Buying Air India will bolster overseas network: IndiGo

Bloomberg

IndiGo, the only carrier that has made a pitch to purchase Air India Ltd., sought to allay investor concerns about the budget operator buying the unprofitable national carrier, saying a deal would help speed up its plans for low-cost, long-distance flights.
Spelling out the rationale for their interest in the highly indebted airline in a conference call with analysts, billionaire owners Rahul Bhatia and Rakesh Gangwal said IndiGo would gain access to workers and overseas routes through the purchase, which otherwise would take
a long time to replicate.
“Air India’s international operations would bring a very important element to our network,” IndiGo’s co-founder Bhatia said. “It will provide a rapid entry into restricted,
and in some cases, closed
international markets.”
Bhatia and fellow co-founder Gangwal held the call to justify IndiGo’s interest after the company’s announcement to bid for Air India wiped out more than $500 million in market value for IndiGo, the nation’s biggest and most profitable airline. Surviving on a taxpayer bailout, Air India hasn’t made a profit for about a decade and has piled up debt of about $7.7 billion.
A combination with Air India would help consolidate IndiGo’s position as the country’s biggest airline with a domestic market share of 54.2 percent and a total fleet of 283 registered planes. For a successful bid, IndiGo will have to buy out either the international or the entire airline operations of Air India, without a partnership with the government, Gangwal and Bhatia told analysts.

Economic Sense
Even without a deal, IndiGo will look to start long-haul operations as it makes “fundamental economic sense,” said Gangwal, a former chief executive officer of U.S. Airways. Bhatia, a former travel agent, and Gangwal teamed up to start IndiGo, which has become India’s biggest airline in just a decade, luring customers with on-time performance, new aircraft, cheap fares and a tight grip on costs.
Buying into inefficient businesses has a history of success, Gangwal said. It is “questionable” if United Airlines would have become one of the world’s largest airlines today if it hadn’t acquired Pan Am’s Pacific operations and London routes a few decades back, Bhatia said. American Airlines followed the same model in buying Trans World Airline’s London routes, providing a proven road-map for such an approach, he said.

Fiscal Burden
An Indian ministerial panel gave preliminary approval on June 28 to sell the national flag carrier, reviving earlier attempts to dispose of the state asset that has strained public finances for decades. Though Prime Minister Narendra Modi’s administration has given its consent, it has yet to decide on the contours of the sale — especially the fate of the debt.
A committee had recommended privatizing the airline by possibly asking the buyer to absorb more than $3 billion of loans linked to aircraft purchases, a person with direct knowledge of the matter told Bloomberg last month.
Venturing into long-haul routes is a “significant change in strategy” and IndiGo has the wherewithal to gain market share on those routes, driven by low fares and its domestic feeder network, Citigroup Inc. said in a research report after the conference call.
“Whether the company buys Air India and what would be the final structure of the deal is something to watch out for,” Citigroup’s Mumbai-based analyst Arvind Sharma wrote in the note. “We remain positive on IndiGo given its strong market share, growth prospects and profitability.”
IndiGo has made an annual profit since at least the year starting April 2009, compared with the combined $10 billion in losses for the Indian airline industry in about the same period.

Gulf Carriers
IndiGo has long advocated a single-aircraft-type model to bring costs under check, and has ordered 530 of Airbus SE’s A320 family jets, becoming one of the world’s top customers for the
Europe-based planemaker.
Gulf carriers like Emirates Airline and Etihad Airways PJSC have captured a large share of the Indian traffic on transcontinental flights.
Another challenge IndiGo may face, if it manages to buy Air India, is having a mixed fleet. A potential buyout of Air India would throw Boeing Co.’s 737, 777, 747 and 787 jets in the mix.
Air India, which is known for its Maharajah brand icon, traces its roots to Tata Airlines, founded in the 1930s by the then-patriarch of Tata Group, J.R.D. Tata. A member of the global Star Alliance, it has rights to fly to and land in most of the global airports, as well as a trained workforce of 27,000.