One of the leading airline in India, IndiGo has begun flying low on ‘sale and lease back’ model as its cost of aircraft ownership experiencing increase.
During the last fiscal, IndiGo had acquired six ATR aircraft out of its free cash. The low-cost carrier believed it would help bringing the operating cost down in the Indian market, which is known for its price sensitivity.
About the same time, the company’s managing body had indicated that while it would continue its ‘sale and lease back’ model, it would also bring about some changes in the acquisition strategy for aircrafts.
In its annual report released on Wednesday, the company revealed that its aircraft ownership cost has increased 7.7%, from Rs 3,296.51 crore in the financial year (FY) 2017 to Rs 3,550.14 crore in last fiscal. IndiGo’s total cash has also risen by a whopping 46.7%, the report stated.
Market analysts are of the opinion that a change in strategy would play an important role in the company’s growth trajectory, since IndiGo has remained a pusher for ‘sale and lease back’ model despite getting ranked among the most profitable airlines in the country for the past several years.
For the uninitiated, an aircraft lease-back agreement is signed when the aircraft owner sells the plane to a lender/lessor, who then leases back the aircraft back to the original owner. The original aircraft owner earns some extra cash out of the procedure, since they typically purchase the plane at a discounted rate from the manufacturer. This business model allows the airline to reinvest the cash elsewhere, while the lessor is paid from the income earned by the airline using the said aircraft.
‘Sale and lease back’ model also saves the airline from maintenance repairs incurring from around 6th to 7th year of an aircraft’s operations. These maintenance repairs usually cost a small fortune. The ‘sale and lease back’ model has found early adopters in LCCs like IndiGo, Air Berlin, Virgin Australia and Lion Air.
The annual report released by IndiGo management stated that the success of company could be attributed largely to the low cost of operation. Backed by a strong balance sheet, the company now plans to acquire some planes out of its free cash.
“This will further reduce the overall ownership cost, going forward, against relatively higher lease rentals associated with sale-and-lease-back aircraft. During FY18, the company acquired six ATR aircraft out of its free cash” the report stated.
In his introductory message in the annual report, the interim CEO and non-executive promoter director of IndiGo, Rahul Bhatia said that complying with the 25 per cent public shareholding requirement, the company has successfully completed an Institutional Placement Programme (IPP).
He further stated, “The IPP resulted in a fresh issue of 22.4 million shares, taking the total number of shares outstanding to 384.4 million, as on March 31, 2018. Further, the IPP proceeds received by the company will be primarily utilised for the purchase of aircraft, helping us reduce our aircraft ownership costs.”
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