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IndiGo plans long-haul low-cost with Air India deal

Indian low-cost carrier IndiGo has explained its intention to acquire the international operations of Air India and its Air India Express subsidiary, with the aim of building them into long-haul low-cost operations.

Sharing the company's plans were co-founders Rahul Bhatia and Rakesh Gangwal in a conference call with investors and analysts on 6 July. They also stated that if the Air India deal does not come to fruition, the carrier has plans to launch its own long-haul low-cost flights in the future.

"[Air India's international operations] would provide rapid entry into restricted, and in some cases, closed international markets. We believe that IndiGo has the ingredients to significantly grow and unleash the true growth and earnings potential of Air India’s international operations," said Bhatia.

"An acquisition of Air India’s international operations would require significant restructuring and management oversight. A task that we are quite comfortable taking on."

Bhatia added that IndiGo does not have the "ability or the desire" to take on debts or liabilities that can not be supported by a standalone restructured international operation of Air India. However, should the government sell all of Air India's airline operations - including domestic - IndiGo "would still be interested in exploring that option".

"As the largest domestic carrier, it would not be prudent, if not irresponsible, on our part if we did not look at and explore all the opportunities that may or may not exist from the government’s divestiture plans for Air India."

The conference call follows IndiGo's expression of interest to New Delhi for Air India's international operations on 30 June, after the government gave its in-principle approval for the divestment of the flag carrier.

Gangwal meanwhile pointed out that it is not proposing "a new concept" for what it plans to do with Air India. He questioned whether United Airlines would be one of the largest carriers today had it not acquired Pan American Airway's Pacific operations and then the latter's London routes in 1990. American Airlines followed that same model with the acquisition of Trans World Airlines' London routes.

Gangwal added that "irrespective of how the Air India" deal plays out, "it makes fundamental economic sense" for IndiGo to enter the long-haul international market via a low-cost model. IndiGo's domestic market share of 40% will be a key enabler for its long-haul operations.

"We have been able to build meaningful operations at all the large metropolitan cities of India. And, in the years to come, we expect to keep up our pace of rapid growth in the domestic market. We would not attempt to enter the international long-haul market but for the fact that we have this large domestic feed network."

He added: "Our journey of building an international, low-cost operation will be gradual... to be clear, whether we do some limited transaction with Air India, or launch our own long-haul, international operations or a combination of both, the business case would need to be EPS (earnings per share) accretive for us to go down that path."

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