2013

SIMSR

[STRATEGY PROJECT ON] INDIGO- AIRLINES

Submitted by Shashank A Shagun Agrawal Siddharth Reddy Raghaw Mundhra

Under Guidance of: Dr. Rushi Anandan 1 04 14 36

Table of Contents
1. 2. 3. 4. 5. 6. 7. 8. EXECUTIVE SUMMARY .......................................................................................................................... 3 PESTLE ANALYSIS ................................................................................................................................... 4 Porters Five forces Analysis ................................................................................................................. 7 RESOURCES ......................................................................................................................................... 10 CAPABILITIES ....................................................................................................................................... 13 COMPETITIVE STRATEGIES FOR INDIGO AIRLINES .............................................................................. 14 TETRA THREAT FRAMEWORK FOR SUSTAINABILITY ........................................................................... 15 Value Chain of Indigo .......................................................................................................................... 17

APPENDIX .................................................................................................................................................... 18

1. EXECUTIVE SUMMARY
In this report, we will analyze what strategies IndiGo followed to enter the aviation industry. Also, we will discuss how IndiGo implemented the low cost strategy to gain competitive advantage and provide recommendations to sustain its competitive position in the long-term. To know about the industry attractiveness of aviation and the factors that helped IndiGo enter this market, we will use the Porters Five Forces model. This will be useful in gaining insight about the entry barriers, power of buyers and suppliers, competition among the existing players and the feasible alternatives in aviation industry. SWOT analysis of the company will help us understand the current positioning of the company based on the analysis of external and internal environments. For internal analysis, we will study the criteria for sustainable competitive advantage as well as the Value Chain Analysis. This will help identify the strengths and weaknesses of the company. Further, the analysis of government policies, competitors strategies and other variables like fuel prices, increasing domestic traffic, economic downturn etc will lead us to the external influences that affect the aviation industry of India. Hence, using the external environment study, we can come to know about the opportunities and threats for IndiGo airlines. Thus, the consequences and influence of the all factors of SWOT taken together will aid in the formulation of alternative strategic actions that IndiGo may consider to sustain its competitive advantage.

2. PESTLE ANALYSIS
A PESTLE analysis is an analysis of the external macro-environment that affects all firms in an industry. P.E.S.T.L.E is an acronym for the Political, Economic, Social, Technological, Legal and Environmental factors of the external macro-environment. Such external factors usually are beyond the firm's control and sometimes present themselves as threats. For this reason, some say that "pest" is an appropriate term for these factors. Political /legal Factors The government has opened up the Indian skies by allowing up to 49% FDI in Domestic Airlines which is expected to give an impetus to the sector which is reeling under huge cost side pressures Government allowing direct import of ATF is another move in the right direction to decrease the operating costs Micro-managing by the government is seen as a great negative for the industry as the airlines are not being given enough freedom to run their operations Slow growth of airport infrastructure because of government impasse Lack of government initiatives stalling the growth of the sector. Overall the government is slowly waking up to the issues plaguing the sector and is taking few steps to improve the health of the sector, Indigo which is the market leader in the LCC segment stands to be benefitted the most Economic factor Business cycles have a wide reaching impact on the airline industry. During recession, airline is considered a luxury & therefore spending on air travel is cut which leads to reduce prices. During prosperity phase people indulge themselves in travel & prices increase The economy is slowing down which is a huge negative for the industry as the capacity is getting underutilized and the companies are being forced to reduce the ticket prices to reduce the capacity wastage Consistently high oil prices along with high taxes contribute significantly to the operational costs Depreciating value of rupee is adding to costs as substantial portion of other operating costs like lease rentals, maintenance, expat salaries and a portion of sales commissions are USD-linked or USD-denominated The industry operates under high cost of capital which again adds to the operational costs but the positive side for indigo airlines is that it is in a far better position

financially than the competition which helps it to raise capital comparatively at a lower cost Social factors The changing travel habits of people have very wide implications for the airline industry. In a country like India, there are people from varied income groups. The airlines have to recognize these individuals and should serve them accordingly The destination, kind of food etc all has to be chosen carefully in accordance with the tastes of their major clientele especially, since India is a land of extremes there are people from various religions and castes and every individual travelling by the airline would expect customization to the greatest possible extent. For e.g. A Jain would be satisfied with the service only if he is served jain food and it should be kept in mind that the customers next to him are also jain or at least vegetarian. With the income levels rising in the Tier-2 and Tier-3 cities, there is demand being generated for air connectivity in these cities also. Technological factors The industry is in the process of adopting a new standard for distributing airfare information which the IATA has termed as NDS which stands for New Distribution Capability which will help the airlines to tailor the services to each customer and will add value to both the airline as well as the customer Growth of Electronic ticketing satellite based navigation systems Leveraging technology has made check in times to reduce which has contributed in efficiency improvements for the airlines The Airports Authority of India is developing modern communication, navigation, surveillance, and air traffic management systems for India's aviation sector that will help the country meet the expected growth and demand for air passenger and cargo service over the next decade. Environmental With air traffic growing, environmental concerns are also gaining an increasing importance. Although the aerospace industry has already made significant efforts to reduce its environmental footprint, further technological and operational improvements are necessary to outweigh the impact of traffic growth. The two main environmental issues associated with aviation are noise and emissions. Within emissions, the distinction is made between local air quality and climate change. Noise: The principle sources of aircraft noise are the aircrafts engines and, particularly during approach, airframe noise when the aircrafts flaps/slats are fully extended and the landing gear are deployed. Air traffic movements have

significantly increased, and will continue to grow. As a result aircraft noise continues to have a very significant environmental impact around airports and be a source of disturbance to the public. Many airports have implemented noise related charging schemes, night time restrictions or even night curfews. The number of airports affected in this way will likely increase further during the next decade. Local air quality: Air pollutants such as Nitrogen Oxides (NO2 and NO) and particulate matter (PM); have been identified as key contributors from air transport to the problems of local air quality. Exposure to particulate matter can lead to impacts ranging from minor effects on the respiratory system to premature mortality. It is therefore likely that air quality will be a significant feature in the debate concerning additional runway capacity. Alternative Fuels: Alternative fuels should become a major driver in reaching the objective of carbon-neutral growth for aviation. Drop-in bio fuels have been successfully tested and are already in use on certain commercial routes. The industry is aiming at replacing 6% of current fossil fuel with bio fuel by 2020. Beyond the complex issue of life cycle assessment, the major challenge will be to ensure that bio fuels are supplied in a reliable and cost-effective manner to air operators Land acquisition has become one of the serious issues plaguing the industry because it is stalling the building of new infrastructure which is the need of the hour Future objectives: The ultimate aim for the industry must be sustainable development, where the environment is not sacrificed for growth and future generations will be able to continue to benefit from air travel. The aviation industry has already started to tackle this formidable task, but continued and imaginative effort is required to ensure the industry maximises the use of its "environmental capacity"

3. Porters Five forces Analysis

1. Threat of New Entrants Threat of New Entrants Aviation industry is highly cost intensive. Besides it has to go through a number of regulatory compliance before it gets an excusatory order. The factors which make entry of new entrants in the Indian Aviation sector a difficult task are the following The capital requirement- An airline is required to have capitalization of minimum thirty crores without which it is not allowed to takeoff. Expected retaliation-The market is concentrated in the hands of a few players thus any new player would to face stiff competition and retaliation from the existing players such as Jet Airways and Indian. Inadequate airport infrastructure often makes it difficult for the new entrants to get right flying slot time. Shortage of pilots and high fuel costs also pose a threat as the existing demands itself are not being fulfilled. Exit barriers-The high capital requirement makes it difficult for the companies to exit the market but being a growing industry the existing players are willing to acquire and make exit for an operator less difficult.

2. Bargaining Power of Suppliers Any airlines in general face a duopoly of two major suppliers of aircrafts i.e. Airbus and Boeing. There are other suppliers like Dauphin,Dronier,Bell,ATR-42 but do not meet the requirements to serve the low cost commercial aircraft carriers, particularly IndiGo airlines. Fleet Forecast for the India-Region 2006-2011 shows that there will be approx. 85% growth in the order rate of air carriers. Thus, suppliers are few and thus in better position to bargain as they always finds customers for their aircrafts IndiGo fleet comprise of Airbus-A320 and the switching cost is high due to the limited number of suppliers. Due to shortage of commercial aircraft pilots in India the supply of pilots is concentrated, hence increasing their power. There are only four suppliers for ATF (Aviation Turbine Fuel); IOC, Hindustan Petroleum Corporation, Bharat Petroleum and ONGC and since their number is limited, they possess more power. The proof of evidence for high power enjoyed by ATF suppliers lies in the fact that the ATF prices constitute 35-40% of the costs in India compared to 20-25% globally.

The brand value of suppliers is high due to their less number and results in higher bargaining power for them. The airlines also face a threat of forward integration since the suppliers are in close contact and are familiar with the knowhow of the aviation industry. The suppliers are few and thus in better position to bargain as they always finds customers for their aircrafts.

2. Bargaining Power of Buyers Buyers in airlines industry are large in number and highly fragmented thus lowering their power .With the growing Indian economy and increasing low cost carriers, the buyers have increased and so have the growth opportunities. The switching cost is minimal since there are multiple alternatives available. It is not difficult to move from one airline to another or to switch to a substitute. Furthermore the players in the particular strategic group do have minimalistic differentiating points. Backward integration from the buyers end is very difficult and next to impossible.

3. Competitive Rivalry The aviation industry is a highly competitive industry because of which it is difficult to earn high returns in this sector. Below are the major reasons for the high competition in the low-cost carrier airlines: Very little scope for differentiation between competitors products and services Aviation is a mature industry with very little growth. The only way to grow is by stealing away customers from competitors Suppliers of aircrafts are the same, i.e., Boeing and Airbus. Hence suppliers bargaining power is high. Switching cost of customers is high for low cost carriers, i.e., there is no brand loyalty. Closest competitor of IndiGo is SpiceJet followed by GoAir. Below is brief description about each of them: SpiceJet is a low-cost airline based in New Delhi, India. Spice Jets mission is to become Indias preferred low cost airline, delivering the lowest air fares with the highest consumer value, to price sensitive consumers. Its vision is to ensure that flying is no longer

confined to business travellers, but is affordable for everyone and thus the tagline flying for everyone Spice Jet airways began its operations in May 2005. SpiceJet has chosen a single aircraft type fleet which allows for greater efficiency in maintenance, and supports the low-cost structure. It has a fleet of 6 Boeing 737-800 in single class configuration with 189 seats. SpiceJet's new generation fleet of aircraft is backed by cutting edge technology and infrastructure to ensure the highest standards in operating efficiency. Spice Jet currently flies to 11 destinations. GoAir Airlines, owned by Wadia Group, is a low-cost budget airline based in Mumbai, India. It has been showcased as The People's Airline. GoAir is looking at 'commoditising air travel' by offering airline seats at marginally higher train prices to all cities in India. The Airlines theme line is Experience the Difference and its objective is to offer its passengers a quality consistent, quality assured and time efficient product through affordable fares. GoAir's business model has been created on the 'punctuality, affordability and convenience' model. Go Air operates four A320 aircraft with a single class, 180-seat configuration, and plans to expand its fleet to 33 aircraft in three years. Thus, we can summarize from above data that all the three players are trying to follow cost leadership strategy by bringing down the ticket rates to the minimum possible value. However, it is clear that, to sustain in this cutthroat competition, each player will have to come up with different strategies to improve the non price factors 5. Availability of Substitutes The substitute for low cost airline company is the railways. But this substitute is not very powerful due to the following reasons: 1. Customers use airline transport as it is convenient and saves travelling time. So trains cannot work as a substitute to save time. 2. Secondly, many customers use airlines as a status symbol. So again, trains cannot substitute for prestige. So if we consider IndiGo airlines, the direct substitutes are the other low cost carriers like SpiceJet and GoAir. So in this case, threat of substitutes is high as the switching cost between low cost carriers is low.

4. RESOURCES
Tangible Resources: Physical Resources Aircrafts: Indigo is the first Indian airline with Sharklet equipped A320. Indigo welcomed its first Sharklet equipped Airbus A320 on January 28, 2013.Sharklets are newly designed wing-tip devices that improve the aircrafts aerodynamics and significantly cut the airlines fuel burn and emissions by four per cent on longer sectors. (Source: http://www.airbus.com/presscentre) The airline currently operates 399 daily flights with a fleet of 65 Airbus A320 with an average fleet age of 2.3 years and flies to 33 destinations (Source: www.goindigo.in) Fuel: Fleet maximum fuel capacity is 23,860 Litres. Fuel is a resource for Indigo as due to the use of A320 it attains around 4% of fuel burn reduction. Further ATF (Aviation Turbine Fuel) is a complementary product for airplane and it constitutes almost 35% of production cost. Financial Resources As confirmed by India's Minister of Civil Aviation, Ajit Singh on 22-Mar-2012, all scheduled Indian airlines except Indigo are incurring losses, based on returns filed by airlines with the Directorate General of Civil Aviation (DGCA). As the only profitable airline in India, Indigo was able to put an order of 180 new aircrafts A-320 as of in 2011, in a total cost of USD 15 billion. Financial resources also enable Indigo to phase out aircrafts older than 6 years, in order to keep the average fleet age low. Human Resources In a time of crisis when competitors are laying off staff or leaving the market (Kingfisher), Indigo is on lookout for more pilots, cabin attendants, customer service and airport service agents in order to keep growing and in congruence with its new aircrafts. Indigo has one of the highest percentages of pilots who are trained to fly under dense fog. Great employee relationship- Indigos president, Mr. Aditya Ghosh, makes sure he is available to 4000+ employees of Indigo; was named the travel industrys best employer in 2010.

The attrition rate in Indigo is negligible or zero percent. Technology Resources Indigo uses e-ticketing facility which makes travel by Indigo hassle free. E-tickets add to its cost efficiency as it saves fee and commission paid to agents. Unlike manual systems used by other airlines, Indigo planes are equipped with a digital link system for transmission of short, simple messages between aircraft and ground stations via radio or satellite called Aircraft Communications Addressing and Reporting System (ACARS). Before every Indigo flight departs an automatic message is triggered from the aircraft to its operations control centre and immediately the same departure time gets recorded in the software. Similarly, the moment the flight lands an automatic message is triggered from aircraft to control centre. Hence, the on-time performance is diligently monitored for every flight in real time.

INTANGIBLE RESOURCES: Brand Equity/Reputation: Indigo is the most reputed low cost carrier due to the following reasons: On time arrivals is the key differentiating factor for Indigo Airlines. Indigo keeps implementing new and innovative ideas to increase the quality of customer service. Recent example is: Indigo has roving check-in counters where passengers with only cabin baggage can check-in with an Indigo official with a handheld device, rather than lining up at the check-in counter. Compared to the direct competitors, that is, the other low cost carriers like SpiceJet, Jetlite, etc. Indigo offers the lowest airfare. Reputation of high value added services-which also contributes to word of mouth promotion of brand. Social Capital: Indigo has amicable relationship with the other organizations that contribute to the value addition for the service provided to the customers.

Indigo has engaged many travel web-portals and regional travel agents with incentives like booking commissions, etc. There have been no instances of distress between Indigo and its other collaborators, that is, suppliers. Collaboration with hotels: Mumbai-based hotel chain operator Sarovar Hotels and Indigo Airlines announced a marketing tie-up for frequent travellers. The highlights are: a) The arrangement will allow guests staying at select Sarovar Hotels across 26 destinations in India to avail a 10 per cent discount on their next travel booking with Indigo. b) While Indigo flyers can avail up to 25 per cent discount on published room tariff, 10 per cent discount on holiday stay packages and 10 per cent discount on restaurant dining at select Sarovar properties. Hence Indigo has a remarkable social capital. (Source: http://www.business-standard.com/article) Brand Awareness: Indigo is a well known Low Cost Carrier in India. The following points contribute to the brand awareness of Indigo: Advertising using print media like newspapers, billboards, etc. Advertising has been done my TV commercials as well. Indeed indigo was the first low cost airline to release a TVC. Unlike regular airline ads, it opted for an animated ad-to cut the cost and break the clutter. Further the series of commercials continued like- the on time commercial, the anthem commercial, etc. It may not pay for an advertisement in a newspaper, but has been covered in news for its low cost strategy implementation. As Indigo provides better value added services to the customers, word of mouth promotion also works in its favour. Employee Relationship: Good Employee Relationship is a key factor to sustain competitive advantage. Indigo provides several incentives to its employees. As per the news article published in The Hindu Business Line: At a time when several domestic airlines are looking to prune their staff strength, the Delhi-based low cost airline, Indigo, is on the lookout for more pilots, cabin attendants, customer service and airport service agents. The above facts show that Indigo has taken a positive approach while dealing with its loyal employees at the time of economic slowdown.

5. CAPABILITIES
Capabilities are what we do with our assets. It includes our operational efficiency, distinctive competence and core competence. Financial Capability: Indigos financial capability is evident by the fact that it got the permission from Indian government to fly aboard by September 2011. The government cannot freely offer licenses to any airlines which wish to fly abroad. We have to look into other aspects like the financial viability of the airline as well so that it can sustain international operations even when the demand is low, said an official of aviation ministry. Indeed, Indigo is the fourth Indian low-cost carrier to operate overseas services. (Source: http://www.thaindian.com/newsportal) Further, Indigo has managed to be the only profitable airline in India currently. Low fare flights: Indigo has successfully managed to be a low fare flight maintaining its reliability and good service. It focuses on customer needs by offering low fares. Indigo scored a hatrick at SKYTRAX World Airline Awards 2012 for being the best low cost airline of India & Central Asia Cost efficiency: Indigo has been offering low fare flights and is still able to have good cash flows. This is due to the cost efficiency capability. They have managed to reduce the costs. This can be attributed to various strategies adopted: No frills i.e. no in flight services Operating on secondary airports E-ticketing: to avoid fee and commission paid to travel agents Single model of aircraft Fewer employees per aircraft and more seats per aircraft Hub and spoke model for flights Reduction on fuel burning due to A-320 aircrafts Selling and leasing back planes helps its balance sheet Indigo goes in for cost saving to the extent that every time an Indigo aircraft takes off in daylight, the pilot switches off the navigation lights located on its wings and tail tips. The reason is the saving on cost of changing bulbs. Its such a minor detail and saving so small that most airlines wouldnt bother, but its taken seriously at Indigo.

On-time flights: Passengers all across India rave about Indigos on-time performance, the highest amongst all airlines at 92.4%. They are always on time and often before time, which is remarkable. Passengers call punctuality the hallmark of the airline. The moment the flight lands an automatic message is triggered from aircraft to control centre. Hence, the on-time performance is diligently monitored for every flight in real time. Low turnaround time: The turn-around time for an Indigo flight is less than 30 minutes, a hard feat to match. Though there are no complimentary meals on this no-frills airline, the service and performance matches the best.

6. COMPETITIVE STRATEGIES FOR INDIGO AIRLINES

Air craft management Indigo purchased the aircrafts, then sold them to intermediary and then hire the fleet on lease from then on contractual basis. Use single configuration aircraft. For maintenance, it allied with airbus Indigo preferred airbus over Boeing as the fuel efficiency of the former is greater than the latter.

Growth and Expansion strategy It adopted a strategy with one aircraft and adding one after six week. In other way is that they first tested one market and after establishing foothold in that market, they expanded to other markets. Shorter trajectory for landing. Does not require ground based navigation Helps in reduction of green house gas emission. Turnaround time is less Low frills Hub and spoke models for flights IndiGo preferred to wait and have a solid business plan in place. Its plan was to stick to operating a single configuration aircraft, providing point-to-point connectivity. IndiGo, however, continued its gradual expansion and waited for five years to launch its international operations, although, arguably, the airline had to wait those five years because of airline industry regulations.

Still, it wasn't tempted to find loopholes to expand aggressively in what was a rapidly growing market. This slow and steady approach has made IndiGo the second-largest airline in terms of passenger carriage in a matter of over five years (it commenced operations in August 2006) with a fleet of 50 aircraft.

7. TETRA THREAT FRAMEWORK FOR SUSTAINABILITY

Added Value You add value to the industry if the value generated by you is not equal to the value generated without you. Core competency adds value. If value generated by you = value generated without you, then you are not required. Threats to added value are: 1) Threat of imitation: Imitation is the case when there is a diffusion of successful business model by competitors. Company creates added value by competitive advantage through low-cost leadership.

A company chooses a particular peak depending upon its strength and weakness on this 3D business landscape. When a competitor tries to come to your peak and when peak gets crowded, it comes down thereby bringing down your performance. This is the reason why imitation is considered a direct threat. Some of the imitation threats to Indigo are:

Imitation of its aircrafts Imitation of its human resource Imitation of brand awareness

2) Threat of Substitution Railways and roadways (response: time saving travel) Technological advancement (diminishing the need to travel) High end airlines (the ones providing services) Either of the LCC

Appropriated Value 3) Threat of Hold-up Value gets added vertically across the 5-forces model i.e. through the participants including suppliers, buyers, competitors, etc. Value is captured by each of these along the vertical chain. A company cant capture all the value because of the presence of the competitors. Competitors hold up companies or participants from capturing whole value. Threats of hold-up for Indigo are: High power of the aircraft suppliers i.e. Airbus and Boeing High power of supplier of pilots due to the shortage of commercial aircraft pilots Holding up of value by the limited number of suppliers of ATF: IOC, Hindustan Petroleum Corporation, Bharat Petroleum and ONGC Government interference: government has a control over fuel prices, foreign investments (i.e. FDI policies), tourism laws, taxes, etc.

4) Threat of Slack Slack is the gap b/w the appropriated value and the value actually captured. Slack generates not because somebody takes any value from some organization, but because the firm looses it itself. Slack cant be avoided but it can be maintained. This is the gap which the firm creates to generate value. Threats of slack for Indigo are: Increasing fuel prices Increasing labour costs High capital investment Rising airport costs

8. Value Chain of Indigo

APPENDIX
MARKET SHARE OF INDIGO Despite only entering the market less than six years ago in Aug-2006, Indigo has rapidly soared up the ranks to become the second largest domestic carrier, overtaking Air India and Kingfisher Airlines on the way. In doing so, Indigo has overtaken more wellestablished carriers that have expanded not only organically but through acquisitions and with a mixed-product that offers both full service and low cost products. And the growth for Indigo is expected to continue, with the airline likely to remain the fastest growing airline in India in 2012, as it continues to add capacity on both domestic and international routes, with the latter expected to generate a growing proportion of total revenue. Indigo held a 21% domestic market share at the end of 2011, behind Jet Airways/JetLite. For the second consecutive year, the carrier reported domestic passenger growth of almost 40% to 11.8 million, with total passenger numbers exceeding the 12 million-passenger mark following the launch of international operations in Sep-2011. According to DGCA monthly traffic data, Indigo handled over 1 million passengers for the first time in May-2011 (with 1.1 million passengers), a feat replicated in Jun-2011, Oct2011, Nov-2011, Dec-2011, Jan-2012 and Feb-2012, with over 1.1 million passenger in each of these months.

Fig: Indigo passenger numbers: Aug-2006 to Feb-2012

Domestic load factors in 2011 were also strong, averaging 83.3%, based on DGCA data, with load factors exceeding 90% in Dec-2011. In 2010, load factors exceeded 90% on four occasions in May-2010 (92.3%), Jun-2012 (90.7%), Nov-2010 (91%) and Dec-2012 (93.3%). So far in 2012, the carrier has reported load factors of 85.9% in Jan-2012 and 82.8% in Feb-2012.

Fig: Indigo load factor: Apr-2004 to Feb-2012 In the month of Feb-2012, the LCC held a 21.3% market share compared to a combined 29.8% at Jet Airways/JetLite. Indigo will likely take the top spot from Jet Airways, with growth of around 12% p.a. expected over the next few years.

Fig: India domestic market share by carrier: Feb-2012

Growth Path of Indigo Airlines