New Delhi: InterGlobe Aviation Ltd-run IndiGo is convinced there is an opportunity for a large India-based airline with a significant international footprint, and may consider investing in Jet Airways (India) Ltd if it fails to acquire a stake in Air India, a person briefed on the airline’s strategy said on condition of anonymity.
And as it grows, the airline will focus on finding the kind of managers who have the required expertise to run a large airline by global standards, even if it means changing some of its current senior management team, this person added.
IndiGo, run by billionaire aviation entrepreneurs Rahul Bhatia and Rakesh Gangwal, was the first to send in its interest, unsolicited, in Air India to the government, the day the latter decided to sell a stake in the state-run airline.
The new foreign direct investment (FDI) policy released by the government on 28 August clearly says that the rule allowing foreign airlines to invest up to 49% in an Indian airline does not apply to Air India, clearly ruling out the possibility of a foreign airline buying into India’s national carrier.
The person briefed on IndiGo’s strategy said the airline will anyway take the organic route if it can’t acquire a stake in an airline, but added that this would obviously be “a slower process”.
Currently, foreign airlines carry about 65% of the international passenger flow to and from India while the rest is carried by Air India and Jet Airways besides other airlines which only fly to South-East Asia and West Asia on their single aisle Airbus A320s and Boeing 737s.
IndiGo would only want the international business of Air India because of its international flying rights and slots, the person briefed on the airline’s strategy said, echoing what the airline’s management told analysts in a call soon after announcing its interest in Air India.
IndiGo will retain the Air India brand for international operations, the person added, and if the government insists on bundling the state-owned airline’s domestic operation with its international one, IndiGo will try and negotiate to break up Air India into four parts (based on India’s geography) and acquire one along with the international operation. If that too doesn’t work, the airline will look at other alternatives, the person said.
One alternative could be Jet Airways.
IndiGo “sees an opportunity there” in a year, the person said.
Jet sold a 24% stake to Etihad Airways PJSC in 2013. Since then Etihad, which also was an investor in other international airlines, has been tweaking its strategy.
On 15 August, Air Berlin Plc filed for insolvency after Etihad, its leading shareholder, withdrew its financial support, marking the second failure of a major European airline in four months after the Persian Gulf carrier pulled the plug on funding Italy’s Alitalia SpA in May, Bloomberg reported the same day.
There have been reports that US airline Delta Air Lines Inc. may be interested in Jet.
An email seeking comments, and reminders, sent to Etihad remained unanswered. Jet Airways said it does not want to comment on any potential stake sale or talks with IndiGo.
Delta spokeswoman Elizabeth Wolf said it had no comments to provide on the subject.
If both these options do not work out, then IndiGo may look to order wide-body planes from Boeing Co. or Airbus SE and start international operations on its own but that will be a “very slow process” and will be the last resort for the airline, the person briefed on the airline’s strategy said.
IndiGo already has 50 ATR planes to induct over the next one year and a dozen of A320neo planes which will see it touching a fleet of about 350 planes in the next few years.
With a fleet of 139 planes, it is already the largest domestic airline and its operational and management bandwidth is being tested.
The airline has shown signs of strains in its on-time performance and airport operations, for instance, over the past year.
As it grows, it will face more challenges.
IndiGo is aware of this, said the person. “No Indian management of an airline has operated even a 200-aircraft fleet and IndioGo knows this.” The airline could bring in expat managers at the highest levels if that is what is needed to manage it as it grows really big, the person added.
To build managerial bandwidth IndiGo has brought in several experts from the US and other markets in departments such as finance, commercial, airports and flight operations.
The airline has also started spotting, promoting and attaching in-house talent in the age group of 35-45 to these international executives.
When the foreign executives set up the processes and algorithms and leave in a year-to-three-years’ time, the in-house executives will take over, the person explained.
This is not an uncommon strategy.
Gangwal, who himself became chief executive officer (CEO) of US Airways Inc. at 45, brought in CEO Bruce Ashby , chief operating officer Steve Harfst, and chief financial officer Riyaz Peermohammed to set up the airline in 2005. Most left after a few years (but were well rewarded for their efforts in terms of shares). Later, Indian executives took over many of the departments.
As it grows, IndiGo is aware that things that worked for it in the past may not work for it in the future. One of the approaches it considered was figuratively breaking itself up into smaller airlines for operational purposes, but it decided against this, the person said. It has now settled on finding people who have the experience of running really large airlines, he added.
But even as it does this, the airline’s big worry is airport infrastructure or the lack of it, this person said.
IndiGo said in July it will consider ways to reduce the promoters’ stake to meet “applicable laws including through a follow-on public offer and/or an institutional placement programme”.
According to the rules, companies need to ensure minimum public shareholding of 25% within three years of listing. InterGlobe has to reduce its promoters’ holding from 85% to 75% to meet the regulatory norm.
IndiGo shares slipped 1.50% on Tuesday on the BSE to end at Rs1,245 a piece on a day the Sensex was up 0.34% to end at 31,809.55 points.