IndiGo might shift from sale and leaseback model

Owning aircraft may impact dividend payout

In a change of strategy, IndoGo, the country's largest domestic air carrier, has signalled it would own aircraft rather than using the sale and leaseback model.

The reason given is with the A320neo being a new-generation plane, with fuel saving technology, it would like to own the aircraft for a longer period. The current average age of IndiGo's fleet is around six years.

"Most of our aircraft are on a short-term operating lease. We may choose to operate the A320neo for a longer period. Hence, there is a shift in strategy," said Rohit Philip, chief financial officer, in an analyst call.

Low-cost carriers across the world have been users of sale and leaseback. In this, a lessor will purchase the aircraft from the airline and lease it back. This removes the aircraft debt from the airline's balance sheet and allows it to invest equity for some other purpose. According to sectoral sources, IndiGo makes around $4 million dollar per aircraft under such transactions.

As of end-March, it had 131 aircraft, of which 17 were owned or on finance lease; 118 were on an operating lease.

The company will take a final call after further clarifying on how lease and import of aircraft would be treated under the new goods and services tax (GST). Under the new taxation laws, airlines may avail of input credit for taxes paid on procurement of both goods and services in the case of business class but can offset the input tax liability only for services in the case of economy class travel.

As a result of this change, capital cost for the company could increase. Though the company refused to share details, Philip said they'd use internal funds and debt to buy new aircraft, which might impact the dividend payout. "Our dividend payout has been based on the quantum of profit. Going forward, buying of aircraft will also be a factor," he said. For 2016-17 the company paid a dividend of Rs 34 a share.

The company will also raise cash through dilution of promoter stake. It didn't say if it would issue new shares but an analyst said there would be some primary sale to raise money. To meet the requirements, the company or its controlling shareholders must sell a 10.85% stake, worth about Rs 4,900 crore on the current share price.