India’s Finance Ministry broke news on Wednesday, June 28th, that the government had agreed “in principle” to sell its stake in Air India, India’s flag carrier. Finance Minister Arun Jaitley announced that a special committee would be formed to figure out the actual sale, including potential bidders and how big of a stake the government will sell. However, the government has already received its first letter of interest when IndiGo, an Indian low-cost carrier, formally wrote to the government expressing its interest in acquiring Air India.

In the letter, IndiGo president Aditya Ghosh said IndiGo was looking to acquire either the international operations of Air India and Air India Express, or alternatively, all the operations of the airline. He stated, “We would like to point out that our confidence and ability to build for our country one of the world’s largest international carriers is driven by the significant domestic network we have built over the years. In our view, no other carrier is better placed to realise this potential and we would not even dream of embarking on such a journey but for our domestic feed network.”

Where did Air India’s financial issues start?

Air India’s finances have always been murky due to its status as a state institution, including overstaffing and corrupt practices. However, its most recent and public bout of financial issues started in 2007, when the Indian Government announced that Indian Airlines (the government’s other flag carrier, which focused on domestic services, as Air India mainly operated long-haul international services) would be merged into Air India through the creation of a company named Air India Limited. Once the merger was complete, the airlines would operate together as one under the Air India name.

An Airbus A320-200 in Indian Airlines’ livery landing at Dubai in 2009. Photo Credits: Wikimedia Commons / Konstantin Von Wedelstaedt

Indian Airlines had started to succumb to debt as a number of low-cost domestic airlines entered the market in India, including SpiceJet, IndiGo and GoAir, as well as continued competition from now-defunct Kingfisher Airlines and its subsidiary Kingfisher Red. As recently as 2005, the airline had turned a profit, but after the Indian Airlines – Air India merger, the combined company held a debt of over $1.1 billion USD (₹72 billion).

In 2011, India’s Comptroller and Auditor General blamed Air India’s rapid fleet expansion and the merger with Indian Airlines for its debt, which had reached $6.6 billion USD (₹426 billion) by this time. Around this time, the airline’s invitation to join Star Alliance was rescinded as well, due to its inability to meet the minimum standards for membership. After a government bailout of $4.5 billion USD in 2012, the government began looking into ways to rescue the airline’s finances, including privatization.

An Air India Boeing 777-300ER departing from Paine Field, Washington State, USA. Air India’s order for Boeing 777s, among others, was cited by India’s Comptroller and Auditor General as a source of the airline’s financial problems. Photo Credits: Wikimedia Commons / Mitrebuad

The carrier currently holds around $8 billion USD in debt, and government officials have been tired of keeping the airline afloat with cash infusion after infusion, with Aviation Minister Ashok Gajapathi Raju telling CNNMoney in February that, “I can’t commit the taxpayers’ money for eternity to keep it going.” In the fiscal year 2015-2016, the airline posted a $410 million USD loss (₹26.36 billion).

What is IndiGo?

IndiGo is possibly the largest airline that you’ve never heard of. The airline is India’s largest airline in terms of fleet size and passengers carried, and has a 41.2% market share in the domestic market as of May 2017. It carried 41 million passengers in 2016, and has 135 aircraft in its fleet. The airline made headlines in 2015 when it placed an order for 250 Airbus A320neo aircraft (since expanded to an order for 410, with 22 of those delivered), worth $27 billion USD at list prices — Airbus’ largest single order in its history.

An IndiGo Airbus A320neo landing in Toulouse, France after a test flight. Photo Credits: Wikimedia Commons / BriYYZ

The airline was founded in 2006 with backing from American and Indian investors, and placed an order for 100 Airbus A320 aircraft in 2005, to begin delivery in 2006. By 2010, the airline had surpassed Air India as the third largest domestic carrier, and in 2012, became India’s largest domestic carrier, surpassing Kingfisher Airlines after its demise and Jet Airways. Q1 of 2012 also marked financial success for the airline, when it became the most profitable airline in India.

The airline flies nearly a thousand flights a day to 46 different destinations, including 39 domestic and 7 international. Besides its finances, the airline has much to boast about, including being named a “Great Place to Work for in India” 10 years in a row, Aon’s Best Employer in 2017, and the airline recently won the “Best Low Cost Airline in Central Asia and India” award from Skytrax at the Paris Air Show.

How would the combined airline work?

If the Indian Government gives permission for IndiGo to take over part of Air India’s operations, it is likely that IndiGo would operate with both brands, given its strong domestic brand and Air India’s brand recognition around the world. In addition, both airlines’ networks fit into each other well, with the airlines having roughly the same hubs, and Air India already serving all of IndiGo’s international destinations.

The interior of the domestic terminal at Delhi’s Indira Gandhi International Airport, which Air India and IndiGo both operate a hub from. Photo Credits; Wikimedia Commons / Rishabh Mathur

One issue that has been raised is the difference in their operating models, with Air India operating as a full-service carrier, while IndiGo operates under a low-cost carrier model. However, to the passenger, the experiences are not so different: IndiGo’s current operations allow passengers to check a bag in for free, and on-board services can be easily adapted to an operating model that the combined airline sees fit.

In terms of the airlines’ fleets, both rely on the Airbus A320 family for domestic operations, and given IndiGo’s order book, it is likely that the airline will stick with the aircraft. It is likely that Air India Express’ fleet of Boeing 737-800 aircraft would be replaced by the Airbus A320 family. The new airline could also move to consolidate its fleet, which has been one of the reasons for IndiGo’s low maintenance costs, and it is possible that the Boeing 747-400 and Boeing 777-200LR fleet could be retired, as the Boeing 777-300ER and Boeing 787-8 can do most, if not all of the operations that the above aircraft perform.

An Air India Boeing 747-400 pictured at Hyderabad, taxiing for departure to Jeddah. Under IndiGo management, the airline would likely shed the four Boeing 747-400s in its control, among other aircraft. Photo Credits: Wikimedia Commons / Himmat Rathore

For the on-board product and customer-facing part of operations, it wouldn’t be a stretch to compare the hypothetical airline with Brazil’s Azul, which recently acquired five Airbus A330-200 aircraft to operate between Brazil and destinations in the United States, as well as in Portugal. The airline created a brand-new, award-winning business class product to place on its new aircraft, which has been named by many frequent travelers as the best way to travel to Brazil, and managed to combine its low-cost model and brand flair with a full-service, long-haul cabin. Given people’s disdain with Air India’s current premium class service, doing this would be a way to regain customers that have fled to other international carriers that have expanded into India in recent years, such as Emirates, Qatar Airways and Singapore Airlines.

So, what now?

Given the multiple attempts to privatize Air India in the past, the process will be slow, however with a letter of intent from an establish, well-financed carrier, it is almost certain that the Indian Government will be encouraged to start figuring out the details on how much of the airline it’d like to sell and how it will sell the airline. However, for now, operations will stay as is, with IndiGo dominating the domestic market, and Air India holding onto its 17% market share in terms of passengers flying internationally to/from India.

Featured image by InterGlobe Enterprises.

Categories: Industry Talk