IndiGo's global ambition hinges on execution

Integration of multiple aircraft, employee and maintenance costs would be key challenges

The stock of InterGlobe Aviation, which operates India’s largest airline under the IndiGo brand, gained one per cent after the promoters outlined their interest in tapping international markets via, if it was for sale, the international operations of Air India (AI). 

Founder promoters Rahul Bhatia and Rakesh Gangwal, in a conference call, said they’d proceed with bidding for AI’s international operations only if confident of turning around the government-owned airline’s network. Analysts say they’d have to wait, as it is not known whether AI’s international operations would be carved out as a separate entity or sold by the government without a break-up. 

InterGlobe has 40 per cent of the domestic aviation market but only three per cent in the country’s Rs 70,000-90,000 crore international air travel segment. By capitalising on AI’s potential, it will have an opportunity to become a significant international player, says a Motilal Oswal Securities report. The key benefit, according to the management, are AI’s prime slots at major international airports and rights to fly to a large number of destinations abroad, difficult to replicate. Further, the company would be able to use its large domestic traffic base to feed the international operations.

Brokerages and investors were initially sceptical of IndiGo’s plan to acquire AI. IndiGo, was the contention, would be saddled with debt totalling Rs 52,000 crore by the end of FY16. More, notes IIFL, than the market capitalisation of InterGlobe. Joseph George of IIFL says even if deal takes care of balance sheet stress, operational efficiencies might be difficult to work out.

IndiGo’s promoters are, however, confident that they’d be able to convert AI into a low-cost and long-haul carrier. And, over time, be able to retire its working capital debt, which is 60 per cent of the overall debt. IndiGo has indicated it could adopt disruptive pricing to increase its market share. And, keep customers within its network by cutting their travel time.

Mohan Lal of Kotak Institutional Equities is cautious, given the significant gap in the profitability of AI's operations versus those of IndiGo. Stemming largely from AI’s complex operations, expensive leasing arrangements and low productivity. He believes IndiGo runs the risk of getting distracted in managing this cumbersome acquisition. The promoters, however, think the due-diligence process would give them enough insights to avoid this.

Most analysts believe it is too early to take a call, given the time it will take to close the AI sale. Yet, most are bullish over the company’s India prospects –given strong demand, lower costs due to falling crude oil prices and expectations that yields are expected to stabilise. All this should help to grow its earnings by over 30 per cent annually over the next three years. If it is able to get only the international operations of AI and turn it around, it could be a major player in the international market. 

However, if not able to execute well, given the multiple aircraft, higher maintenance and staff costs, AI would be a major drag, as was the case with Jet Airways (Air Sahara) and Kingfisher Airlines (Air Deccan).

While acquisition of AI’s international operations will be long-drawn, IndiGo has already indicated its intention of pursuing organic expansion into global markets. This might take time but will be an attractive proposition, with its track record on execution and the fact that the international travel market is twice as large as India's domestic one.