IndiGo makes a massive bet on Indian aviation—worth 250 Airbus jets

83 aircrafts and counting.
83 aircrafts and counting.
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IndiGo has done it again. After massive aircraft orders in 2005 and 2011—100 and 180 planes, respectively—the Indian low-cost airline has just placed another humongous one: 250 Airbus jets.

It is Airbus’ biggest order ever, topping even IndiGo’s $15 billion (Rs 92,000 crore) purchase from the European aircraft manufacturer in 2011, at that time the largest in commercial aviation history.

The new deal, worth around $25 billion (Rs1.53 lakh crore), will see Airbus A320neo jets joining Indigo’s fleet starting in 2018. The low-cost carrier, which began operations in 2006 with an Airbus320, has already ordered 280 aircrafts from the Toulouse-based planemaker.

It currently has 83 planes in its fleet, with the delivery of another aircraft expected in around three weeks. It is also leasing 12 aircrafts from Singapore’s Tiger Airways. By the end of next year, Indigo’s fleet will swell to 100 aircrafts.

On the back of its steadily growing fleet, Indigo has quickly expanded to become India’s biggest airlines, with a marketshare of 32.6% in August 2014. Even as its rivals have struggled, the unlisted airline has posted strong numbers.

In FY 2013, it’s profits stood at Rs787 crore ($128.29 million), a sixfold increase over the previous year. For FY 2014, profits fell to Rs317 crore ($51.67 million), but it was Indigo’s sixth consecutively profitable year.

“There is a big market and this is an assertion, reaffirmation of how we look at India,” IndiGo’s president Aditya Ghosh told Quartz. “We truly believe that is a huge market waiting to be tapped and expanded.”

These new aircrafts could also help IndiGo grow its international operations—it currently serves only five foreign destinations—but Ghosh explained that it was still too early to determine exactly how much emphasis would be placed to overseas expansion. “This gives us the ability to plan ahead,” he said.

“Every time we try and plan something, India grows faster,” he added.

There have been a string of international joint ventures since the government allowed 49% foreign direct investment in aviation in 2012. In November 2013, Jet Airways and Etihad became the first joint venture of this kind, with the Middle-Eastern airline buying a stake in the Indian carrier. Subsequent partnerships involve Singapore Airlines and AirAsia, both of whom have announced joint ventures with the Tata group.

Ghosh said IndiGo’s plans were “not determined” by what had happened in the last six month or a year.

Analysts indicated that while the deal was expected for some time now, it would help bolster IndiGo’s image as it prepares for a possible IPO in coming months. Kapil Kaul, CEO South Asia for the Centre for Aviation, said that the order “will help in strengthening IndiGo’s perception of a long-term solid player but may not play on valuations as expected.” He added that IndiGo may also now explore partnerships with international carriers.

“There were rumours on the street about the deal during the Farnborough Airshow in July this year,” said Amber Dubey, partner and India head of aerospace and defence at KPMG. “The deal is a strong indicator of the long term potential of the Indian civil aviation market, despite severe short term challenges.”

Although Ghosh said that IndiGo hasn’t taken a call on the IPO yet, the airline has already roped in merchant bankers to explore the possibility. These include JP Morgan, Morgan Stanley, Citibank, Kotak Mahindra Bank, UBS, Barclays and Standard Chartered, he told CNBC-TV18.

IndiGo also has a sale-and-leaseback operation, where a third-party buys an aircraft and leases it back to the airline. This helps IndiGo keep its fleet young and cuts down on cost, and purportedly also helps the airline post profits while its competitors falter. “As much as 895 of aircraft in IndiGo’s fleet are financed through sale and leaseback agreements,” Ghosh said last year, while denying that it was the reason for the carrier’s profitability.

India’s commercial aviation fleet could grow five times over the next 20 years, forecasts say, with a requirement of over 1,600 new airplanes. The majority of these would be single-aisle jets, exactly the sort that IndiGo has developed a seemingly voracious appetite for.