Unlocking The Drivers of Robust Value Creation at Indigo by Value Octagon

 

VALUE OCTAGON

The value octagon is a framework developed by Dr. Prasanna Chandra, outlining eight key levers for driving value creation in an organization. It provides a holistic approach, encompassing areas beyond just financial performance, to achieve sustainable long-term success. InterGlobe Aviations, India's leading airline, is a prime example of value creation through the Value Octagon framework. 

 Let's dive into how each facet of the Octagon contributes to InterGlobe's success:

1. Strategy and Business Model- IndiGo operates on a low-cost carrier business model, strategically focusing on operational efficiency, customer-centric approaches, and market expansion. With 112 destinations, split between 86 domestic destinations (Ayodhya the latest) and 32 abroad, IndiGo offers the most extensive domestic route network of any Indian airline and had a historical feat of having 100 million passengers in a year. In order to harness the expected demand growth, the company plans to increase its fleet size to 350 in FY24 from 306 in FY23. Its revenue increased by 110% from 2,59,309M to 5,44,465M in FY23. The management continues to focus on affordable fares (supported by cost leadership with CASK of 3.31), courteous and hassle-free service (low cancellation rate of 0.2%), and unparalleled network

2. Capital Allocation - IndiGo has utilized a strategic approach for capital allocation to support its growth and operational efficiency. A significant portion of this was directed towards fleet expansion. In 2011, it primarily invested in Airbus A320neo aircraft, known for their fuel efficiency and cost-effectiveness. Later in 2019, it signed a  deal with Airbus for the purchase of 300 A320neo family aircraft. Recently, it inaugurated its second maintenance repair and overhaul (MRO) facility at the Kempegowda International Airport on November 17, 2022. Indigo was also the first airline in India to invest in ACARS technology to record turnaround and take-off times of aircrafts automatically in order to use data to constantly shave off wasted time. The management is planning market expansion by starting flying to Nairobi and Jakarta, and declared a code-share agreement to expand to the U.S, for which they are awaiting delivery of A321XLR aircraft from Airbus, which can fly longer distances and will help them expand further into Europe, Southeast Asia and Northeast Asia.  

3.   Strategic Financing Decisions

IndiGo’s financial success hinges on its strategic financing decisions, balancing ambitious growth plans with cost-consciousness.  

• Debt-fueled expansion: Early on, IndiGo relied heavily on debt to fund fleet acquisitions and network expansion. This accelerated growth but increased financial leverage. 
• Shifting to equity: Gradually, IndiGo diversified its financing mix, raising capital through initial public offerings (IPOs) and qualified institutional placements (QIPs). This reduced reliance on debt and improved financial flexibility.

a)     WAAC % Industry Distribution

              b)     Sources of Finance                                              

    

 

4. Performance Management

IndiGo values its employees and is recognized as among the top 25 safest workplaces by KelpHR PoSH Awards 2023. Building upon its commitment to fostering a safe work environment, IndiGo has taken several initiatives in this regard. IndiGo has formed an internal committee which is dedicated to creating an environment that serves as a benchmark where each employee can thrive and flourish in a safe workplace; as well as a resource group called ‘6E SAFE SPACE’. IndiGo has a policy framework with all employment aspects in place- recruitment, training, working conditions, salaries, transfers, and career advancement  

5. Cost Management - With a fleet primarily comprising Airbus A320 family aircraft and a commitment to direct sales channels, it maximizes cost efficiencies. It employs various strategies such as fuel hedging to mitigate fuel price fluctuations, negotiating favorable terms with suppliers, and optimizing routes to maximize revenue per available seat kilometer (RASK) and minimize cost per available seat kilometer (CASK) to reduce costs. During FY 2023, the Company inducted 47 new fuel-efficient Airbus NEO powered by CFM LEAP-1A engines, 4 ATR Aircraft, 2 P2F, and 1 B777. The uniform fuel-efficient A320NEO Family aircraft will allow IndiGo to maintain its strong focus on lowering operating costs and delivering fuel efficiency with high standards of reliability. Almost 80% of IndiGo’s fleet comprises NEOs which are 15% more fuel efficient compared to the A320 CEOs. It maintains a young fleet resulting in lower fuel consumption.

6. Corporate risk management- To combat supply-chain issues related to the availability of spare engines for its NEO aircraft, IndiGo has taken various measures such as lease extension of aircraft due to be redelivered, getting aircraft on ACMI, etc. to reduce operational disruptions. IndiGo takes the cyber-security threat diligently. It also follows the ‘Defense in Depth' approach to cybersecurity and has implemented controls for prevention, detection, and response to cyberattacks. its processes and protocols to maintain and evolve its cyber-security framework.

7. Mergers and acquisitions-

Singapore-headquartered BOC Aviation Limited and India's largest airline, IndiGo, have entered into a finance lease transaction involving 10 Airbus A320NEO aircraft to further expand its fleet. Further, IndiGo has strategic partnerships with 7 international airlines. IndiGo is working to increase its global presence through strategic alliances (codeshare agreement with Turkish Airlines) and loyalty programs. The company’s loyalty program subscriber base has increased 4.5 times from FY21 levels. There are an additional 30 destinations in Europe through strategic partners, with 7 current partnerships across the world as under-

8. Corporate governance- InterGlobe Aviation discloses information regularly, publish financial reports, quarterly results, and other significant information to ensure transparency with shareholders and stakeholders. The company adheres to legal and regulatory requirements set by the Securities and Exchange Board of India (SEBI) and other relevant authorities. InterGlobe Aviation has a board of directors which consists of a mix of executive and independent non-executive directors. There are committees such as the audit committee, nomination and remuneration committee, and CSR committee. IndiGo's mission often revolves around providing safe and efficient air travel while delivering excellent customer service. Compliance efforts likely focus heavily on aviation safety regulations, ensuring all safety protocols are met or exceeded. This aligns with their vision of being a reliable, safe, and customer-centric airline.

Thus, InterGlobe Aviation has holistically assessed and strengthened its value-creation efforts across various stakeholders by employing the Value Octagon framework. This approach fosters a sustainable business model, enhances customer satisfaction, and drives long-term growth for the company.