Meaning of Competitive Advantage

Competitive advantage is the favorable position an organization seeks in order to be more

profitable than its rivals. To gain and maintain a competitive advantage, an organization must
be able to demonstrate a greater comparative or differential value than its competitors and
convey that information to its desired target market. For example, if a company advertises a
product for a price that's lower than a similar product from a competitor, that company is likely
to have a competitive advantage. The same is true if the advertised product costs more, but
offers unique features that customers are willing to pay for.

Porter’s Technique for analyzing competitors

1. Threat of new entrants - How easy is it for a new competitor to enter the
market?

2. Rivalry among existing competitors - How many competitors offer a similar

product at a similar price?

3. Threat of substitute products or services - What is the likelihood a customer

will switch to a similar product?

4. Power of buyers - How easy is it for buyers to drive prices down?

5. Power of suppliers - How easy it is for suppliers to drive prices up?

6.

The first three forces are sometimes referred to as horizontal competition. Variables in
horizontal competition include the possibility of new competitors entering the market, the
rivalry among existing competitors and the threat posed by substitute products or
services. The last two forces are sometimes referred to as vertical competition
Competitive Advantage of Indigo Airlines

IndiGo Airlines is a focused Low Cost Carrier in the Indian domestic air transport segment. It
operates from the national capital Delhi and its tag line says “low fares, on-time flights and a
hassle-free experience” to our passengers. It commenced operations in August 2006 with a
single aircraft, and has grown their fleet to 97 aircraft. They have a relatively young fleet and
the average age of their aircraft is 3.26 years.
IndiGo has:

 A single aircraft type

 A high operational reliability

 An award-winning service

1. It was formed by collaboration of two main promoters, who had much exposure of Low
cost airline operation and also seen bankruptcy of some LCCs up close in the USA. Mr.
Rahul Bhatia is the Promoter and Non-Executive Director of the Company.
Mr. Rakesh Gangwal, a citizen of the United States of America is the other Promoter and
also a Non-Executive Director on the company Board. He holds a master’s degree in
business administration from the Wharton School, University of Pennsylvania, with a
major in finance. He has more than 30 years of experience in the aviation industry. Mr.
Rakesh Gangwal joined United Airlines in February 1984 where he held positions of
various responsibilities before leaving as Senior Vice President - Planning in November
1994. Mr. Gangwal then joined Air France as an Executive Vice President - Planning and
Development in November 1994. He left Air France in February 1996 to join the US
Airways Group, Inc. and US Airways Inc. as the President and Chief Operating Officer. In
November 2001, he left the US Airways Group as the President and Chief Executive
Officer and was engaged in private equity and consulting related activities.

2. InterGlobe Enterprises Limited is the holding company of IndiGo Airlines.

Inter Globe Enterprises was incorporated as Inter Globe Enterprises Private Limited on
September 13, 1989 under the Indian Companies Act, 1956. InterGlobe Enterprises is engaged
in the business of inter-alia providing services as tourist and travel agents, transport agents and
IATA agents
3. Indigo Airlines, is the largest domestic Low-cost Airline in India, with a 38.9% market
share and 2.8 million passengers as on May-2015. Indigo Airlines maintained its market
share lead over other competitors in this industry.
 Cost Structure

Jet fuel is the biggest component of an airline's cost structure. Fuel Cost accounts for nearly
40% of the total revenue. With the falling prices of crude oil airlines industry as a whole and firms
with high fuel costs in particular are benefitting. Recently Aviation Turbine Fuel (ATF) price was
slashed by 10 per cent. ATF price in Delhi was reduced by Rs. 4,428 per kilolitre (kl) or 9.99 per
cent to Rs. 39,892.32 per kl. Further, price was reduced by Rs. 4,765.5 per kilolitre, or 11.94
percent to Rs. 35,126.82 per kiloliter but it was hiked by 12% again recently. Jet Airways has
maintained a low fuel cost when compared to IndiGo and SpiceJet despite IndiGo carrying lesser
fuel per flight and being equipped with technology like Sharklet fuel saving wing tip devices that
deliver significant fuel savings of up to 15 per cent. This might be attributed to better lobbying and
fuel hedging capabilities of Jet Airways. A fuel hedge contract allows a company to establish a
fixed cost. Jet Airways also entered into deals with rival airlines like Kingfisher on joint fuel
management to reduce expenses.

IndiGo relatively kept its fuel costs low by carrying lesser fuel and by not serving hot meals
on board, thus reducing the weight on board and resulting in lesser fuel consumption. IndiGo
and SpiceJet do not hedge their fuel prices which gives Jet Airways a relative advantage. By adding
A320neos to its fleet it will be further reducing its fuel costs and increase its capacity by a huge
margin. IndiGo is scheduled to take delivery of 24 A320neos by March 2017, starting from March,
2016.

In terms of Employee cost IndiGo has the least cost per revenue ratio because it employs
far fewer people. It has one of the industry’s leanest work forces. In 2012 IndiGo had 96 employees
per aircraft compared to Air India's 250 a plane. But given the huge expansion plans of IndiGo the
employee costs might go up because of the limited pool of employees available especially pilots.
IndiGo tactically recruited Kingfisher’s pilots at much lower salaries by paying them the 7 month
salary due.

Operation expenses form the major part of the miscellaneous expenses. Operations is the major
part where IndiGo saves at. IndiGo has a standardized fleet of A320s which requires it to deal with
one set of pilots, spares and engines. The pilots need not be trained to fly different airplanes and
 IndiGo having outsourced the maintenance of flights to another firm at a cheaper price it reduces
on the costs.

A plane generates revenue as long as it is in the air. IndiGo closely monitors turnaround
time and fixes tough targets; currently, it gets an aircraft ready for its next flight in 30
minutes which is the least in the industry. This helps in keeping the plane airborne for 12 hours a
day. IndiGo also maintains a no shrills policy thereby cutting on costs and doesn’t encourage any
loyalty scheme for passengers.

IndiGo has not a single penny in working capital or non-aircraft purchase related debt. It
has one of the lowest debt structure which is evident from its low debt service. Almost 30% (Rs
1,166 crore out of its Rs 3,912 crore) of the debt will be retired from the proceeds of its IPO.

Cost Structure

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%
Indigo SpiceJet Jet
Power and Fuel Cost Employee Cost Miscellaneous Interest Expense
Indigo Market Shares

Indigo Airlines, is the largest domestic Low-cost Airline in India, with 49% market share and 5.98
million passengers as on May 2019. Indigo Airlines maintained its market share lead over other
competitors in this industry

Competitive life Cycle Analysis

Airline industry by nature is international in nature. Standardization of equipment, personal
training procedures and generally similar aircrafts makes air travel highly interchangeable.
Moreover safety standards being a state subject, passengers are assured of reasonable safe air
travel world over, whichever airlines they choose. This makes Airline business highly
competitive and all the airlines have to offer greater value over its rivals for survival.
Low cost Air lines in India are presently operating in the beginning of mature phase. There have
been few bankruptcies and few take overs in recent past like Deccan Airways and failure of King
Fisher airlines. Commercial Airline industry is characterized with long phases, with current Low
cost model approaching some maturity. Change is typically slow to arrive and is mostly lasts
couple of years, especially technological advancements. Because of safety reasons any new
advancement are highly tested and passed after rigorous checks and balances. Competitive
advantages and innovations are mostly expected in processes and sales innovations. Area of
differentiation is also restricted considering Low Cost model of these airlines.
During the last 5 – 6 years Indigo has demonstrated excellent dynamic strategic capability. It
has not only maintained focus on low cost operations and OTP (on time performance) but also
gauged the future scenario correctly. Various trade bodies were forecasting major traffic
growth in the Indian domestic market, but world over the airlines were reeling in losses or
cutting operations to reduce losses. In this scenario Indigo bargained and secured an order of
250 Airbus Neo, at highly discounted price. Now the time to reap benefits of that calculated
decision has come. For next five years Indigo can enhance capacity at a very low cost as
compared to its competitors and thus position them-selves in a very favorable competitive
position.
It is highly unlikely to witness any significant disruption in the Indian LCC market. This industry
has been adapting to international innovations and breakthroughs by adapting or by acquiring
international practices and management. In the international scenario there may be a
Disruption waiting to happen by way of new innovative sales offering like low cost shuttle with
guaranteed accommodation (at low cost). World over, the Hub and Spoke model is under stress
especially after arrival of LCCs, there may be a rediscovery of integrated low cost hub and spoke
operation by utilizing A380 Class of aircrafts by alliances of LCCs and extending low cost last leg
at a very attractive price.

Internationalization Analysis
Indigo has been a focused domestic operator but however since 2012 has scaled up operations
to 5 neighboring countries. However, as compared to its domestic operations, international
operations are miniscule. Considering cost of operations to Gulf States, which are comparable
to local domestic operations, Indigo should expand operations to these destinations manifold.
Beginning Mar 2016 deliveries of initial batch of Airbus Neo 320 will start which will lead to
dramatic increase in capacity. In addition to notching up operations in domestic sectors, Indigo
should aggressively utilize its spare capacity in this lucrative sector
Available facts point towards present competitive advantageous position of Indigo Airlines. Low
costs of operations, surplus capacity coupled with falling ATF prices propel Indigo towards a
very valuable position to capture significant Indo Gulf market. If Indigo markets aggressively its
extensive domestic network as last leg connectivity for international travelers along with its
Indo Gulf connectivity, it can reap good benefits. Passenger profile in this sector mainly
constitutes price sensitive travelers, so making available low cost international flights with
extensive connecting domestic leg will be a major value preposition for this price sensitive
market segment. Relevant capabilities of Indigo which will support its internationalization
efforts are its proven expertise in Low cost on time operations, high efficiency, local reputation,
innovative pricing and good track record of strong sales effort. Indigo has great knowledge pool
of Gulf Operation and exceptional knowledge and experience of sustained low cost small to
medium haul operation. These capabilities coupled with growing demand offer exciting
Internationalization strategy.

Diversification Strategy
With the present business model and a working low cost model Indigo should not go for any
vertical diversification. However Indigo should and is actually working on horizontal
diversification of expanding operations to tier two and other towns of India. It will enable
Indigo to tap the high growth in domestic traffic by scaling operations, which is presently its
strong position.
An area where Indigo can diversify is extensive cargo operations by night. Indigo has a Power by
the Hour contract with International Aero Engines (IAE), which provides the engines that put
the onus of performance delivery on the manufacturer. IndiGo has similar agreements with
Airbus, as well as with the vendors for other critical components Considering Indigo has mostly
opted for "power by hour" type of contracts for aircraft operation; higher aircraft utilization will
not offer any operational difficulties for the airline. Scaling up cargo operations will satiate the
ever increasing faster cargo demands of growing e-retail industry in domestic market. Current
utilization rate of 11.5 hrs per day can actually be further pushed up to at least 14 to 15 hrs per
day by introducing some cargo and by combining Red – eye Flights.
Another area where Indigo can evaluate diversification is working out value addition for its
passengers by offering bundled app driven taxi services for airport pick up and drop. Rather
than starting its own app based taxi service, it should tie up with existing players like Uber and
Ola. Working on a revenue sharing model rather than owning a subsidiary will enable roll out of
highly value driven service for its passengers without any expenditure and also increase its
bottom line.

Stakeholder analysis
Indigo Airlines has been able to develop a unique competitive position that allows it to create
value for its key stakeholders. The company has a clear long term business strategy of
positioning itself as a clear market leader in LCC segment in India. Its competitive position is
able to align its values, opportunities and capabilities in a very effective way and is able to
become fastest growing profitable LCC in India. There have been no reports of any negative
issue regarding any primary or secondary Stake holder of Indigo Airlines. The Company is not
only successfully able to create financial returns but also to impact the society positively as a
whole. Exhibit 1, Stakeholder map depicts key stakeholders and the value proposition offered
by Indigo Airlines.
VRIN Analysis

As can be seen from the above figure, Indigo’s fleet utilization, brand and human resources are all
valuable, rare, inimitable and non-substitutable resources that give Indigo a distinct competitive
advantage. The brand Indigo which is known for on time service is a reputation that Indigo has
built over a period of time and it is not something that the competitors could easily imitate.
Similarly, Indigo has been buying similar airlines from Airbus for a long time now, that it is not
possible for the competitors to imitate and gain a cost advantage.

Marketing capabilities of Indigo is something that is a necessity since the competitors also possess
this resource and it brings the rivals at a competitive parity. Fuel management / fuel hedging is
another capability that all the other airlines possess. It was pioneered by Indigo because of which
Indigo gained a first mover advantage and its fuel management was a source of competitive
advantage for some time. But, since others a catching up, it will become a source of competitive
parity in some time.
Synthesis of Findings
Indigo has been making all the right moves on the strategic planning front. Company has been
able to maintain focus on low cost operation and on time performance. Its cost of capital has
been under control and they have been able to sustain value for customers in the long run,
without increasing ticket price. Its strategic move of aircraft acquisition at the time of market
slump has proved to be a master stroke and likely to help company position itself in an enviable
position.
With the Indian Government coming out with its latest draft Aviation Policy and Open Sky
Policy consumers will be benefitted. Air Operators are likely to face tough challenges and there
may be few bankruptcies, in years to come. In order to enter the next orbit of growth the
company needs to continue with its operations and also evaluate its diversification strategy.
With tough competition and high interchangeability, companies need to innovate and offer
better value than competitors. In any case company is poised to enter high growth cycle if no
external negative factor is experienced.