NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES,

BENGALURU
12th August 2019

Report on

ECONOMIC ANALYSIS OF
INTERGLOBE AVIATION
(INDIGO)

Under the Guidance & assistance of

Dr. Akshay Dhume

SUBMITTED BY -
Chandra Kiran (B009)
Kopparathi Poorna Kashyap (B018)
Rahul Vaidyanathan (B034)
Rohan Chopra (B036)
Tanya Sardana (B050)

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 INTRODUCTION
INDIAN AVIATION INDUSTRY:

 The civil aviation industry in India has emerged as one of the fastest growing industries in
the country during the last three years.
 India is currently considered the third largest domestic civil aviation market in the world.
India has become the third largest domestic aviation market in the world and is expected
to overtake UK to become the third largest air passenger market by 2024.
 In India, low cost is critical to the airline industry which is characterised by highly price-
sensitive consumers. On one hand, increase in input costs such as fuel prices and aircraft
landing and en-route charges have added pressure to the industry’s profitability. While on
the other hand, demand for air travel continues to be robust at low fares in the domestic
market, thereby absorbing the rapid capacity expansion and stimulating higher air travel
demand.
 Amongst the macro-economic factors such as India’s relatively low per capita income and
low domestic air penetration levels, low cost carriers or LCCs (Low Cost Carriers) continue
to be one of the key drivers for traffic growth by offering affordable flying options to
India’s rapidly growing air travel market.
 As one of the fastest growing airline markets, India is the 7th largest civil aviation market
in the world, according to the International Air Transport Association (IATA). Since 2014,
India has overtaken major domestic markets like Australia, Japan, Brazil, and Russia in
terms of RPKs flown, and accounts for around 1.5% of total industrywide RPKs.
 IATA expects air passenger numbers to, from and within India to increase by 3.3 times
over the next 20 years, to more than 500 million passenger journeys per year. This strong
growth outlook for air passenger demand will see India overtake Germany, Japan, Spain,
and the UK within the next 10 years.

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INTERGLOBE AVIATION:

 IndiGo is India’s largest passenger airline operating as a low cost carrier.

 Serving 52 domestic destinations and 16 international destinations, the company provides
travelers with a simple, unbundled product, fulfilling our singular brand promise of
providing “low fares, on-time flights and a courteous and hassle free service” to the
customers.
 In addition to passenger transportation, the company’s activities primarily include cargo
and mail services on scheduled flights.
 IndiGo had commenced operations in August 2006 with a single aircraft, and has grown
its fleet to 217 aircraft as of March 31, 2019.
 For the second time in a row, IndiGo was ranked amongst the top 20 mega airlines globally
in terms of On-Time Performance (OTP), based on data compiled by OAG and IndiGo was
also the only airline from India to have made it to the list.
 IndiGo was also awarded the Best Low Cost Airline - Asia at the Tripadvisor, Travelers’
Choice Award 2019 and also the Passenger Choice Award for being the ‘Best Low Cost
Carrier in Asia and South Pacific’ at the Apex Asia Awards 2019. This was based on
customer feedback from more than a million flights, across nearly 500 airlines around the
globe, over a period of 12 months.
 These awards are a testimony to IndiGo’s best in class service quality.
 IndiGo was set up in early 2006 by Rahul Bhatia of InterGlobe Enterprises and Rakesh
Gangwal, a United States-based NRI. IndiGo began its operations on 4th August 2006 with
a service from New Delhi to Imphal via Guwahati.
 To keep fares always affordable, IndiGo has designed a clean, comfortable and reliable
airline without costly frills that put upward pressure on fares. Below are the key factors of
the business model of IndiGo airline:
 A single passenger class
 Single type of aeroplane to reduce training and service cost.
 No frills such as free food/drinks or lounges.
 Emphasis on direct sale of tickets through internet to avoid fee and commissions paid
to travel agents.
 Employees working in multiple roles.

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MARKET STRUCTURE – AVIATION INDUSTRY

The aviation industry in India, especially with regard to passenger airlines, follows a strictly
oligopoly-type structure with the following characteristics:
 An industry dominated by a small number of large firms.
 Firms sell either identical or differentiated products (the only differentiation here being in
service quality and frills offered).
 The industry has significant barriers to entry (which holds true both with respect to
regulations and huge capital investment required).
 Strategy dependent on rival firm’s behaviour.

DIFFERENTIATED OLIGOPOLY:

Each seller in an imperfectly competitive market faces a negatively sloped demand curve for his
product, permitting him some control of the price of his product. The aviation industry is a
differentiated oligopoly which produces at a profit maximizing level of output where marginal cost
equals marginal revenue. The firm finds the price it will charge customers at the profit maximizing
level of output (Qm) from the demand curve, and sets price to Pm. The firm is earning economic
profits since price exceeds average total cost at the profit maximizing level of output.

PRICING MECHANISM

Price and quantity are determined by the interaction of demand and supply in the market. However,
given the large number of buyers, firms can decide prices at which they will sell tickets. In fact, in
the airlines sector, firms go in for third degree price discrimination and segment the market,
charging a higher price to the market with a relatively inelastic demand (such as fares between
business and economy class travellers, or between emergency travel and leisure travel by providing
apex fares). The low-cost airlines follow this different pricing strategy. Customers booking early
with carriers such as IndiGo will normally find much lower prices if they are prepared to commit

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themselves to a flight by booking early, on the justification that consumer’s demand for a particular
flight becomes more inelastic the nearer to the time of the service. In airline industry, the marginal
cost of flying an additional customer is very low. Thus, IndiGo tries to maximize its revenue by
selling the maximum number of tickets possible. It earns its revenues not only from the sale of
tickets but also from the sale of food items and any other service for which it charges over and
above the price of the ticket.

Airline Industry practices the following strategies while pricing its services and meeting with
competition.

i. Implements peak-load pricing.

ii. Implements third-degree price discrimination. That is, fare restrictions screen customers
and segment them by their sensitivity to price and potentially by their demand uncertainty.
iii. Implements an inventory control system for coping with uncertain demand.

ELASTICITY OF DEMAND:

The airline industry is an extremely unstable industry because it is highly dependent upon current
market conditions. Events such as inflation, terrorist attacks, and the price of oil have greatly
influenced the demand for airline tickets throughout the years. Competition consistently affects
the price of airline tickets because it gives the customer other options. Substitutes that are existence
is traveling by train, car, or avoiding travel whenever possible. Customers have resorted to all
named substitutes during turbulent times in our economy. The elasticity of demand is greatly
affected by the customer's purpose for travel. Airline customers typically fly for business or
pleasure. With the wave of technology, a large percentage of business travel has been eliminated
to conserve spending.

Price elasticity of demand measures the responsiveness of consumers to a change in the price of
a particular good.

Price elasticity of demand = % change in Quantity Demand (IndiGo Tickets)

% change in Price (IndiGo Tickets)

The number of substitutes an airline has (for a particular sector) can be one of the main
determinants of how elastic or inelastic demand will be for the airline tickets. If an airline has a
number of substitutes, for a particular sector, consumers are likely to be more responsive to the
changes in the price of tickets, whereas an airline that has few or no substitutes, consumers are
likely to be less responsive to the changes in prices of the tickets.

Airline industry observers have generally assumed that the demand for airline travel is price elastic.
Indeed, one of the primary benefits of the airline industry being deregulated is the fall in fare level
and the increased passenger traffic.

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SWOT Analysis

 Strengths:
1) Service: IndiGo offers a wide extent of services, such as multi-channel direct deals,
online flight booking, nonstop client support through call focuses and air terminal
counters, online flight status checking, an easy to use IndiGo application for Android
and so on.
2) Fleet Strategy: The fleet strategy of IndiGo has always focused on ensuring that the
average fleet age in four years. The airline has also ensured that it purchases its fleet at
prices much lower than what a seller would sell them for. This has helped the airline
maintain its low costs consistently.
3) Highly drive workforce: IndiGo is a hassle-free place to work in and this has ensured
that they have a highly motivated and self-driven workforce. IndiGo has deployed the
i-fly facility where their new employees are given complete real-time training on how
to deliver the best customer service. This has been considered as the best training
facility in this domain.

 Weaknesses:
1) Sustaining profits: IndiGo is positioned as a low-cost carrier and thus pricing for the
airline needs to be as low as it can be managed. At the same time, the costs need to be
maintained as low as possible. However, IndiGo has often been unable to sustain its
profits consistently and this can be a weakness for the company.
2) Over-dependence on volumes: In order to sustain profits the company needed to
ensure that the volumes were always high and business could not be affected by
fluctuations in demand. This means that the business needs to ensure that sufficient
steps are taken to ensure consistent volumes and this required an additional investment.
3) The grounding of aircraft: After the safety of Pratt & Whitney aircraft became
questionable, the Civil Aviation Authority had to make a decision to ground these
airplanes owned by IndiGo. This scandal affected the goodwill and trust of the
customer.

 Opportunities:
1) Growing demand for Domestic travel: Interglobe Aviation Ltd being a low cost
carrier has an ample growth opportunity in the domestic travel given the new
proposition of 100 new Airports in Tier 2 cities of India.
2) Growing demand for foreign travel: There is a surge in the number of people in India
who need to travel to foreign locations both for business and pleasure. This means that
there is a huge scope for the airline to expand to more foreign destinations.

 Threat:
1) Competition: The airline faces a lot of competition from brands such as Spicejet,
GoAir, Air Asia etc.
2) Costing: The key components of cost in an airline is the fuel which is highly fluctuating
and in order to manage the pricing in accordance with the dynamics of fuel prices is a
threat today and even in the future.

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REGRESSION ANALYSIS OF INTERGLOBE

The pertinent oil prices in the country is a major factor affecting sales of the Airlines industry. The
regression analysis, using oil price as the independent variable(X) and Sales as the dependent
variable(Y) gives a relationship between the two.

Indigo Airlines
x̄ 61,589.77
ȳ 1,55,446.15
Y'hat Y'hat= 9850.48 + 1.66 X
Explained Vart. 33,03,15,17,912.80
Unexplained Vart. 4,29,16,61,473.52
Total Vart. 37,32,31,79,386.31
R^2 0.89
Coefficient of Correlation 0.94
b'hat 2.5
bx̄ 1,54,133.93
a 1,312.23
n 8
K 2
(n-K) DF 6
(n-K)*Σ(X - x̄)^2 31,64,46,65,835
Sb 0.368
T 6.8
T test at 5% LOS 2.306

Hypothesis:
H0 – Advertisement is not a significant factor of sales
H1- Advertisement is a significant factor of sales
Therefore, it is a two tail test.
Now, b (hat) is positive, thus any change in advertisement cost will result in increased sales by a
factor of 2.5. For eg. An increase of Rs. 100 in fuel results in increase of sales by Rs. 250.
Also, as per the t-test performed at 5% LOS, the calculated value of t is 6.8 and the tabular value
of t is 2.306. Thus, t (calculated) > t (tabulated) therefore, we can reject H0.

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Observations:
Now, a (hat) = Rs. 2,909.60 Cr., this is the value of sales when advertisement cost is zero.
After the analysis we get R^2 = 0.89. Thus, the sales are defined by independent variables up to
89%.

DEMAND FORECASTING

The linear trend projection method is used to forecast future sales of the airlines and as the airlines
face extreme seasonal variations, we also take that into account.
The forecasted quarter-wise sales for IndiGo for 2018 and 2019 are as follows:

Forecasted
Period Sales
(in Crores)
2019-20 Q1 8,158.53
2019-20 Q2 8,584.38
2019-20 Q3 9,032.46
2019-20 Q4 9,503.94
2020-21 Q1 10,000.02
2020-21 Q2 10,521.99
2020-21 Q3 11,071.22
2020-21 Q4 11,649.11

However, there are some seasonal variations, i.e. certain months in a year have higher sales
turnover. Therefore, to adjust the trend forecast for the seasonal variation, we incorporate the
seasonal effect into the forecast as follows:

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 SEASONAL VARIATION-INDIGO
ACTUAL / ADJUSTED
QUARTER ACTUAL (Y) FORECAST
FORECAST FORECASTED
2015-16 Q1 4,188.88 3,739.12 1.1203 4,045.31
2016-17 Q1 4,545.19 4,437.73 1.0242 4,801.13
2017-18 Q1 5,752.91 5,266.86 1.0923 5,698.17
2018-19 Q1 6,818.33 6,250.92 1.0908 6,762.80
AVERAGE 1.0819
2015-16 Q2 3,519.52 3,902.72 0.9018 3,667.11
2016-17 Q2 4,149.30 4,631.89 0.8958 4,352.27
2017-18 Q2 5,290.98 5,497.31 0.9625 5,165.44
2018-19 Q2 6,514.20 6,524.41 0.9984 6,130.54
AVERAGE 0.9396
2015-16 Q3 4,273.40 4,073.47 1.0491 4,436.70
2016-17 Q3 4,943.11 4,834.55 1.0225 5,265.64
2017-18 Q3 6,177.88 5,737.83 1.0767 6,249.46
2018-19 Q3 8,229.37 6,809.88 1.2084 6,398.78
AVERAGE 1.0892
2015-16 Q4 4,060.69 4,251.70 0.9551 4,300.86
2016-17 Q4 4,848.22 5,046.08 0.9608 5,104.42
2017-18 Q4 5,799.11 5,988.88 0.9683 6,058.12
2018-19 Q4 8,259.81 7,107.83 1.1621 6,678.74
AVERAGE 1.0116

ANALYSIS

The demand forecast for IndiGo sales shows a growth rate of 4.89% and the average quarterly
seasonal is 1.03056.

This depicts that sales for IndiGo and seasonal effect in the airlines industry has a huge impact on
sales but there the effect of seasonality factor

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CONCLUSION

India has no dearth of challenges. Land acquisition for airports is a complicated process. India’s
potential in air cargo, maintenance, repair and overhaul (MRO), helicopters, seaplanes and general
aviation remains untapped. Availability of skilled manpower is inadequate.

Other reforms such as the formation of an independent civil aviation authority, corporatisation of
Air Navigation Services and public listing of Airports Authority of India are still pending. The
recent bids for privatisation of Air India and helicopter company Pawan Hans drew a blank. So
did the bid for selection of private operators for Jaipur and Ahmedabad airports, despite all these
assets having high intrinsic value. The bid conditions are expected to be made more liberal and
investor-friendly.

Indian aviation is currently in a sweet spot. It has the potential to become the third-largest in the
world by the end of 2026 thanks to a growing economy, strong middle class, rising tourist traffic
and a supportive policy environment. This provides a great opportunity for Indo-Gulf collaboration
in areas such as airlines, cargo, MRO, general aviation, aerospace manufacturing and skill-
building.

We believe despite cost pressure, aviation sector is poised for growth based on lowering cost of
air travel, growing middle-income population and capacity constraints in other public transport
services such as Railways. In addition, government’s “UDAN” (Regional Connectivity Scheme)
scheme aiming at connecting small cities to metro cities at affordable prices will support overall
growth. The scheme is expected to add 1.3mn new passenger seats across new networks. Also,
fleet modernization by the airlines will protect their profits despite ATF price pressures.

REFERENCES
 https://www.goIndiGo.in/information/investor-relations.html
 https://www.ibef.org/industry/indian-aviation.aspx
 Bloomberg – Brokerage Research Reports

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