IndiGo, playing the S-Curve successfully in India

Sep 02, 2016

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Airline failures have been rife in India, with over 20 bankruptcies including carriers such as Air Deccan, Kingfisher and ModiLuft. IndiGo, which started operations just 10 years ago, has become the market leader and is achieving strong levels of profitability. This insight looks at network strategy as one explanation to explain the success.

The S-Curve is a well-known econometric model or tool. It is defined by Andrew Latham, of studioD, as “a mathematical model also known as the logistic curve, describes the growth of one variable in terms of another variable over time. S curves are found in fields from biology and physics to business and technology. In business, the S curve is used to describe, and sometimes predict, the performance of a company or a product over a period of time.

In aviation, the S-Curve is often used to describe the relationship between capacity and market share. A study by Intervistas in 2013 shows the impact of the share of frequency and the impact this has on passenger market share. The S-Curve described in the graph below shows that in the US short-haul markets studied by Intervistas, an airline typically offering 20% of the frequencies on a given route would gain only a market share of around 8% of the passengers. Whereas an airline offering 70% of the frequency on a given route would gain a market share of about 86%. In other words passengers choose to fly with an airline that offers higher levels of frequency.

Graph showing US markets

Source: Intervistas 2013

Airlines understanding this economic principle choose to develop their network strategy around the benefits that utilising the S-Curve can bring. In the European short-haul marketplace, easyJet is certainly one airline that chooses to base at least part of its’ network strategy around exploiting the benefits of operating high levels of frequency on many of its’ thicker routes.

The charts taken below from the easyJet 2015 Annual Results Presentation show how the airline benefits in the Contribution per Block Hour (CPBH) when it increases frequencies on a route.

easyJet 2015 Annual Results

Source: easyJet 2015 Annual Results Presentation

So the benefits of operating high frequencies are not just gained by higher passenger market share but also by gaining a higher level of contribution, as a result of higher air fares.  As one would expect, offering higher frequencies is especially attractive to high-yielding business passengers.

The S-Curve impact on market share and contribution is of course not just confined to US and European markets. In India, it is IndiGo that seems the airline that has best exploited the S-Curve.

India is one of the fastest-growing aviation markets in the world. Traffic growth in India is underpinned with GDP forecasts by the OECD of around 7.4% in 2016 and 7.5% in 2017. The decline in oil prices has seen fares fall and year-on-year domestic traffic capacity growth is expected to be in the order of 14.4% for 2016.

From RDC’s Schedules data, the graph below shows the strong performance of the local market compared to the international market.

Graph showing RDC schedules data

Source: RDC Apex Schedules data / OAG

IndiGo, was established a decade ago, has since become the dominant player in the Indian domestic market. The chart below shows seat capacity growth by airline since 2006, IndiGo’s first year of operation.

Graph showing annual seats

Source: RDC Apex Schedules data / OAG

Since 2012, IndiGo has become the largest airline in the domestic market and now has a market share that is approaching 40%. This in a domestic market which is expected to surpass the 100 million passenger level in 2016.

IndiGo has chosen to adopt a policy of a tight network concentrated on achieving domination of a relatively small number of markets. IndiGo’s top 10 routes account for 52% of all the capacity flown by IndiGo. The graph below shows these top ten routes and IndiGo’s market share on each route.

Graph showing top ten routes and IndiGo’s market share on each route.

Source: RDC Apex Schedules data / OAG

The red marker shows the average capacity of all airlines operating the route. For each route, IndiGo enjoys a dominance in terms of capacity offered, with its’ level of seat capacity significantly above the average levels offered by other airlines operating the route.

So does this network policy also translate into higher fares for IndiGo as it does for easyJet ? Our in-house fares data shows that IndiGo does manage to achieve a fare premium to its’ competitor SpiceJet. On every one of the routes shown below, IndiGo’s fares are higher than its’ main competitor.


Chart showing route costs with IndiGo and SpiceJet

Note: One-way Average fares in USD including Government taxes, July 2016 data.

Source: RDC Apex Fares data / OAG

This has translated itself into profits in a market where airlines have traditionally struggled to survive. With revenues of INR 166,013 million (US$ 2,468m) for the financial year ending 31st March 2016, IndiGo earned net profits of INR 19,897 million (US$296m), an impressive net margin of 12.3%.

Tim Coombs

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Tim Coombs
Managing Director, Aviation Economics

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