen, then maybe, we do not need to import fuel. I'm very hopeful on that. Ultimately, if those tax structures come down, those airport charges come down. If it becomes a more efficient place to work and to operate in, ultimately the cost of travel will come down and more people can travel in India. Add to that, the fact is India is growing, the economy is growing, number of passengers is growing, not enough airplanes are coming in. If you put these together, you'll see why this is a great business to be in.

If we look at flash sales, there is not too much of a difference between an LCC and a full-service carrier. Is it then fair to call low-cost carrier a misnomer?
There is a lot of confusion regarding what is a low-cost carrier and what is a low-fare carrier. Anybody can be a low-fare carrier as anybody is free to charge according to their wish. But a low-cost carrier can only be somebody whose own cost structure is much lower. For example, somebody's cost structure is Rs 10, while somebody else's is Rs 12, somebody's is Rs 17 and somebody else's Rs 20. Now, if the guy with lowest cost structure charges Rs 11, he makes a 10% profit. Anybody else can charge Rs 11 and customers see all the prices are similar to each other. So, one guy is then making money and everybody else is racing to the bottom. During flash sales, all the other three are losing money but the guy with the lowest cost structure wins because he is selling above his costs. That's why while one is making profit, others are bleeding. What should they do is to try to bring lower their cost structure.

The government has been frowning about high airfares during the peak season and alleged cartelization. What are your views?
Fares are driven by demand and supply, like almost anything else. So during a few days in a year – around a festival or holiday weekend – when everybody wants to fly, the fares start going up because the planes start filling up, and then, as that holiday season gets over or as schools reopen, fares start dropping. This happens every year because it is a dynamic product, where it is not the same price throughout the year. When the demand is less, price will drop and when the demand is high, the price will go up. Also, there is less number of airplanes in this country than actually required. So, we need many more airplanes in the country. We need to make it very easy for people to bring in airplanes and that is a fundamental premise of more demand, less supply, highly under-penetrated aircraft market, but fastest growing aviation market in the world, which led us to ordering 100 airplanes, then 180 airplanes, and finally ordering another 250 airplanes. We can see that there is not enough supply but there is a lot of demand. So, as an airline, if we are also able to bring in more airplanes, add to the choice that the customer has in terms of flights, in terms of frequencies, in terms of destinations we can fly to, as we start gaining economies of scale and we are able to bring our cost structure down. We should be able to then pass on some of the benefit to the consumers.

You have already taken delivery of the entire lot of 100 aircraft you ordered in 2005. When would you start taking delivery of next lot of 180 A320 neos which you ordered in 2011?
That lot will start arriving at the end of this year. So, we are now around 100-120 days away from beginning to take deliveries of these planes. But what is more important of those airplanes is not just the fact that we are bringing in more capacity, it is that those aircraft come with new engines – the geared turbofan engines. And these engines are expected to burn 10-15% less fuel. Fuel is the biggest element of our cost. If we are burning less fuel, then we are fundamentally bringing down our cost structure and if we fundamentally bring down our cost structure, then we would be able to pass on that benefit to the consumers. As a business, we are not only the lowest cost producer, but we find the ways to bring down the cost structure down. Usually, over a period of time you'll expect the cost factor to go up, but here, because of the capacity we are bringing in, because of the technology that we invested in, we start bringing our cost structure down.

So, the reason behind bringing in the new aircraft is solely to reduce fuel consumption?
Yes. The fundamental behind a low cost carrier is one type of aircraft. So it is one type of A320. At the same time, it is different because it is going to burn so much less fuel. So, it is an ideal combination to be able to do the same old thing, and yet find a technological way in attacking the biggest bulk of cost, which is fuel.

Fuel is 50% of your costs. How much of the less fuel consumption will get translated to your total costs?
If you do some rough math, it is 10-15% of 50%, which is, say, 5-8%. In a business where we are fighting for 1-2% advantage, here is something which just provides that upside to the investors.

Can our airports accommodate these new aircraft?
There are 65 airports in the country which can land A320, and we only fly to 33 of them. There are many cities which are of great opportunities, but IndiGo doesn't fly to them because we don't have airplanes. Cities like Leh, Dehradun, Port Blair, Silchar, Jorhat, Jodhpur, Udaipur, Madurai, Tiruchirappally (Trichy), Mangalore, Surat, Bhopal, Amritsar, Aurangabad – we don't fly there because we don't have enough airplanes and in the next few years, we will get there.

So, what are the new routes you are now looking at?
We focus on all three buckets: metro-to-metro, metro-to-non-metro and non-metro-to-non-metro. And we see passenger numbers growing in all three buckets. I obviously look at the Big India opportunity – a country of billion people has 400 commercial planes or less than that. A country of one-third our size in terms of population, say the United States, has around 6700 commercial planes. You can imagine the potential that exists. There is another stunning statistics. There are around 8.5 billion railway passengers in the country but less than 1% travel by air. If we could take only 1% of the rail traffic, we will need 400 more planes.

What is your cost competitiveness in comparison to other global players like Ryan Air or AirAsia?
If you take fuel out (because it creates an anomaly in India because of the tax on fuel), we are one of the lowest cost producers amongst all of these listed low-cost carriers of the world. Yes, we are competing in the Indian market and we are better than the rest, but even among the benchmarks of global bests, we actually come out to be very well.

You filed your DRHP in June. When do you expect the IPO to hit the market?
It is difficult for me to predict. We filed on June 30 and we are going through the typical process that it takes. I was told that it normally takes three to three-and-a-half months. So, we are around.

And, are you looking to raise $400-500 million?
What we have done is, we are looking at primary proceeds which are just about $200 million or so, and the balance is our existing shareholders, who are offering certain shares. Now, the price at which it sells will be determined by the market on that particular day. We don't have any target other than that the primary proceeds should be around $200 million.

What made you go for an IPO now?
There are two reasons. One, we have created this track record and 7 years is a fairly substantial time to post profits continuously. The other is we are building an airline for the next 15-20 years and we are making decisions which will have impact for many more years. So, as we become bigger, as we move into the future, when we need, we would have access to right funding mechanisms, capital markets and more options. It seems like the right thing to do for the growth of an airline, for growth of the business.

How will you be utilising the proceeds?
It will be for funding a few aircraft, retire some debt related to aircraft as we don't have any working capital loans, buying some ground service equipments and for some general corporate purposes. But bulk of it will be for retiring some of our debt.

What is the status of your discussion on marketing tie-ups with Qatar Airways?
We are still in discussion with them. Nothing concluded, but it is limited to simple marketing partnerships. Still trying to work out what will be the contours of it without complicating our model in any which way.

So, is there possibility for you to sell some stake to Qatar Airways or any foreign airline?
No, not at all. Never wanted to and now we are any way going to be listed.

With AirAsia India and Vistara, how do you look at competition?
Actually, in the same way as we have looked at competition always. As long as your cost structure is lower, you will win. That's the simple thing. As long as our cost structure is lower than whoever else is there in the market and we keep getting scale, it will help.

You are focused on your India operations though you are flying to some destinations overseas. Would you now look at expanding your international footprint?
We will do some, but essentially we are going to be focused on the India opportunity. The world is coming to India to take advantage of. I think we will be foolish to take our eyes off that.

Where do you see IndiGo 5 years from now?
Our focus is whether we can improve our cost structure, continue to stick to the model and take advantage of the India opportunity. That really worried us. If we can just stick to that we will be successful.