Airlines have traditionally traditionally focused on load maximisation, a value-destructive strategy that is easy to replicate. However, post-Covid, improving consumer spending habits have prompted IndiGo to shift towards a revenue maximisation strategy. This approach is less replicable as it requires a combination of assets that IndiGo has developed over time, such as a strong network, high capacities, and customer engagement. IndiGo’s closest peer in the Tata group may take a while to build up sufficient capacity to establish a comparable domestic network. Therefore, we believe that the Tata group may be better positioned to focus on international markets once its ordered capacities are operational. We have increased the fair value (FV) for IndiGo to Rs 2,725 from Rs 2,550 based on higher yield assumptions.
Time ripe for a shift away from the replicable load maximisation strategy: Covid times have only led to a higher price differential between air and comparable air-conditioned rail offering. Air travel pricings have appreciated 35% over the past three years and price differential versus comparable airconditioned rail offering has only increased. Air travel volumes returning to pre-Covid levels in such a context is reflective of changing consumer behaviour. The incumbent has built a network beyond the top-75 cities having 1 mn+population. The time is ripe for the incumbent to add new cross connections and get the first-mover’s advantage. IndiGo is doing exactly that—with dominant share in new routes added by airlines last year. This would be a shift away from the strategy of maximising load factors through aggressive pricing.
Excess capacities are necessary but not sufficient for maximising yields in the airline industry. IndiGo has an advantage in this regard, with over 300 aircraft and 50 more expected to be delivered in FY2024, as well as a robust domestic network that can support the addition of new connections.. It also has 13 bases for its aircraft versus six that Tata group has—can cover more hinterland at the start and end of the day. It can pick and choose new routes to maximise its yields while gaining the first-mover’s advantage (airport slots). Customer connect is another asset IndiGo has built over time, enabling it to further increase yields by putting more inventory closer to the date of travel.
The Tata group has placed an order of 470 aircraft and has divided the same between the top two vendors to accelerate deliveries. In our assessment, it would take five years or more for such supply to fructify. Similar backlog of IndiGo’s will fructify much faster. We increase yield assumptions and thus FV for IndiGo to Customer connect is another asset IndiGo has built over time, enabling it to further increase yields by putting more inventory closer to the date of travel.
Tata group has placed an order of 470 aircraft and has divided the same between the top two vendors to accelerate deliveries. In our assessment, it would take five years or more for such supply to fructify.