IndiGo’s Play for Air India Draws Mixed Reactions

 - July 6, 2017, 10:54 AM
IndiGo has become India's dominant domestic airline.

The Indian ministry of civil aviation’s decision to divest Air India and its subsidiaries late last month found a suitor in the country’s largest and most successful budget carrier, IndiGo, within hours of the announcement. However, the news met with mixed reactions from industry, ranging from doubts about IndiGo’s real intent to optimism that a takeover could finally give India a strong and vibrant international flag carrier. 

Our interest in Air India is primarily in its international operations,” wrote Indigo president and director Aditya Ghosh in a letter to his employees.

Once non-aircraft debts are taken off, Air India will be a valuable asset since it will get slots and access to bilaterals,” noted the Center for Asia-Pacific Aviation’s India director Kapil Kaul. However, he acknowledged he was surprised by “this kind of unsolicited interest by a listed company.”

An airline official said under the condition of anonymity that the courtship could amount to a tactic to ensure the government invites IndiGo to bid.

Notwithstanding his belief that IndiGo would ensure the conditions for sale would align with its interests, “there is a significant risk,” he said. “It will be a strategic mistake if IndiGo goes for it.”

Meanwhile, many question the very basis of IndiGo’s expression of interest, viewing it as a way to hasten the process of divestment. “It will be in IndiGo’s interest for Air India to be sold as it is presently since it keeps getting funding, bilaterals and has major international slots,” argued Vishok Mansingh, CEO of Mumbai-based consultancy CAV Aero Services. “Whoever buys Air India will likely not be a single bidder and have a higher cost base. If the airline is not run well it goes back to the open market. IndiGo, as an established airline, will meanwhile continue its growth.”

Jitender Bhargava, former executive director of Air India and author of Descent of Air India does not agree. “Have you ever known IndiGo to go back on its word?” he asked. “It has always done what it has promised.”

Long-haul flying rights could open once Air India becomes privatized because the flag carrier maintains rights to more than 350 code shares, asserted Mansingh. However, one airline official strongly refuted that notion, stressing to AIN the importance of code shares and bilaterals. “[The new airline] will not let go of its primary source of revenue,” he said. “It is one of the reasons why Air India is being bought.”

IndiGo, which holds orders for approximately 450 aircraft, could look at Airbus A350s or A330neos, said Mansingh. “Since they go for bulk purchases, they could order forty to fifty,” he said. He also emphasized that IndiGo will ensure no interference with its domestic services and start another company for international operations.

Good timing and the right intentions should not spark an urgency to sell to the highest bidder, cautioned Frost and Sullivan’s aerospace and defense practice director Diogenis Papiomytis. “It is the Indian government’s responsibility to ensure the long-term viability of a privatized entity and therefore examine carefully the business plans of interested investors,” he said. Papiomytis added the privatization process involving state-owned enterprises never proves easy, particularly in the aviation industry, where an abundance of failed attempts should cause pause. He cited instances of Malev Hungarian Airlines, which ultimately liquidated; Malaysia Airlines, which after partially going private returned government ownership; and Alitalia, which recently entered bankruptcy proceedings.

Nevertheless, Bhargava said professional management could successfully harness the strengths of Air India—including its assets—and capture its international market. “It obviously wants to come into league with the likes of Lufthansa, British Airways, and Star Alliance,” he said of IndiGo’s intentions.