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War in the Domestic Skies Heats up: IndiGo's Mega Aircraft Deal


 Dear Readers,

In this week's newsletter, we delve into the escalating battle in India's domestic skies as IndiGo, the leading airline, secures a ground-breaking aircraft deal. IndiGo's recent agreement with French aerospace giant Airbus for the purchase of 500 aircraft has set a new record in the aviation industry. Not only is this the largest-ever single aircraft order placed by any airline with Airbus, but it also signifies a defining moment in aviation history.

Industry veterans and analysts emphasize that IndiGo's deal is commercially significant, as it secures delivery slots for the next decade. Such a massive order empowers customers to negotiate commercially viable terms, including engine selection, aircraft type mix, and pricing.

With this milestone order, IndiGo has soared above Tata-owned Air India, which had surprised the industry with its turnaround plans and a 470-aircraft order placed with Boeing and Airbus earlier this year.

Post-pandemic, domestic skies in India are proving to be a bonanza for airline companies. Surging demand and high passenger load factors have resulted in skyrocketing airfares, making headlines across the country. IndiGo, already enjoying the largest market share in the domestic skies, anticipates having a fleet of over 1,000 aircraft by 2035.

For those intrigued by the financial strength of airlines that faced significant challenges during the pandemic, they have seemingly discovered a winning business model. Analysts speculate that IndiGo might adopt the sale and leaseback model to finance its fleet acquisition—a strategy well-suited to the aviation industry given the substantial cost of aircraft. Additionally, the sale of aircraft at a later date, usually at a profit, further strengthens their financial position.

However, future aircraft orders and the sale-and-leaseback model bring potential risks, including currency volatility and the need for effective lease liability management, especially during challenging times for the industry.

Nevertheless, these aggressive deals in the domestic skies signal prosperous times for the aviation industry as a whole. Globally, the airline market is projected to grow at a compound annual growth rate (CAGR) of 25.5% from 2022 to 2027, with significant growth expected in the Asia Pacific (APAC) region. According to forecast reports by Boeing, the APAC region is estimated to account for roughly half of global air traffic and 40% of all new aircraft deliveries over the next two decades.

IndiGo's success in securing this mega aircraft deal validates its business model, leading to a positive market response. Investors have given a resounding thumbs-up as the company's stock reached a 52-week high upon news of the latest agreement. However, it remains to be seen how competition will unfold in the skies, particularly with the Tata group's deep pockets and a range of brands, indicating their unwillingness to be outdone.

Here are the highlights from the newsletter in chronological order:

  1. IndiGo, also known as Interglobe Aviation, secures a 500-aircraft deal with Airbus, lauded as a defining moment in aviation history. 
  2. The deal is reported to be the largest-ever single aircraft order placed by any airline with Airbus, granting IndiGo delivery slots for the next decade and enabling favorable terms in engine selection, aircraft mix, and pricing.
  3. Tata-owned Air India shocks the industry with its 470-aircraft order placed with Boeing and Airbus earlier this year, but IndiGo's deal surpasses it.
  4. Post-pandemic, the domestic skies in India prove lucrative for airline companies, with high demand, passenger load factor, and soaring airfares making headlines.
  5. IndiGo anticipates having a fleet of over 1,000 aircraft by 2035, solidifying its position as the leader in the domestic skies.
  6. Analysts suggest that IndiGo may use the sale and leaseback model to finance its fleet acquisition, which helps manage the significant cost of aircraft and potentially leads to profitable sales in the future.
  7. The future orders and sale-and-leaseback model pose risks related to currency volatility and lease liability management during challenging times for the industry.
  8. Globally, the airline industry market is projected to grow at a CAGR of 25.5% from 2022 to 2027, with the Asia Pacific region expected to account for approximately half of global air traffic and 40% of new aircraft deliveries in the next two decades.
  9. IndiGo's successful business model and the latest deal receive a positive market response, as the company's stock hits a 52-week high.
  10. The Tata group, with its resources and multiple brands, is expected to provide strong competition in the domestic skies.

Stay tuned for more updates on the evolving aviation landscape in the coming weeks.

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