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Why Air India is an attractive bet for Indigo, in 4 charts

LiveMint logoLiveMint 13-07-2017 Ragini Bhuyan

Mumbai: When the government first announced that the cabinet had cleared a proposal to privatise Air India and its subsidiaries, Tata Group was the first name to pop up in the media as a potential match. But IndiGo’s bold declaration of interest in Air India has completely reversed the media narrative. IndiGo (InterGlobe Aviation Ltd) has clarified that it’s interested only in the international operations of Air India, and its low-cost division, Air India Express, which operates flights to the Gulf region.

As Chart 1 shows, Air India, Air India Express and IndiGo together commanded a greater than 50% share of domestic carriers’ passenger traffic for the January to March 2017 quarter. If IndiGo is successful in its bid, it would effectively dethrone Jet Airways (India) Ltd, which had a 38% share in domestic carriers’ passenger traffic for the same period, from its position as the biggest private domestic carrier handling international passengers. The five domestic carriers, IndiGo, SpiceJet, Air India, Air India Express and Jet Airways, together had a greater than 60% share in total international passenger traffic to India over this period. A combined IndiGo, Air India Express and Air India entity alone would command over 20% of international passenger traffic to India.

IndiGo’s initial announcement of its interest in Air India was met with disapproval by markets. The management had to allay fears by clarifying that it was only interested in international operations, and that even if it does not manage to get Air India, it is serious about launching low-cost, long-haul flights. Chart 2 shows that both in 2013-14 and 2015-16, SpiceJet—Indigo’s domestic, low-cost rival—witnessed faster annual growth in international passengers. Acquisition of Air India’s international operations could be a good move for Indigo, giving it an edge over SpiceJet, which has scripted a remarkable turnaround to become the world’s best aviation stock with a 124% gain.

Air India Express, which has reported profits for the last two years, comes closest to tracking the performance of domestic low-cost carriers (See Chart 3). At 82%, the airline’s international passenger load factor compared favourably with that of Jet Airways (84%), Indigo (83%) and SpiceJet (85%) in 2015-16, and was way ahead of its parent Air India, which recorded the lowest at 74%. Chart 4 also shows that Air India Express did a good job of keeping its costs almost constant from 2013 to 2015. According to the latest media reports, Air India Express’s FY17 profit came in at Rs296.7 crore, a decrease of 18% from the previous year, with revenue rising 14% to Rs3,335 crore. Though a detailed financial statement is yet to be made public, the dip in profit despite revenue growth suggests that the airline did not have as much success in reining in costs in FY17.

The government has not yet given any indications of how it wishes to structure the sale, so it’s not clear yet if IndiGo will have the opportunity of acquiring only the international operations. An analyst with a brokerage, requesting anonymity, pointed out that Air India’s engineering services division, which is involved in maintenance, repair and overhaul services, also makes for an attractive acquisition target, though no company so far has expressed any interest in this division.

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