As aviation costs rise, IndiGo goes slow 'sale-and-lease-back' model

The cash-flush IndiGo, country’s largest airline in terms of market share, has begun going easy on ‘sale-and-lease-back’ model with its cost of aircraft ownership heading North. In the last fiscal, the low-cost carrier (LCC) acquired six ATR aircraft out of its free cash, which it believes will help in bringing down the operating cost.

The cash-flush IndiGo, country’s largest airline in terms of market share, has begun going easy on ‘sale-and-lease-back’ model. Image source: Official website

The cash-flush IndiGo, country’s largest airline in terms of market share, has begun going easy on ‘sale-and-lease-back’ model with its cost of aircraft ownership heading North. In the last fiscal, the low-cost carrier (LCC) acquired six ATR aircraft out of its free cash, which it believes will help in bringing down the operating cost.

The management had last year indicated that it will be bringing some changes in its aircraft acquisition strategy, though it will not completely discard the sale-and-lease-back model.

From Rs 3,296.51 crore in the financial year (FY) 2017 to Rs 3,550.14 crore in last fiscal, IndiGo’s aircraft ownership cost has increased 7.7%. In the same period, its total cash rose 46.7%, the company said in its annual report.

According to the analysts, the changing strategy is important considering the fact that IndiGo, which has been among the most profitable airlines for the past several years in the country, has been more of a pusher for sale-and-lease-back model.

An aircraft lease-back agreement is a typical business strategy wherein the aircraft owner sells the plane to a lender/lessor who then leases back the aircraft back to the original owner. This way, the original aircraft owner earns some extra cash out of the selling after purchasing the plane at a discounted rate from the manufacturer. This allows the airline to reinvest the cash elsewhere.

The lessor is paid from the income earned by the airline using the said aircraft. By way of lease-back agreement, the airline also saves on the maintenance repairs.

IndiGo management in its annual report said that the low cost is fundamental for the success of the airline, and therefore, on the back of a strong balance-sheet, the company has started acquiring some of the planes out of the available free cash.

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“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 airline said.

Rahul Bhatia, interim CEO and non-executive promoter director, in his introductory message in the annual report, said that during the year, the airline has successfully completed an Institutional Placement Programme (IPP) to comply with the 25% public shareholding requirement. “The IPP resulted in a fresh issue of 22.4 million shares. Further, the IPP proceeds received by the company will be primarily utilised for the purchase of aircraft, helping us reduce our aircraft ownership costs,” Bhatia said.

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