As the Indian government announced its plans to disinvest from the national carrier, Air India; IndiGo was the only private airline that expressed its interest in the airline, however, the true intentions were clarified only yesterday.
In a conference call addressing the investors on July 6, the two founders of the low-cost airline Rahul Bhatia and Rakesh Gangwal cleared the air of doubt about IndiGo’s interests in acquiring the airline operations of Air India.
Explaining India’s growing economy and its dramatic growth in the domestic aviation space, Bhatia pointed out that IndiGo is witnessing a domestic traffic growth of 15 pc to 20 pc every year. “On the international side, we believe that India represents one of the largest untapped air transportation market opportunities that are out there, and the country certainly lacks its fair share of long-haul international flights,” Bhatia said.
Addressing the media and investor circle speculation about IndiGo’s strategic interests in Air India, Bhatia added, “IndiGo is not looking at acquiring all of Air India’s businesses and subsidiaries. In our view, that would be a herculean task, which would at best be a very challenging proposition and at worst an impossible task, unless an organisation is willing to fund large losses for a very long time.”
Rakesh Gangwal, the other co-founder started his conference note with a brief summary of the airline’s success in the domestic market and their apposite plans of delving in the long-haul international market. He said, “Irrespective of how the Air India story plays out and based on all our internal work, we are generally of the view that it makes fundamental economic sense for us to enter the long-haul, international market.” Nearing their upcoming quarterly results, the airline would have divulged plans and ideas at the end of this month, “However, that got pre-empted due to the government’s in-principle decision to divest itself of Air India,” added Gangwal.
Air India debts too high
The billionaire co-founders expressed their concern and inability to acquire the massive Air India that employs over twenty thousand people and has ancillary businesses such as hotels, ground handling, etc. The airline lost thousands of millions of rupees over the last five years and the debt of INR 500 billion poses a significant challenge for the government.
“Quite simply, we are interested in the airline operations of Air India. And more specifically, we are focused narrowly on Air India’s international operations and Air India Express. That is what we have communicated in our one-on-one discussions with government officials,” said Bhatia.
Addressing the speculation in the stock exchanges, Bhatia also said that they decided to disclose the letter that they had submitted to the Government when he was repeatedly asked to comment on reports that IndiGo had expressed interest in Air India.
Following global success stories
Adding examples of stories where international operations were acquired by airlines, Bhatia tried to assume the possibility and practicality of their approach. He said,”A few decades ago, United Airlines acquired Pan Am’s Pacific operations. Based on the success of that transaction, United then followed up by acquiring Pan Am’s London routes in 1990. Today, United Airlines is one of the largest international carriers and it is questionable if that would have happened but for those acquisitions. United was able to do with those international routes and route authorities what Pan Am was unable to do principally because United had a large domestic feed network. As a matter of fact, American Airlines followed that same model by acquiring TWA’s London routes.”
IndiGo has seven functional international destinations till date and Bhatia believe that Air India’s international routes would be a game changer for the airline. “It would provide a rapid entry into restricted and, in some cases, closed international markets. So instead of being a small international player, IndiGo would have a path to becoming a major player in the international market,” he added.
Rakesh cited how the South-East Asian cities such as Singapore and Bangkok are gaining traction as an international hub and also middle-eastern hubs such as Dubai, Abu Dhabi and Doha even though they lacked local traffic. Describing how the Indian outbound travellers added to the growth prospect of these airports as major international connection hubs, Rakesh talked about the disruptive low-cost model and its potential to revolutionise the long-haul international market. “In fact, there are quite a few examples of low-cost, long-haul operations that are starting to take hold across the global aviation space – airlines such as Norwegian and Wow Air,” he added.
Bringing another recent example in the international airspace, Gangwal said, “Interestingly, last week, while we were expressing our serious interest in Air India’s international operations, Ryanair expressed serious interest in Alitalia, which is also going through major financial stress. With tongue-in-cheek let me say, our compliments to Ryanair for understanding the fundamentals of the airline business. Jokes aside and in all seriousness, Ryanair is a very smart and formidable airline and it certainly is comforting to see that we are on the right track with respect to our thinking and strategy. Yes, the long-haul business as we know it is changing just like the short haul, full-service segment changed over the last few decades. In our view, this change and transformation will be a worldwide phenomenon with many such operations sprouting up globally and will ever so slowly encroach into the current format of full-service, long-haul flights.”
Since, the government of India announced its plans to disinvest in highly non-profitable and debt-laden Air India, numerous speculations, and theories have floated in the busy skies of India. While Tata Group, founded by JRD Tata in the early 1930’s, expressed its interest in acquiring the operational stakes of the airline, IndiGo’s plans come as a new chapter in the book. We have to wait and watch how things take shape before new vinyls are painted.