Analysis: Why did IndiGo decide to introduce ATR72’s in to its fleet?

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Earlier this month, on the 9th of May, India’s largest domestic airline Indigo, announced that they had signed a term-sheet with French turbo-prop airframer ATR, for the induction of 50 ATR72-600 regional aircraft.

The announcement caught the aviation and investment community completely by surprise. Since its inception 12 years ago in 2005, IndiGo had slavishly adhered to the “one airframe one configuration” fleet strategy common in low cost carriers (LCCs). It even went against the LCC norm of maximising capacity and retained the same 180 seats on the new A320neo despite the variant supporting up to 189 seats (GoAir has opted for 186 compared to the 180 on its A320 classic).

Several questions are being posed on this drastic change in strategy and introduction of a second fleet type, especially given the crew challenges faced by incumbent operators like Jet Airways, Air India, and the now defunct Kingfisher Airlines, and Air Pegasus.

Bangalore Aviation presents a eight point analysis on what are the possible reasons why IndiGo took this step.

Access to towns with smaller airports

Indigo has developed an extremely strong network connecting several points in India. However, certain important towns cannot be connected as they have short runways unable to accommodate the mainline jets like its Airbus A320. and require smaller aircraft like the ATR72 and Q400. The smaller aircraft will allow IndiGo to spread its network and strengthen its domination of Indian skies.

Leveraging the Regional connectivity scheme

We understand that Indigo was initially opposed to UDAN, the Regional Connectivity Scheme (RCS). However, once it saw RCS becoming a reality, there appears to be a rethink at the airline. IndiGo presumably, is especially interested that the policy gives monopoly status on a route. Once again Indigo’s already strong network will further gain and help as the end-goal is not only connecting the smaller towns to metros, but also enabling passengers from these small towns to connect and fly across India.

Reduced fuel and landing-parking fees

Smaller aircraft up to 80 seats capacity enjoy reduced fuel costs thanks to a VAT of only four per cent on fuel compared to VAT of up to 30% VAT on fuel levied for larger aircraft. Smaller aircraft also enjoy lower or zero landing, parking, overnight parking, route navigation and other airport and aviation charges, thus reducing operating costs.

Fleet flexibility

On certain routes such as Thiruvananthapuram (Trivandrum) – Maldives, Chennai – Colombo, Kolkata – Kathmandu, Varanasi – Kathmandu, Kolkata – Dhaka etc., the operating economics of an ATR work out better because of the short stage lengths. Having the new aircraft type gives Indigo the flexibility to ply these aircraft on routes thereby lowering costs, lowering breakevens and redeploying the A320s on longer routes

Ensuring a steady stream of trained pilots

Airlines in India have had challenges with attracting trained pilots with command hours experience. Pilots clamour for transition to jets like the Boeing 737 and Airbus 320 families which then provide a stepping stone to wide-bodies and the glamour of international travel. The problem for regional aircraft and the airlines operating them is further compounded, and they are forced to use expatriate talent which is more expensive by leaps and bounds.

Even larger airlines like Jet Airways have several expatriate commanders flying the turboprops. This not only drives up the cost-base, it also becomes administratively challenging as expatriate contracts have certain provisions on time-off and bases which add to overall cost. Indigo by virtue of the tie-up with CAE already has a cadet training program and produces a steady stream of pilots. With the new fleet type, Indigo can now feed its cadet pilots to the ATR fleet. These pilots can then “graduate” onto the A320 jets having gained sufficient time and experience (much like the model used in other countries).

Additional slots and parking

With Indigo continuing to lead in capacity, it will likely touch a 45% – 50% marketshare within two years. At the same time all other players also anticipate fleet inductions. Airport infrastructure has not kept pace and the fight for slots and parking will most likely attract regulatory intervention with one player getting too strong. With a second AOC (airline operator certificate), an Indigo Regional can effectively get more slots and parking at airports without creating a sense of being a monopoly player.

Taking competitors head-on

Indigo is extremely competitive and without the regional aircraft type, on certain routes it simply cannot compete. On the other hand, SpiceJet and Jet Airways have both done extremely well on regional routes such as those to Hubli, Vijaywada, Tirupati, Tiruchirapally, Bhuj, Indore, Madurai, etc. With its competitors nurturing these markets and bring them to a point they are accustomed to airline service, Indigo can easily go in, and compete far more effectively. The news of Jet Airways pulling out of ATR operations further comes as an opportunity which both Indigo and SpiceJet will go after.

Truly creating a transportation system – next step widebodies

Indigo promoter Rakesh Gangwal has indicated in a prior interview that the goal was not only to create an airline rather a transportation system for India. In that sense, the regional aircraft are another important piece of the system; the others being

• the Ground Handling setup (see Bangalore Aviation’s article on why Indigo is likely to get into Ground Handling),
• the pilot training facility along with CAE,
• the travel distribution setup (with parent company Interglobe),
• the main airline (Indigo).
• One has to strongly consider, the next likely step will be wide-body aircraft for low cost international travel. Are we far away from an IndiGo order for the Airbus A330neos, of which Tony Fernandes’ AirAsia X is a major customer?

Summary

At the time of the announcement on May 9th, IndiGo had indicated it would proceed with the ATR strategy subject to certain conditions being met. The carrier did not elaborate on the pre-conditions and IndiGo President Aditya Ghosh did not respond to our email queries.

Overall, the second fleet type is a strategy that has been now successfully employed by low cost airlines airlines such as SpiceJet, JetBlue, and LionAir. That said, IndiGo’s decision on the ATRs, is a bet on the Indian market maturing very rapidly; on airport infrastructure development in the country; and on Indigo’s own ability to keep the business model simple, leveraging synergies of marketing, distribution and administration without building in additional complexity.

We wish Indigo all the best.

Stay tuned for updates.

As usual, we welcome your comments and thoughts.