IndiGo Airlines’ Soaring Success: Unraveling the Power of the Sale and Leaseback Model 📈
Indian Aviation market
The Indian aviation market is one of the toughest to crack. In the past few decades, India has seen many airlines go bankrupt and decline. Some of them were big companies such as Air Deccan, Jet Airways, and Kingfisher, among others.
However, among the few remaining, IndiGo holds the largest market share in the Indian aviation market. With a fleet surpassing 350 aircraft and a staggering 2000 daily flights, IndiGo’s dominance is unparalleled. In 2023 alone, the airline ferried over 100 million passengers, a testament to its unwavering resilience and unmatched operational prowess.
Sale & Leaseback Model — How does it work?
IndiGo employs a strategic sale and leaseback model to optimise its fleet management and financial flexibility. Upon acquiring new aircraft, such as the A320/A321s manufactured by Airbus, IndiGo initiates a sale to reputable aircraft leasing companies like BOC Aviation.
For instance, let’s consider IndiGo’s hypothetical purchase of 100 Airbus A320 aircraft at a discounted bulk rate of $55 million each, down from the original price of over $100 million. IndiGo then sells these aircraft to BOC Aviation at a negotiated price, say $70 million each, resulting in a profitable transaction for both parties. For BOC as well, it was profitable deal as it acquired each aircraft at a massive discount of $30 million per aircraft.
Subsequently, IndiGo leases back these aircraft from BOC Aviation, injecting immediate cash into its operations while retaining access to the aircraft for operational purposes. This strategic manoeuvre enables IndiGo to access modern, fuel-efficient aircraft without bearing the full burden of ownership costs.
By leveraging the sale and leaseback model, IndiGo not only optimises its fleet management but also maintains a contemporary and environmentally friendly fleet, subsequently reducing fuel consumption and operational expenses over time.
This also led to an enhanced Cash Flow. In 2022, IndiGo recorded an operating cash flow of $2.2 billion and a free cash flow of $1.1 billion. These impressive figures highlight how the sale and leaseback transactions bolstered IndiGo’s cash flow, ensuring it had ample resources to cover operating expenses, invest in new aircraft, and reward its shareholders.
The Hub & Spoke Model
Though employed by many airlines, IndiGo also utilises the Hub & Spoke model to plan its flight routes. In an air transportation network, the Hub & Spoke configuration can save airline operational costs and increase system capacity. In this type of network, due to the use of indirect connections, fewer flights, on-service aircraft, and crew staff are needed.
Let’s assume IndiGo operates on a point-to-point model where it has to connect 7 cities and transport passengers between them. This would require 15 aircraft.
Now, let’s consider if it operated on a hub & spoke model where it has to connect the same number of cities. A main city would act as a central point for passenger exchange. Only 6 aircraft would be needed.
This idea involves concentrating most flights in one or a few major airports, called hubs, and connecting them to smaller airports, called spokes. This allows for more destinations and frequencies with fewer aircraft and crews, benefiting from economies of scale and scope.
In conclusion, IndiGo Airlines stands as a beacon of success in the challenging landscape of the Indian aviation market. With its strategic initiatives, including the sale and leaseback model, the airline has not only achieved unparalleled dominance but also revolutionised fleet management practices.
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