Class war: IndiGo shows Air India it means business

New Delhi: In 2016, after IndiGo had logged ten successful years with its single-class, low-cost model, executives from Airbus knocked on its doors with a tempting pitch. They offered the Indian carrier six dual-aisle Airbus 330 planes for free to test the medium- and long-haul international market on a pilot basis. Airbus said payment would have to be made only if IndiGo chose to continue operating the planes.

IndiGo, to the French aircraft maker’s surprise, turned down the offer. “The reasoning was clear. Operating a dual-aisle fleet would require business class capacity, separate training for crew, etc. Basically, it would have distorted IndiGo’s model, so it was not taken,” said an airline executive who did not want to be identified.

That same year, IndiGo inducted the first Airbus 320neo into its fleet. Even there, it had the option of going with 186 seats on the new planes but decided to stick with 180. Reason: IndiGo did not want any kind of disruption in its 180-seat operations. In this instance, too, the airline stuck to its tried and tested model, which had worked well.

Things, however, started to change when IndiGo ordered ATRs—aircraft made by a Franco-Italian manufacturer with the same abbreviation—in 2017 to launch regional operations. The ATRs operated by IndiGo are 78-seater turboprops that can fly up to 90 minutes, connecting airports in smaller cities across the country. Currently, IndiGo has a fleet of over 380 aircraft, of which 45 are ATRs.

And, a couple of weeks ago, on its 18th birthday, the low-cost carrier announced the launch of a business class, IndiGo Stretch, on some of its Airbus 321 aircraft operating between 10 metro destinations in the country. Currently, these planes have 232 seats in an all-economy configuration. The business class cabin will feature 12 seats in a 2-2 configuration, while the economy class will have 208 seats—12 seats will be sacrificed to make room for IndiGo Stretch.

IndiGo executives Mint spoke with say that the business class should be looked at in the context of the airline’s larger plan to focus on improving yields or average revenue per seat. It is also looking to expand globally through the Airbus 321XLR, which is likely to be inducted next year, and the Airbus 350, which is likely to join in 2027. Emails sent to IndiGo and Airbus seeking an official response on the recent development had not elicited any replies at the time of publishing.

Industry watchers said that premium-class fliers make up about 5-6% of the Indian market, and IndiGo will target that segment. “The IndiGo of tomorrow is going to be very different from the IndiGo of 2006 or today. The business class entry is clearly to tap the segment, which has lower capacity now than until early 2019, when Jet Airways was still in operation,” said noted analyst Ameya Joshi, founder of aviation consultancy Network Thoughts.

Speaking on condition of anonymity, an airline executive added, “The business class launch is just the beginning of IndiGo’s expansion in international skies.”

Focus on yields

Around the time airlines in India and globally were recovering from the impact of the covid pandemic, IndiGo’s top management decided to shift focus away from load factors to better yields.

“If you look at IndiGo’s load factors, as compared to competitors, we may be lower. But that’s because we are focussing on earning more per seat (with higher average fares) rather than just filling it,” said an executive who did not want to be identified.

The load factor is a measure of the percentage of seats filled per flight—a higher percentage means more seats are filled. But higher fares can earn more revenue even if fewer seats are filled.

A case in point is the passenger load factor data on 14 August, which was a peak flying day due to the long weekend on account of Independence Day and Rakshabandhan. The data shows that IndiGo’s load factor on that day was the lowest, at 86.8%, compared to 92.1% for Air India, 91.3% for Vistara, 90.1% for Akasa, and 88.9% for SpiceJet.

“If you look at IndiGo’s strategy, the focus is clearly on yields. Even with the business class launch, the airline will be reducing the number of seats from 232 to 220—they are adding 12 business class seats in the aircraft by losing just 12 economy seats,” said a former airline executive who has worked with the commercial department of more than one airline. “These business class seats will earn them three times more revenue per seat over the economy class.”

The executive added that the cost of providing business class services on a legacy full-service carrier such as Air India is up to 40% more than the cost of an economy class seat. “In the case of IndiGo, it could be only 25% higher than its economy class seat, and the reasons are simple: IndiGo’s business class offer is simpler—no hot food, no warm towel, no fine cutlery, lounge access, etc.—and that keeps the cost down,” he explained. “So, it’s a win-win for IndiGo, where it would fetch better revenues at a lower cost as compared to its peers.”

Eyeing the international pie

Airline executives told Mint that the strategy is also part of the plan to prepare IndiGo for a big international expansion, which will see with the induction of the Airbus 321XLR and Airbus 350. While the Airbus 321XLR will have a flying range of 7-7.5 hours, the Airbus 350 can fly double that. To put that in context, an Airbus 321XLR can fly non-stop from New Delhi to Amsterdam, whereas an Airbus 350 can fly directly from New Delhi to New York.

“These planes will provide a better business class product, including a flat bed, hot food etc., and passengers flying these classes would want a similar or close to similar premium class on domestic flights,” said one of the executives quoted above. “The business class product will help in providing a premium offering to international passengers even on domestic connections.”

IndiGo co-founder Rahul Bhatia gave Mint a glimpse of the airline’s international plans during an interview on the sidelines of the business class launch. “Indian aviation, when it comes to flying internationally, has never fired on all cylinders for several reasons—prior government policies may have played a role in it. But, the current disposition is supportive of Indian airlines going to the world. It is time that we bring some of that economic wealth that sits outside the country,” he said.

“A lot of foreign carriers are flying customers from India to the world, and I think that economic opportunity has to be brought back to this country. I believe that between Air India and ourselves, we will do what it takes to bring all of that back,” Bhatia added.

Is the timing right?

Explaining the rationale behind IndiGo’s success, Bhatia said, “There is a lot of execution, and I want to recognize the efforts of tens of thousands of people in the company to build what we have, but it is also a little about being at the right place, and at the right time.”

So, is the timing of IndiGo’s entry into the premium segment right? Industry executives seem to believe it is near-perfect. They point out that the Indian market is moving towards becoming a duopoly, with IndiGo and the Air India Group as the key players and every other airline operating with a single-digit market share.

“I think this is the right time, right place and potentially the right product as well to introduce in the market. I think it will be taken up pretty decently by the public at large. It is about testing the market and the price point,” Amar Abrol, former CEO of AirAsia India, told Mint. “From the profitability perspective, obviously they have done their math and it makes sense.”

Aloke Bajpai, group CEO of online travel platform ixigo, agreed. “The IndiGo business class offering is well timed because as the disposable income and aspirations of flyers in our country rise, there is an emerging critical mass of travellers willing to pay a premium for priority services, comfortable and reclining seats, as well as gourmet meals,” he said.

“There cannot be better timing for IndiGo. Air India is still working on upgrading or refurbishing its fleet, which will take longer than usual due to supply chain constraints,” said the former airline executive cited above. He added that the refurbishment would take a minimum of three years, and that is the time IndiGo needs to build on its premium class offerings—first with the Airbus 321s, then with the XLRs, and further with the Airbus 350s.

Getting the timing right is also critical for IndiGo when it comes to expanding internationally. “This was one of the factors that led to IndiGo chasing the Airbus 350 over the Boeing Dreamliner. Boeing was offering a delivery date much later than 2027, and IndiGo was in no mood to delay deliveries of the dual-aisle planes any further,” said an executive at one of Airbus’s rivals on condition of anonymity.

Not an easy flight path

While the general view on IndiGo’s business class is positive, a section of the industry believes that the business class product is halfhearted compared to IndiGo’s international peers.

“Globally, low-cost airlines don’t really support business class as a product. At best, sections of aircraft are reconfigured with more comfortable seats and with better seat pitches of 30 to 32 inches,” said Mark Martin, founder and CEO of Martin Consulting, an aviation advisory firm. The premiumness with low-cost airlines comes from offering a greater level of comfort and ‘value’, he explained. “And that value usually is an in-flight entertainment or an additional service that helps in making travel less stressful. flydubai is a classic example of this,” said Martin.

flydubai is a low-cost carrier that offers basic services such as hot food, lounge access, an in-flight entertainment system etc. on its flights, even between India and Dubai, which is a two- to three-hour flight.

Others warn that any disruption in the market can cause problems for IndiGo. “If everything goes as is—Air India upgrading its fleet, SpiceJet struggling with finances, and Akasa not being able to expand as aggressively as it did during the earlier years—there is no worry for IndiGo,” said one of the executives quoted above.

Martin predicts that the airline’s business class may not find many takers due to its low-cost image and the nature of the Indian market. The success of the low-cost model across the world was rooted in making air travel affordable and more accessible to a wider traveller base, he pointed out. “Not long ago, air travel actually did compete with rail in India, and in some sectors continues to do that,” he said. “Travellers have evolved into making air travel a necessity and not a luxury—that’s what has made IndiGo the third-largest airline in the world by market capitalization.”

Offering comfort on a long-range flight exceeding eight hours makes sense if there are takers, Martin added, but it has to match the standard offered by full-service carriers. “I am not very confident that IndiGo Stretch would be much of a hot-seller on domestic flights because Indian travellers are about price,” he said.

A full-service airline?

The low-cost focus is what helped IndiGo become the undisputed market leader in just a few years. And that, said Bhatia, will not change. “It will always be a low-cost airline. People use the term ‘low-cost’ quite loosely. Low cost is anything that you do; you have to make sure you have the lowest cost structure in the industry—I don’t put that in the context of India, I put that in the context of the world,” he told Mint during the interaction two weeks ago. “And so, when we launch a new product like the one we launched today, it doesn’t move away from the theme of our low-cost airline.”

Bhatia’s observation needs to be seen in the context of the Indian aviation market. Unlike global markets, where low-cost airlines can use different airports or terminals that are cheaper, both low-fare and full-service carriers use the same airport and terminals in India.

Essentially, there is only a little room low-cost carriers in India can play with to enjoy a cost advantage over full-service carriers. For the economy class end-consumer too, there is little difference in terms of the experience.

On its part, the Air India Group does not appear to be worried about IndiGo’s entry into the premium class. “One thing is clear for us—our low-cost brand, Air India Express, will operate a large part of our domestic network and it will compete with IndiGo. As far as Air India goes, we are not going to compete with IndiGo,” said an executive from the Tata-owned airline, who did not want to be identified.

To be sure, IndiGo’s entry into the premium segment has injected some excitement into the Indian aviation market. But whether a consumer would fly its business class between Delhi and Mumbai, paying ₹18,000 (the introductory price) for a two-hour flight, or pay ₹26,000 to fly Air India is anybody’s guess.