IndiGo, Now On Board With PM Modi's Plan, To Buy Planes For $1.3 Billion

Indian discount airline IndiGo placed an outline order for 50 turboprop planes worth $1.3 billion at list prices as the subcontinent's biggest carrier expands into regional flights connecting smaller population centers.

IndiGo has signed a term sheet to acquire the ATR 72-600 aircraft, with the first planes due to enter operation by the end of this year, the company, based in Gurgaon near New Delhi, said Tuesday as it reported a 25 percent decline in quarterly earnings. Shares dropped the most in more than two weeks.

IndiGo had previously held off from committing to Indian Prime Minister Narendra Modi's so-called regional connectivity program, which aims to provide air links to under-served cities in a country with fewer than 100 runways able to handle standard jetliners. Rival SpiceJet Ltd. already uses Bombardier Inc. Q400 turboprops to tap regional demand.

"We are embarking on a journey to build a nationwide regional network and connect cities that have not benefited from the growth in Indian aviation," Indigo President Aditya Ghosh said in a statement. The ATRs have low enough operating costs to be able to offer "reasonable fares," he said, while the order terms allow for deliveries to be reduced under certain conditions.

IndiGo revealed the purchase after posting net income of Rs 440 crore ($68 million) for the fourth quarter through March 31. The carrier, a unit of  InterGlobe Aviation Ltd., attributed the decline to an increase in fuel prices. It had a cash balance of Rs 9,340 crore at the end of the period and total debt of Rs 2,600 crore.

A320s Dominate
The IndiGo fleet was already due to expand to 170 planes by the end of this fiscal year even before the ATR purchase, all of them Airbus SE A320-series narrow-bodies. That will increase capacity by 25 percent over the 12 months, excluding the turboprops.

The enlarged fleet will include 47 upgraded A320neos, among them 28 due to be delivered this year, Ghosh said separately on an investor call Tuesday, without revealing how handovers have been impacted by glitches with Pratt & Whitney engines that power the planes.

Pratt plans to offer an improved combustion system for the Neo before the end of the calendar year, he said, adding that fuel savings offered by the new aircraft are as advertised.

India's rapidly growing domestic market represented close to 100 million passengers in 2016 and is set to become the world's third-largest by 2020, according to the release. Under the regional strategy some 100 new airports will be built within two or three years and airlines will receive financial support and other incentives to make travel affordable.

Capping Fares
Airports Authority of India has backed at least 27 proposals received under the program, which will cap fares at Rs 2,500 for a one-hour journey on a fixed-wing aircraft or 30 minutes by helicopter, according to the ministry of civil aviation. PM Modi on April 27 approved services from New Delhi to Shimla in the Himalayan foothills and from Hyderabad to Nanded and Kapapa, third-tier towns in Maharashtra and Andhra Pradesh states.

The ATR order by IndiGo "is logical," said Kapil Kaul, director for South Asia at CAPA Centre for Aviation. "But it is possible to see these operating under a separate subsidiary." The target for inducting 50 by 2019 "is very aggressive" and "will test execution capabilities," he said.

The ATR 72-600 comes with 68 to 78 seats and has a range of 900 nautical miles (1,665 kilometers). The IndiGo deal will provide a boost to manufacturer Avions de Transport Regional, which is co-owned by Airbus and Italy's Leonardo SpA, after orders last year slumped to 36 aircraft from 76 in 2015.

© 2017 Bloomberg L.P