IndiGo Airlines A Case study in International Business StrategySubmitted to: Dr. K. Rangarajan Submitted by: Joshil A K (Roll No 18) IIFT PGDBS Mumbai - BKC

IndiGo Airlines Indias fastest growing Domestic Airlines

IndiGo going International IndiGo has 21% of the domestic market share,

behind the combined low-cost and premium operations of Jet Airways The Centre for Asia Pacific Aviation (CAPA) expects IndiGo to take the top spot by 2015 Indias best On-time performance & least flight cancellations Carry the highest load factor of 89.40%

Growth in Passenger traffic/ Growth in Indigo Market Share100.00% 90.00% 500.00 80.00% 70.00% 400.00 60.00% 300.00 50.00% 40.00% 200.00 21.90% 30.00% 19.90% 17.00% 15.40% 20.00% 10.30% 100.00 4.00% 5.00% 10.00% 0.00 0.00% 200 200 200 200 201 201 201 6 7 8 9 0 1 2 Indigo (lac) 10.71 16.06 38.05 65.42 83.06 104.22122.97 Other Airlines (lac) 256.99305.14331.35359.38405.54419.48438.53 Indigo Market Share 4.00% 5.00%10.30% 15.40% 17.00% 19.90% 21.90% 600.00 Passenger Traffic (lac) Indigo Airlines has been one of the airlines which has been eating away market share from its competitors

Growth of Indigo AirlineMarket Share25.00%

21.90%20.00% 15.00% 10.00% 5.00%

5.00%

0.00%2006 2007 2008 2009 2010 2011 2012

Companies position within the Industry

Industry Attractiveness

Competitive Strategy

Strategy Execution

Industry Attractiveness

Five forces AnalysisThreat of New Entrants

Internal RivalryIndustry Attractiveness

Bargaining Power of Suppliers

Substitutes

Bargaining Power of Buyers

Threat of New Entrants

Low Threat Very High Setup Costs Increasing Fuel prices Shortfall + High Cost of Skilled resources - Pilots

High Threat Low product differentiation in basic services Low Switch Costs for Customers but high switch costs for Airlines To switch from full service airline to limited-service airline Open Sky Policy allows foreign Entrants

Threat - High

Bargaining Power of SuppliersAllow import of ATF

Low bargaining power with Airlines Duopoly in Aircraft Market Switch cost to other suppliers is high Shortage of Commercial Pilots in India Limited Suppliers for ATF in India Scope for Suppliers to forward Integrate

Supplier Bargaining Power -

Bargaining Power of Buyers

Fragmented Buyers

Switch costs are minimal for buyers

Buyer Power - Low

Competitive RivalryHigh Very little product differentiation in services Mature Industry Only Scope for growth by gaining other players market share No sense of brand loyalty amongst customers and can easily switch to other airlines

Rivalry - High

Availability of Substitutes

Low Indirect substitute are Railways but not powerful as Airlines score highly in the travel time Travel by Airlines a Status symbol

High However direct substitutes are other LCC since switch cost is low between airlines, threat of substitutes is high

Substitute Power - High

Industry AttractivenessGiven the economics, the avg. returns and the history of the industry and the five forces , it is low to moderately attractive

Company Position within the Industry

Strategic Position

Sustainable Competitive AdvantageCore Competency

Business level strategy

External Environment

Internal Environment

Strategy

Analyze Strategic Position of IndiGo Internal Environment External Environment

External Environment - OpportunitiesHealthy passenger traffic growth on account of favorable demographics

Buoyant Economy

Rising disposable incomes

Low air travel penetration

Air travel is been transformed into a mode of mass transportation and is gradually shedding its elitist image

Allow import of ATF, we feel that the duty differential between sales tax (averaging around 22-26% for domestic fuel uplifts) being currently paid by airlines on domestic routes and import duty (8.5%-10.0%) is an attractive proposition for airlines

External Environment - OpportunitiesLow-Cost position Expansion Geographicall y Furthermore, the timing seems perfect if it wishes to capitalize on the pressure currently endured by the established carriers

IndiGos opportunity is directly related to its greatest strength: Low-Cost Low-Fare

The routes held by IndiGo has grown exponentially

Kingfisher Losses, Flight cancellations & unable to pay to their suppliers, salaries & Taxes

Air-India Losses,Govt Intervention, Unreliable service, Old fleet of aircrafts, Frequent strikes crew & pilots

External Environment - ThreatsCost of Operations Rising labor costs Rising Fuel costs High airport charges Airport charges are same for FSCs and LCCs in India Significant congestion at major airports - half an hour hovering at major airport could increase fuel costs by Rs.60,000 to Rs. 115,000 depending on aircraft, besides impacting aircraft utilizations Aviation economics Excessive regulations and taxations Government ownership of airlines Resulting high cost of air travel Competing online ticket reservation systems

External Environment - ThreatsInternationally, too airlines are going through period of stress FDI proposal for allowing foreign carriers to pick up to 49% stake under consideration Expecting competition from Internationally successful airlines

No of Rivals & their relative size Overall higher cost of capital The problems have compounded due to industry-wide capacity additions, much in excess of actual demand Industry profitability in relation to changing economy

National carrier (looking to regain lost market share) Currently the fare of a full-fare airline & Low-Frills airline are same Extent to which rivals use Economy of Scale

Diminished pool of Qualified employees Dearth of experienced commercial pilots

Inflexible labor laws

Internal Environment - StrengthSensible Expansion policy IndiGo has developed a very sensible strategy for expansion, paying particular attention on not straining the cost Indigos fleet makes up approximately 6.5% of Indias combined fleet size and comparing this figure with the market share of 21.90% The continued growth of the company is testament to the strategic direction taken by management, particularly considering the difficult business environment Indigo is expected to receive 12 aircrafts this year, hence they need to allocate these flights carefully to improve on their load factorDelivery of Aircraft (Airbus A-320) to Indigo 2006 6 6 2007 5 5 2008 7 7 2009 6 6 2010 10 10 2011 14 14 2012 12 12 Total 60 60

Internal Environment - Strength

Business model Due to change in passenger profile, business class & first class seats have suffered declining demand, many companies have been forced to introduce low-cost fare options

Highly efficient Operation

Strong Financials Debt-free company Profitable company

StrengthsImage On-time No cancellations

Low operating costs

Financial position

High quality service

Ability to continuously refine service Age of Equipment

Integrated marketing campaign

Internal Environment - WeaknessLittle room for strategic development No established alliances Major weakness is operating in a highly competitive market The industry is highly competitive as to Fares; Routes & Services

It puts enormous strain on the company to maintain its position in the industry while running a smaller fleet

WeaknessProduct breadth & Depth

Lack of intraairline services & Alliances

Heavily dependent on Domestic market

Key Success Factors

Positioning Limited Passenger service Low price tickets Point to Point routes Frequent & Reliable departures

Market Share March 2012JetLite, 7.30%

Air India, 17.90%Jet Airways, 21.90%

King Fisher, 6.40%

Indigo, 21.90%

Spice Jet, 17.10%

Go Air, 7.50%

Indigo Strategy

IndiGo - Strategy

Source of Competitive Advantage

Cost

Uniqueness

Breadth of Competitive Scope

Broad Target Market

Cost Leadership

Differentiation

Narrow Target Market

Focused Low Cost

Focused Differentiation

Is IndiGo Successful?Fastest Growing Domestic Airline Co. Youngest Domestic Airline Co When IndiGo entered the arena they had to compete with mature competitors; recession world-over & spiraling costs due to sharp increase in crude oil prices

Only Airline co. to make a profit

Growing market share (No. 2 currently)

Indigo Airlines has been one of the airlines which has been eating away market share from its

IndiGo has won the following awards for its excellent service across the Indian airspace Best LCC by the Airline Passengers Association of India (2007) Best LCC at the Galileo Express Travel Awards (2008) CNBC Awaaz's Travel Award for best low cost airline(2009) Safety Excellence Award by Rajiv Gandhi International Airport (2009) Most Admired Travel Product of the Year 2009 by SATTE (2010) Best Domestic Low Cost Service Airline for the Year 2010 by Travel Agents Association of India (TAAI) (2010) Safety Excellence Award by BIAL (2010) Skytrax Central Asia's best low-cost airline award (2011)

Strategy Implementation

How did indigo achieve this success? Strategic Capabilities

Low Cost; Not Low Quality

Success Factor (Load-factor)To calculate load factor, divide RPMs by ASMs RPM = It is calculated by dividing passenger revenue by available seat miles ASM= One aircraft seat flown one mile, whether occupied or not (An aircraft with 100 passenger seats, flown a distance of 100 miles, generates 10,000 available seat miles)

Indigo has reported a Load Factor of 75.7% when the Industrys average was 65.6%Load factor for a single flight can also be calculated by dividing the number of passengers by the number of seats

Load factor represents the proportion of airline output that is actually consumed

Key Success FactorsOperational Efficiency Turnaround Time Aircraft Utilization On-time performance for timesensitive travelers Single model usage Young fleet of aircraft (hence less maintenance issues)

Arithmetic of ProfitabilityGreater Value

Lower Cost

All the differences between companies cost arise from hundreds of activities Cost is generated by performing activities Cost advantage arises from performing particular activities more efficiently then competitors, similarly differentiation arises from the choice of activities and how they are performed

IndiGo outperformed its rivals by establishing a difference; it created greater value to its customers at lower price Hence arithmetic of Profitability automatically followed Delivering greater value allowed them to charge higher Greater efficiency resulted in lower average costs

IndiGos Value Chain SystemNo Meals Limited Passenger ServiceNo Connections with other airlines

Frequent & Reliable Departures

Turnaround

16 min gate

IndiGo the No-Frills Airline Point to Point routes

Trained Pilots

Highly Productive Crew

Standard Fleet of A320

Low Ticket Prices

Highly Skilled Crew

Regular Training

High Aircraft Utilizations

Internet Ticket booking

Limited use of Travel Agent

Cost reductionFuel efficient engine To reduce its cost of holding inventory of components, IndiGo has done a tie-up with Air France under which the French airline will stock components required by Indigo. In this way, the Inventory will not be in Indigos Books. IndiGo says it spends less than 1% of revenue on marketing Point-to-point & no connections with other airlines Hence there are no costs

Fuel Efficienc y

Cost Reducti on

for baggage administration and direction to connecting flights They go several times a day the same relative short route. So no additional costs for staff

Cost AdvantageUsing paint which overall weighs 50 Kgs less Lightest passenger seats in India which weigh only 12.8 Kgs Avoiding the in-flight services

No Free meals

Lower employees per aircraftHigher number of seats in the aircraft

Selling tickets through the internet

Individually these savings are negligible on their own but collectively, It has been helping Indigo to cut on

Efficiency Success FactorsAn important factor is its on-time performance of 94 per centThe airline has trained its crews to de-plane the passengers in 6 minutes and unload the baggage in 10 minutes It regularly achieves Turn around times of around 22-25 minutes

The lesser the time taken at the airports, the more the airplane can fly and earn more revenues

On an average, an IndiGo aircraft flies for around 12 hours a day, compared to eight to 10 hours logged by most competitors. The extra hours allow it to undertake one extra flight daily, which translates into more seats and revenue

Improve EfficiencyIndigo has a fleet of 19 Airbus 320s They intend to receive 81 more similar planes by 2016

All the planes have exactly the same configurations, having the same engines, same number of seats in one class configuration. They can use the same crew (Pilots; Cabin crew) for their entire fleet Based on demand the aircrafts can be allocated on routes without worrying about the type of aircraft Makes the maintenance much less costly No additional staff training for diff routes or aircraft

Hence all the above advantages result in reducing the cost and improving efficiency

Strength Indigos fleet makes up approximately 6.5% of

Indias combined fleet size and comparing this figure with the market share of 21.90% Shows that Indigo has been successful in attracting customers away from other airlines

Competencies Skill (Cost & Service culture)

Price sensitive & Time sensitiveIndigo has broken up the job into small parcels like loading, unloading and cleaning with time targets and each of these is monitored. The team is trained to focus on its job. They have even turned around an aircraft in 14 minutes. IndiGo has set up a Average age of the fleet centralized operations is about 1 year, the control centre which occurance of technical monitors the weather, faults are low and anticipate delays and because of this IndiGo even provides advance has managed to information to the achieve high On-Time ground staff performance

Competency Human Resource

Team of talented peopleTo ensure that its flights depart and arrive on time in spite of the dense fog that envelops Delhi and other northern cities without fail every winter, IndiGo has one of the highest percentages of CAT-III compliant pilots who are trained to fly under such conditions Centralized operations control centre provides information to ground staff in case an aircraft requires some repair or maintenance while it is airborne so that the engineers are ready to rectify the problem and waste no time once the aircraft lands

Can IndiGo sustain this growth?Constant improvement in operational efficiency is necessary to achieve superior profitability, however it is not usually sufficient Companies can compete successfully based on basis of Operational effectiveness, however staying ahead of rivals gets harder day-by-day The most obvious reason is rapid diffusion of best practices Competitors can quickly imitate with the help of outside consultants or hiring managers from the leader Management techniques New technologies Input improvements Superior ways of meeting customer needs

Any competitor can imitate any other airlines activities. Any airline can buy the same planes, hire same people, train the same way and match the menus and ticketing offered by other airlines

IndiGos Value Chain SystemNo Meals Limited Passenge r Service 16 min gate Turnaroun d IndiGo the NoFrills Airline No Connection s with other airlines

Frequent & Reliable Departur es

Point to Point routes Low Ticket Prices

Trained Pilots

Highly Productiv e Crew

Standar d Fleet of A320

Highly Skilled Crew

Regular Training

High Aircraft Utilization s

Internet Ticket booking

Limited use of Travel Agent

IndiGos Core CompetencyIndiGos strategy involves a whole system of activities, not a collection of parts Everything matters; every activity matters Uniqueness

IndiGo Strategy - UniquenessStrategy is about combining activities Positioning choices determine not only what activities a company will perform and how it will configure individual activities but also how activities relate to each other. While operational activities is about achieving excellence in individual activities

Its competitive advantage comes from the way its activities are fit and reinforce one anotherFit locks out imitators by creating a chain that is as strong as its strongest link IndiGos activities complement eachother in ways that create real economic value One activities cost is lowered because of the way other activities are performed Similarly one activities value to the customer can be enhanced by a companies other activites

IndiGo Outlook IndiGo has the potential to become a global low-cost

carrier, provided it can tide over the current slowdown. If it has the cash to sustain itself for another two years, IndiGo surely will be one of the big players in the low-cost space globally with its expected fleet size of about 100 planes by 2016. At the moment, little is known about IndiGo's financial health because it is not listed on the stock exchanges and, therefore, does not have to put its profit and loss statement in the public domain every quarter, though it is certain the company is in the red like all other Indian carriers. IndiGo has hardly advertised and indulged in brand building activities. Its fast growth has been solely due to word of mouth and repeat customers. They should indulge in brand building exercises.

Indigo Way forward

STOW - AnalysisS-O Strategies Introduce continuous learning program Pursue market growth opportunity Develop marketing strategy to focus on time-conscious business travelers Improve Operational efficiency and shift the productivity frontier outward to make it increasingly difficult for the competitor to copy S-T Strategies Defer Delivery of New Aircraft Continue to successfully hedge fuel prices by importing Focus on Employee retention Develop promotional schemes to tempt consumers procure tickets from the Airline website directly to avoid competition from other low-fare airline W-T Strategies Create a Pilot training program for CAT-III pilots W-O Strategies Expand to International markets Create a shared services program with competitors Target competitor Pilots (Kingfisher; Air India)

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