06 cover story

DECEMBER 22-28, 2013

IndiGo Vs Competitors
IndiGo SpiceJet Jet Airways

With
34.3
lesser
promoter
484.35
funds, 86.33
IndiGo...
Share Capital 2012-13

IndiGo has
been much ...Grew its revenue by 3.5 times
more 20000

efficient
with its use
15000

10000 THE SECRET OF

IndiGo has
900
IndiGo is the only airline to
continuously make profits... CONSISTENT
made
profits for
five
600

300
PROFITS
successive How does the airline turn in
0
years while 2009-10 2011-12 2012-13 profits year after year in one of the
Jet and
-300 world’s toughest markets where
SpiceJet -600 competitors are struggling?
have lost -900

money -1200

-1500 :: John Samuel Raja and Binoy Prabhakar

W
hen IndiGo, India’s largest airline by passengers carried,
IndiGo’s ...With lesser borrowed money reported a profit of `787 crore in the 2013 financial year,
Loan funds it stunned many in a manner unusual for an earnings
borrowings 15000 broadcast. Aviation has always been a thorny industry,
are much one as is said only half in jest that makes millionaires out
of billionaires, but Indian aviation has stood out as noto-
lower than 12000 riously brutal owing to high taxes and costly airport
charges. The year to March 2013 also happened to be the
rivals’ worst in recent years due to a steep increase in fuel pric-
9000
es and weakening rupee. During the year, Kingfisher
Airlines shut shop and IndiGo’s competitors made losses
of more than $1 billion.
But IndiGo emerged unaffected from the wreckage.
6000
The latest numbers, revealed by IndiGo president Adi-
tya Ghosh on September 24, burnished the airline’s rep-
utation as the lone Indian carrier to prosper in a trou-
3000
bled industry.
Even so, the quantum of profit was astonishing. Indi-
Go’s profit had increased six-fold from a year ago.
0 The profit surpassed a projection of $100-110 million
2009-10 2010-11 2011-12 2012-13
Figures in `Cr
(around `550-610 crore based on the then exchange
rate) by the Centre for Asia Pacific Aviation (CAPA), an
aviation consulting and research firm. IndiGo’s own es-
Meanwhile, IndiGo’s fleet has
timate done three years ago presaged a modest profit of
grown faster than rivals’ `57.5 crore in 2012-13.
Fleet size
98 95
85 90
70
61
55
42 47

20 20
NA
2009-10 2010-11 2011-12 2012-13
Source: MCA and Annual Reports
 cover story 07
DECEMBER 22-28, 2013

The Reclusive
Soaring Profits sale-and- leaseback model”, says Kapil Kaul, CEO
What is the secret of IndiGo’s continued profits?
The airline has long been a subject of interest for
of CAPA South Asia.
Indeed, analysts linked IndiGo’s decision to fi-
IndiGo Promoter
air travellers and financial analysts alike. Travel- nally publicize its annual results as a gamble to at-
:: Binoy Prabhakar
lers attribute IndiGo’s success to the efficient ser- tract investor interest and list on bourses.
vice they experience on board and planes that In September, Ghosh denied any such plan,

S
tart-ups start small, right? In 2005,
run on time. Analysts have speculated —IndiGo saying the results were announced to end the “bi-
IndiGo tossed this rulebook out of
doesn’t have to make public its earnings as it is zarre interpretations” people draw from the one
not listed — that it makes most of its money from or two sheets that are leaked every year when In- the window a year before launch.
sale-and-leaseback transactions. diGo makes regula- The airline shopped for 100 Airbus air-
Under this transaction, operators sell newly tory filings. “So I craft, a massive order for any airline,
acquired aircraft to leasing companies and in a From an initial thought [it is] best leave alone a fledgling one. IndiGo
parallel transaction lease the same aircraft. The to be transparent
investment of swung the deal because the man-
price at which the aircraft is sold to a leasing com- and take the mys-
agement of Airbus, the European
pany is usually higher than the price paid to air- around tery out of it.”
craft makers like Boeing or Airbus. IndiGo, however, aircraft maker, was seemingly com-
But InterGlobe Aviation — the company that `100 crore as did not share its forted by the presence of Rakesh
runs IndiGo — raised eyebrows when it revealed equity capital by balance sheet or Gangwal at the helm. Gangwal, co-
that it did not make profits through the sale-and- profit and loss ac-
promoters, founder and promoter of IndiGo, is
leaseback route. (It was the first time that IndiGo count with the me-
chose to go public with its annual results.) a true-blue aviation veteran. He
IndiGo today can dia. On why it was previously associated in vari-
Ghosh told ET that IndiGo made an operating didn’t, Ghosh said
profit of `993.2 crore, a figure he said will end spec- be valued at he didn’t think on ous capacities with Air France, United
ulation that a large part of his airline’s profits is gen- `12,200 crore those lines and Airlines and US Airways, where he was CEO and president, stepping
erated by sale and leaseback of aircraft. On how In- “gave out data from
down shortly after American aviation was devastated by the 9/11
diGo continues to deliver profits, Ghosh said the the form submitted
customers are rewarding his airline for focussing on to the DGCA [aviation regulator]”. attacks. Gangwal has vast experience in buying aircraft for foreign air-
a product that is basic, simple, even boring. lines, says a person familiar with IndiGo’s operations. “He used his
True, Ghosh and his team run an innovative Reliable Model knowledge and experience to put together a fantastic deal.”
and nimble airline. A reputation for punctuality IndiGo promoter Rahul Bhatia too insisted that his
IndiGo president Aditya Ghosh says Gangwal carries a tremendous
has helped IndiGo, a no-frills airline, charge more airline is transparent. Anyone interested in exam-
than full-service competitors like Jet Airways and ining IndiGo’s finances is free to approach the reputation in the airline business, which translates into lots of credibil-
Air India on many routes. Fares actually rose by regulators, he told ET in November. ity among aircraft makers. IndiGo made a bigger order in 2011, for
more than 20% during the year, belying its claim Ghosh, also the airline’s spokesman, did not another 180 planes from Airbus. That order came when a lot of airline
of offering low fares. comment on the finances for this article. “We do powerhouses were chasing the order, says Ghosh.
IndiGo has also shown it is ready to go against not discuss any of these [financial] items in the
the grain. It has introduced an airport lounge ser- press,” he said. The massive aircraft orders have been both springboard and suste-
vice, again unusual for a no-frills airline. Nevertheless, the sale-and-leaseback model nance to IndiGo’s success. Kapil Kaul of CAPA says Gangwal’s ability to
Hormuz P Mama, an aviation expert, says In- helps explain why IndiGo reports consistent prof- take risks and strike winning deals was reflected in IndiGo’s first 100
diGo’s aircraft utilization is the highest for any its while competitors are losing money and are aircraft order, which proved game-changing
Indian airline. “That helps enhance revenues.” saddled with mounting losses. Still, it begs the
Gangwal was both strategically and financially.
question: why can’t other airlines do the same?
A Money-Spinner Actually, many airlines, including those in India, previously Today, Gangwal and Rahul Bhatia, the other
This, however, is only half the story. An analysis do. The benefits of this transaction are significant promoter, play an equally important role at
by ET Magazine of the airline’s books reveals that (see Sale-and-Leaseback Model). In their book associated with IndiGo. Which is to stay away from manage-
it is indeed sale-and-leaseback transactions that Foundations of Airline Finance: Methodology And
helped IndiGo record higher profits. In some Practice, Bijan Vasigh, Ken Fleming and Liam Fac-
Air France, ment despite their huge experience (Bhatia
cases, these transactions turned losses into prof- kay wrote that thanks to sale and leaseback, “the United Airlines runs InterGlobe, a travel services company).
its as it happened in fiscal 2011. Financial docu- airline will receive a cash inflow which will then be Allowing the management “do its thing” is an
ments that InterGlobe filed with the Ministry of used to pay down the debt associated with the air-
and US Airways,
advantage, according to Ghosh. “In many plac-
Company Affairs craft. If the sale value is greater than the amount of where he was es, owners get involved with management
(MCA) also show debt against the aircraft, the airline will receive a
IndiGo has been that the seven-year- positive cash flow.”
CEO and with disastrous results.” The most striking and
old airline consist- A leasing company agrees to such an arrange- president recent example is Kingfisher Airlines and its
the most active
ently reported prof- ment, they wrote, because it is provided with an promoter Vijay Mallya. Neil Mills quit as Spice-
user of sale-and- its from its third asset and an established customer without hav- Jet CEO earlier this year owing to interference
year of operations. ing to buy a brand new aircraft, but still generates
leaseback Of course, it’s not lease income from the airline.
from promoter Kalanithi Maran. Kingfisher has been grounded for
financing among as simple as that. Alex Wilcox, CEO of JetSuite, a private jet com- more than a year and SpiceJet is in turmoil.
Three accounting pany in California, says airlines in the US typically Shakti Lumba, a former vice-president of operations at IndiGo, says
no-frills carriers experts that ET Mag- own about half their fleet and lease the other half. aircraft orders apart, Gangwal laid down the parameters on how the
in the past two azine approached “Some airlines capitalize their leases and long-
airline should function. “He is the visionary at IndiGo, guiding the air-
say the transactions term maintenance and some expense them,”
years to May 1 done by IndiGo ad- says Wilcox who was earlier COO at grounded line at the macro level.” IndiGo’s decision to stay the course with one
here to Accounting Kingfisher Airlines. type of planes — the A320s — which renders benefits in terms of man-
Standards, and one of them called these account- As a financial model, sale and leaseback is pop- aging and training personnel and costs was Gangwal’s. IndiGo has
ing entries as financial engineering to drive more ular among no-frills airlines for the flexibility it stuck to its business plan and model religiously thanks to Gangwal’s
value out of investment. renders to keep balance sheets light. As aircraft
supervision, says the person familiar with its operations.
The combination of operational performance are owned by a lessor, an airline can save on the
and financial engineering has amplified IndiGo’s depreciation provision, which increases profit Gangwal, who earlier used to visit India occasionally, is now almost
valuation. From an initial investment of around and saves tax. permanently based in the US. Employees at IndiGo say they rarely see
`100 crore as equity capital by promoters, the As it happens, IndiGo has been the most active him. He is low profile to the point of casting himself as a recluse.
airline today can be valued at `12,200 crore ($2 user of sale-and-leaseback financing among no-
billion) depending on “how investors treat the frills carriers, according to Flightglobal, a news Ghosh says it is difficult to fathom that Gangwal is a shareholder,
adding that the airline does not even have review meetings. “I am
grateful for that.”
08 cover story
(left)
DECEMBER 22-28, 2013
e r Ra h u l Bhatia
romot h.
IndiGo p ent Aditya Ghos
id
and pres made public its
ne time
and information website. IndiGo completed 37 such
The airli ults for the first

ASHWANI NAGPAL
e s
annual r
transactions in the past two years to May 1, followed by

mber
Virgin Australia with 35 transactions and Lion Air, India’s
SpiceJet and Norwegian with 28 each, it said in a report. in Septe
But the key difference in IndiGo’s strategy was to incor-
porate the purchase of 100 aircraft into its business plan
even before launch. Other operators even now are talking
of only a fraction of that order size, according to Kaul.

Humongous Order
Placing a huge order helps airlines to bring down the
cost price sharply. GoAir CEO Giorgio De Roni says a
huge order hands the buyer huge bargaining power. “It
is true for not just airlines, but also people who buy to-
matoes and potatoes,” he says.
A January 2013 report by accounting and consulting
firm PricewaterhouseCoopers (PwC) on aviation fi-
nance says the list price of
all airline order back log is
Using one type of $1.2 billion as of mid- 2012,
but the real cost is likely to
aircraft helps be “in the order of $700
IndiGo keep million”. That is a dis-
count of 42%.
operations Mark D Martin, founder
simple and earn of Martin Consulting and
an aviation industry ex-
great discounts pert, says he would not be
from Airbus surprised if IndiGo
grabbed a discount in ex-
cess of 40% of the list
price. He reckons the sticker price for an Airbus A320 — can derive other significant advantages by buying one type line business (see The Reclusive IndiGo Promoter).
the only type of aircraft IndiGo uses — at $60 million in of plane from a manufacturer. Pascal-Emmanuel Gobry, “IndiGo is one of the few airlines that tracks and
2007 when the airline signed the agreement. the founder of Noosphere, a market research firm, wrote ensures it capitalizes on the warranty and guaranty
Using one type of aircraft helps IndiGo keep opera- earlier this year discount airlines are almost always the big- clauses,” says a person familiar with the airline’s op-
tions simple. It is a trick it learnt from America’s South- gest customer, which means plane companies are eager to erations. “It has a full section in finance just tracking
west Airlines, the only airline in the world to make please them and give them volume discounts. “For exam- these financial items.”
profits without fail for nearly 40 years, which flies the ple, [European airline] Easyjet, which is committed to Air-
Boeing 737. bus like Southwest is to Boeing, placed the biggest order in Deal for a Steal
Quoting Chris Wahlenmaier, vice-president of ground Airbus’s history after 9/11. They got them at bargain-base- The rules governing aircraft financing stipulate that a
operations at Southwest, Seth Stevenson wrote in Slate: us- ment rates [they went on to resell the planes at a profit].” down payment of only 4% for an entity with credit rat-
ing one type of aircraft “results in all manner of cost-saving Even so, Easyjet was an established airline, having ing of AAA- BBB-, and 7.5% for the ones with lowest rat-
efficiencies: we only need to train our mechanics. We only started its operations in 1995. IndiGo was not even off the ing (CCC- C), according to the PwC report. (The rest is
need extra parts inventory. If we have to swap a plane out blocks. It also had just `100 crore (around $20 million) of paid to the aircraft maker from the proceeds of the sale
at the last minute for maintenance, the fleet is totally inter- promoter money. Yet, it managed to strike a deal for 100 to the leasing company).
changeable — all our on-board crews and ground crews are aircraft and by parting with a low down payment at that. This means IndiGo with a 40% discount on list price for
already familiar with it…” How did IndiGo do it? The credit goes to co-founder Airbus 320 would have had to make a down payment of
Operational gains apart, airlines Rakesh Gangwal, a veteran of nearly 35 years in the air- $151 million (see How IndiGo went about it) for placing an
order for 100 aircraft. The company’s
How IndiGo balance sheet then shows it was well
went about it capitalized — `337 crore ($82 mil-
LIST PRICE
lion)—to meet the payment schedule.
An accounting expert, who did not
AIRLINE $55 MILLION want to be named, says the discount
The Sale and received from manufacturers will not
ORDER SIZE
Leaseback 100 PLANES
be shown separately as it is in the nor-
mal course of business. But other
Model forms of cash and non-cash payments
Pays 5% down
payment while COST PRICE from aircraft manufacturers can be
counted in financial statements.
placing an order $30.25 MILLION That explains why the global fleet
Because it was a bulk order
under leasing has now touched nearly
a third from less than 12% in 1990, says
SELLS TO ORDER SIZE
the PwC report. (The numbers repre-
AIRFRAME LEASING $3,025 MILLION sent the entire leasing transactions
MAKER COMPANIES and not just sale and leaseback.)
FOR A PROFIT; “In my estimate, every sale and
DOWN PAYMENT @ 5%
USES LEASING
PROCEEDS TO
$151.25 MILLION leaseback brings $4-5 million profit
COMPANY OR to IndiGo. And this acts as working
REPAY WHAT’S
OUTSTANDING
RENTS TO AIRCRAFT `620.12 CRORE capital,” says Kaul of CAPA. Curi-
AIRLINE RETURNED TO (at around `41 to $) ously, the finances of IndiGo in the
AIRCRAFT TO AIRCRAFT FOR 5
ENGINE LEASING past six years do not show any profit
DELIVERED MAKERS YEARS
MAKER COMPANY INDIGO WAS WELL for the sale and leaseback of aircraft.
CAPITALIZED
YEAR ‘0’ YEAR ‘3’ YEAR ‘8’
(promoter plus loan)
Airline operator signs Three separate back-to-back transactions: The lease is for five `337 CRORE Assuming the discount is around 45% on list
aircraft purchase the first to take delivery of the aircraft, the years. At the end of OR price (industry average), IndiGo would have
agreement, let’s say second to sell to leasing companies at $60 it, aircraft is $82 MILLION had to pay only `620 crore to place an order
for 20 aircraft for million, making a profit of $ 5 million and transferred to for 100 planes. Such amounts are not paid at
Amounts are indicative and one go. In any case, the company had money
$55 million apiece the third to lease back the same aircraft leasing companies for explanation purposes
 cover story 09
DECEMBER 22-28, 2013
How IndiGo
Boosts Profits
In 2012-13, cash and non-cash
3.4
incentives contributed
1,08.68%) t cashsh
`359 crore, or 45% of total profits (1 u
ho -ca ,7 14.8
)
wit d nonves
an enti
1 0.3%)
(2
2 ,873.5 (50.8%) 0.7 (14
.2% inc

2 80 and s
1-1

c raft ental
el

Air gine r
201

2 0 1 2- 1 3
Fu

en h cash and tives) )

TOTAL (wit
non-
cash
incen

312.6 (51%)
56 (16%

1,3
,
5,654 Depreciation
Finance co
st
65.9 (1.2%)
51.4 (1%)
l4 nd
ft a ntals

e
Fu
Emp
r a
ben loyee
Airc ine re
Aircraft
exp efit
O
ens
es 520.6 TOTAL eng nd
cash a s)
th (9.2% (with h incentive

8,465
er ) cas
non-
s
1,3
41 Deprecia
tion
83 (1%)
.9 ( Finan
ce co
st
2 3.7
3%
Em
be ploy 57.8 (0.7%)
If IndiGo can’t show the discount it receives from ) ex nefit ee
pe
O ns
purchase of aircraft, industry experts say it should be
th es 697
able to book profits when it sells newly acquired air- er .2 (8 Figures in `crore
craft to leasing companies. Their logic is simple — the
price paid by leasing companies for a plane is always
s
1,9 . 2%)
Figures in brackets are
a % of total expenses

(2 58
higher than the cost price. the asset, the practice would be to reduce the cost of ac- Source: Company’s
financial statements
quiring the aircraft in the balance sheet. But in IndiGo’s
3.1 .
%) 4
Tidy Profit case, the airline has leased the aircraft and so it is propor-
CAPA’s Kaul estimates that IndiGo makes a profit of $4-5 tionately reducing it from the lease rentals.”
million for every plane sold to leasing companies, and If the cash incentive was $5 million on a purchase
this translates into a monthly saving of around $50,000 price of $50 million, the actual cost in the balance sheet
on lease rentals. The entire fleet, barring 4 planes, is would be only $45 million after reducing the cash incen- such incentives that can be claimed in future is `1,180
leased by IndiGo and any saving on lease rentals — which tive. But in IndiGo’s case, the aircraft is sold to leasing crore, or `19.6 crore per plane.
account for 19% of expenses — will boost profitability firms and so would not be accounted in its books. And if
(see How IndiGo Boosts Profits). the lease period is for five years, $1 million — that is one- Long-term Gains
The Flightglobal report confirms that IndiGo makes fifth of cash incentives — would be reduced from lease IndiGo started disclosing the quantum of cash and non-
$4-5 million from sale-and-leaseback of each aircraft. rentals every year. cash incentives only from fiscal 2011 in the financial docu-
With an average lease term of five-and-a-half years, the In IndiGo’s case, this yearly component totalled ments submitted to the MCA, the regulator of companies.
airline is also benefitting from the frequent renewal of `262.7 crore for a fleet of 64 aircraft. Assuming 60 of Prior to 2011, the company only disclosed that it receives
its fleet by avoiding costly maintenance repairs that them are leased, the cash and non-cash incentives alone credits from aircraft makers and these were being re-
creep in after six years, according to the report. amount to `4.37 crore a plane a year. The amount of duced from lease rentals. “One might argue that it is more
Mama the aviation expert says returning aircraft to appropriate to present this as income if a direct relation-
leasing companies after five or six years helps. “The A G P AL
ship with rentals is absent – which is often the case,” says
N I N
ASHWA
maintenance cost will be lower for new aircraft. More im- the accounting expert quoted earlier.
portant, the D-Check (the most comprehensive Khatri of KPMG says there is another possibility why
check for a plane) approaches around that time. It is cash incentives are subtracted from lease rentals. He
very expensive. By returning planes before the D- points to Accounting Standard 19, which deals with
Check is due, IndiGo makes big savings.” sale and lease back transactions. Under this, let’s say if
The only problem is that IndiGo has never dis- a company makes a profit of $5 million from selling a
closed profit from sale of plane but in return leases the same at a rental higher
planes to leasing compa- than the market rate, the excess value has to be re-
IndiGo started nies. Instead, the only duced from lease rentals.
disclosing the items it shows are cash If IndiGo pays $400,000 as lease rentals a month
incentives and non-cash compared with the market rate of $350,000, the ex-
quantum of cash incentives of around `265 cess $50,000 would be reduced from lease rentals.
and non-cash crore. These were re- In our example, the excess would be $600,000 a
duced from lease rentals, year and it would have to be reduced from profit on
incentives only boosting profits by a third sale of aircraft. That means only $400,000 will be
from fiscal 2011 in fiscal 2012 and helping considered as profit.
the airline report a surplus If IndiGo shows only reduction in
in its documents in fiscal 2011. lease rentals and no profit from sale
Without directly refer- of aircraft, it would possibly mean
ring to IndiGo, Jamil Khatri, global head of account-
c e on the entire profit from sale and
i
ing advisory services for KPMG, says aircraft manu-
t s erv line’s leaseback is being erased by high-
facturers might have given cash incentives instead of
f i c ien he air ry er lease amount.
discounts for placing the bulk order. Typically, non-
w . Ef i n t
l sto On a net basis, IndiGo still gains as
e rol e l
cash incentives given by manufacturers include free o cr e fu lease rentals drops, boosting profits. Accord-
spare parts, extra engines, free training to pilots and I n diG s a key not th ing to Martin, the amount of discount negotiated by
engineers and support in obtaining credits from lend- The d play that’s IndiGo would be much higher than other Indian
r t
ers. IndiGo is likely to have assigned a value to such boa ss. Bu airlines because of the order size. “That is one key
ce
suc
spares and engines. reason why IndiGo’s operational cost is much low-
Another accounting expert says, “If a company owns er than its competitors.”