IndiGo's Mega Order Brings Spotlight Back On Indian Aviation's Growth Story
IndiGo's massive order for aircraft is well within the norms of its tried and tested formula. Here's why it was good business.
Indian aviation is like a box of chocolates. You never know what you are going to get. Except sometimes you do! A few weeks ago, we were discussing the story of an Indian airline that went into bankruptcy. And now, we witness India's biggest carrier, IndiGo, signing the biggest order for aircraft ever placed by an airline, with its long-time favoured choice, Airbus.
IndiGo Raises The Bar At Paris Airshow 2023
On Monday, IndiGo Chief Executive Officer Pieter Elbers, promoter Rahul Bhatia, and Chairperson of the board of directors Venkataramani Sumantran headed over to the Airbus chalet with Airbus CEO Guillaume Faury and Chief Commercial Officer and Head of International division Christian Scherer. They shook hands and signed a Memorandum of Understanding that announced that IndiGo will order 500 of the A320Neo family of Airbus aircraft.
The order had been in discussion for a while, with Reuters first confirming it in their reporting about it in early June. With this stroke of a pen, IndiGo has now secured its plans through most of the 2030s as well.
The airline is no stranger to Airbus and the airshow business. It signed its first order with Airbus when it was a relatively unknown upstart at the Paris Airshow in 2005, with Rahul Bhatia and Rakesh Gangwal representing the airline. That order was for 100 A320 aircraft. Since then, it has ordered another 180 A320 family aircraft in 2011, 250 in 2014, and 300 in 2019. The airline already had a total order book of 830 aircraft with Airbus, and 480 were undelivered out of this prior back order before they shook hands on Monday.
Why The Rush?
An aircraft assembly involves a global supply chain, with various components manufactured in different parts of the world and then sent to a venue where the plane would be assembled, known as the Final Assembly Line. Clearly, it takes a long time to manufacture and deliver, and hence, the business of aviation involves planning decades ahead.
Once an aircraft is ordered, the airline is assigned the serial number of the aircraft it will receive. In common parlance, these are called delivery slots on the assembly line. As of May 2023, Airbus has over 6,500 of its popular A320Neo aircraft yet to be delivered to customers. The airline intends to ramp up production of the A320 aircraft—which it assembles in Toulouse, Hamburg, Alabama, and Tianjin—to produce 65 of these per month by 2024. At that rate, the current orders will take 100 months to fill. So, Airbus is only able to accommodate new orders from late 2029 or early 2030 onward at the moment.
IndiGo has built its business on a sale and leaseback model, which it has perfected to a T. While the last published list price of the A320Neo aircraft (2018) was $110.6 million, that is not the price that any airline pays. Typically, with such huge orders, IndiGo is able to negotiate very deep discounts, which could be to the tune of 50% or more of the list price. Most of the payment is due at the time of delivery.
IndiGo purchases the aircraft at the time of delivery and immediately brings in an aircraft lessor to purchase the aircraft from it in a back-to-back transaction. This purchase involves the airline receiving a higher amount than the originally contracted cost of the aircraft, pocketed by the airline. IndiGo then leases the aircraft from the lessor and makes a monthly payment.
The genius of this approach lies in the fact that IndiGo makes a few million dollars in profit off the aircraft at the time of delivery. Subsequently, IndiGo would usually keep the aircraft in its fleet for about six years and send it back before the heavy checks come in (which are expensive). Hence, IndiGo is able to keep a consistently young fleet with the newest incremental additions to technology that make its money-saving work for it. For instance, the Neo version of the A320 has 15% fuel savings over the earlier version, which is a lot for a business where 40% of the bills are fuel. Those aircraft are subsequently rented out to other airlines for the rest of their 20–25-year life span.
This Order Was Much-Needed
With this order, IndiGo has secured delivery slots till 2035, long before other airlines even start thinking about it. And for being able to plan far ahead, it would have gotten a great price as well, against the nominal token payments that are made at this stage (just like when you book a car).
But it's not just that. India is an aviation market in the very early stages, with less than 4% of people flying. At the current fleet size, India has one aircraft for every 20 lakh people. On the other hand, a mature market such as the U.S. has one aircraft for every 50,000 people. Even if it takes decades to further build more airports and bring aviation into the hinterland, we can use all the aircraft we can get.
Additionally, this order plans for aircraft replacement at IndiGo as well as growth in the times ahead. And with IndiGo planning to go further out than it already has—such as to Europe, Japan, and wherever else—the A321XLR will be able to take them. IndiGo would be able to plan new destinations internationally with some of these aircraft.
Further Cements IndiGo’s Hold On The Market
IndiGo's flywheel of business involves opening up new unserved markets and then making them mature markets over the years. This is how they are now flying 60% of Indian passengers around the country in a short 18 years since its establishment.
In an upwardly mobile country, many more flyers will come to the market in the years ahead. The same business thesis that holds true for Tatas to back Air India, also holds true for IndiGo. But to keep its grasp on the market, it needs to do more of the same, which is where the order points towards. Also, with the Tatas having ordered 470 aircraft as well this year, it just means IndiGo does not have the breathing space to take its eye off the ball.
But even as I write this, there is more to come. IndiGo has been exploring ordering some widebody aircraft of its own and is currently in discussions with Airbus and Boeing for an order. If it will come through at the Paris Airshow or after, we don’t know.
One thing is for sure, both the house of Tatas and the Middle Eastern airlines are watching IndiGo's moves with keen interest. Until then, we should let IndiGo enjoy the title of the largest aircraft order, till the rolling trophy gets passed on to Turkish Airlines with a probable 600-aircraft order coming soon.
Ajay Awtaney writes about aviation and passenger experience at LiveFromALounge.com, and Tweets at @LiveFromALounge.
The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.
