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Low costs keep IndiGo flying high in India's cut-throat airline market

An IndiGo Airlines Airbus A320 aircraft is pictured parked at a gate at Mumbai's Chhatrapathi Shivaji International Airport in this Feb 3, 2013.

[MUMBAI] Indian budget airline IndiGo is likely to reap the rewards of its frugal business strategy when it launches on Tuesday an up to US$465 million initial public offer in one of the world's fastest growing - and most competitive - aviation markets.

IndiGo, India's largest airline by passenger numbers, is the only consistently profitable local carrier for the past seven years, according to consultancy Centre for Aviation (CAPA).

For investors, this success in dodging the high operating costs and taxes that have over the past three years grounded debt-ridden Kingfisher Airlines and forced the bail out of budget airline SpiceJet Ltd makes IndiGo an attractive bet in a market where passenger numbers are growing at up to 18 per cent a year, bankers say. "They have figured out that people are more focused on getting to their destination on time than anything else. And they deliver that better than any airline," said Gaurav Narain at Ocean Dial Investments, a London-based India dedicated fund.

At US$465 million, IndiGo's IPO would be the largest in India since 2012 and would give the company a market value of about US$4 billion. Sources had earlier said the airline would sell shares worth up to US$510 million.

IndiGo was set up in 2006 by businessman Rahul Bhatia and Rakesh Gangwal, a former CEO for US Airways Group. The airline is operated by InterGlobe Aviation, a company whose main shareholders include Bhatia and Gangwal, and its rivals include Jet Airways, SpiceJet and the Indian unit of Malaysian budget carrier AirAsia.

Industry experts say the focus on cost by IndiGo's management team, led by lawyer Aditya Ghosh, has helped the airline avoid weighing its balance sheet down with the amount of debt saddling peers including Jet Airways and Air India.

IndiGo keeps costs low by buying just one type of aircraft from one supplier - Airbus - as well as selling and leasing back planes, and keeping maintenance costs low, experts say.

At the same time, the airline's track-record for on-time flights, and now low fuel costs, have helped boost revenue.

IndiGo's market share grew to 34 per cent at end-March from 12.5 per cent five years ago, while second-largest carrier Jet Airways market share fell to 22.1 per cent from 28.1 per cent, the latest CAPA figures show.

IndiGo currently has 97 planes in its fleet, and has 430 aircraft from Airbus on order. The company has said it would use the funds raised via the IPO to pay off some aircraft leases and to expand.