It is all go this week as InterGlobe Aviation, owner of IndiGo, files for a US$395 million IPO right on schedule. Existing investors plan to sell around 10% of equity to raise around Rs.2,500 crore (US$395 million) or Rs.420 per share. At the same time IndiGo let lapse its October 2014 provisional deal with Airbus for 250 A320Neo aircraft, Airbus’s largest ever single order. Before Airbus investors go running to the emergency drinks cabinet, they need to remember that the aircraft order needs to be taken out of the equation while the IPO is moving forward in order for the pricing to be as best it can. It is also a relief to many in the sector as the South East Asian low-cost airline market is not growing fast enough in all areas to absorb the mass of aircraft in the delivery stream, especially if Airbus and Boeing ramp-up production. With Airbus quoting 60 A320Neos per month by 2020, one cannot help but be somewhat worried. In the end this hold on the Airbus order is another example of prudent, investor-friendly management by the IndiGo team.
"Although the term sheet has expired we remain in active discussions concerning the potential acquisition of a significant number of aircraft from the A320neo family," InterGlobe Aviation said in the filing for the IPO. But we can be sure that this is a technical delay and the “re-order” will give the airline great fanfare following the IPO later this year.
Founded in 2006 by Rahul Bhatia and Rakesh Gangwal, IndiGo has specialized in placing large orders for aircraft at great discount and then selling them on to lessors in sale-and-leaseback deals to dramatically reduce capital costs. Now many of us have suspected for some time that the airline has been in profit all these years because of sale-and-leaseback activity – that is something the airline denies.
IndiGo is a great airline model, get aircraft cheap and at the same time negotiate large volume maintenance contracts to keep those costs down, then after six or so years release the aircraft and replace with new ones before any heavy checks. The average age of IndiGo’s fleet is 3.26 years, with the fleet of 96 aircraft split as 22 on finance leases and 74 are on operating lease, of which 12 aircraft are on a short-term operating lease.
Like Ryanair IndiGo employs a single type of airframe and engine within its current fleet, with a single configuration of 180 economy seats resulting in a reduction in expenses related to maintenance, spare parts, operations, crew training and labour. It also helps manage crew rosters more efficiently. The airline has also pushed aircraft utilization to 11.4 hours per day per aircraft in 2014. Again like Ryanair, IndiGo operates a point-to-point route network with no interlining or code-sharing with other airlines for passenger traffic, which further reduces turnaround time. Going forward, IndiGo will reduce its distribution costs further by increasing direct sales which will reduce commissions paid to travel agents. At the moment just above 20% of all bookings are made directly with the airline, so there is a great deal to play for in this area.
Not too long ago shareholders tweaked the airline’s shareholding structure to enable the IPO to take place, moreover this opened the door to foreign investment as Gangwal brought his 47.88% shareholding into the NRI (non-resident Indian) category. This holding had been considered as foreign direct investment since it was held through a foreign company, Caelum Investment. Indian law allows a foreign company or airline to own up to 49% in a domestic airline. However, an NRI is allowed to hold 100% in an airline. So by making this change, IndiGo can potentially bring in a strategic foreign investor at some stage after the IPO, possibly Qatar Airways (Rahul Bhatia holds 51.12% in the company).
Other shareholders that are selling all of their stake through this IPO are: the airline’s former and first CEO, Newton Bruce Ashby, and its current chief commercial officer, Sanjay Kumar.
InterGlobe said it would use the IPO proceeds to pay off the lease of existing aircraft, which would allow it to bring in more aircraft. It said it had a net debt of $388 million (Rs 2,463 crore).
Citigroup, JPMorgan, Morgan Stanley, Barclays, UBS and Kotak Mahindra are managers for the InterGlobe share sale.
Meanwhile Boeing confirmed that it is raising list prices by 2.9%, in the company's annual price adjustment based on an internal formula that takes into account increases in the costs of goods, services and labour. Putting this into context - prices rose 3.1% in 2014. This 2015 price increase takes the 777X list price over the US$400 million mark.
Then there is the US Justice Department probe of whether airlines colluded to keep fares high by growing at a slower pace. Associated Press quoted the agency's spokeswoman, Emily Pierce, as saying the government was looking into "unlawful coordination”. Even though she didn't identify which companies were being probed, the news sent shares of all US majors down in trading yesterday: American Airlines AAL, -2.84% Delta Air Lines DAL, -1.97% Southwest Airlines LUV, -1.42% and United Airlines UAL, -2.49%
The highly-competitive airline sector requires management to move with the market from time to time, it also requires fleet managers to adjust capacity to match demand and yield concerns; this can be done without collusion. It would be very surprising indeed if there were emails floating around at this time which confirm that airlines have been illegally pre-warning each other about capacity increases and decreases, new routes and configurations. If there is evidence of collusion then we can expect this to be a very big and damning consumer lead story that could carry with it significant fines. Of course it is likely that the DoJ is looking into something like this on and off almost all of the time - Only time will tell.