InterGlobe’s bid for Virgin Australia — what does it mean for IndiGo?

Early this week, the Australian media reported that IndiGo, India’s largest airline by fleet and domestic market share, will be bidding for Virgin Australia. Virgin Australia had decided to enter voluntary administration on April 21, 2020, amidst the COVID-19 crisis and lack of demand for flying.

IndiGo was swift to react and within hours informed the stock exchanges and the general public that it had not formulated any indicative proposal, nor does it have any interest in this matter. While the airline clarified that it was not interested in Virgin Australia, speculation started on what the confusion was. Was it Indigo Partners which were confused with IndiGo? Indigo Partners is a private equity firm which has interests in aviation and has controlling stake in Frontier Airlines in the US, JetSmart in Chile and investments in Mexican carrier Volaris and European LCC Wizz Air.

Speculation was also rife that it was InterGlobe Enterprises(IGE) which had bid and not IndiGo. This speculation was confirmed today by IGE when it confirmed that it has signed an agreement to participate in the sale process of Virgin Australia and it is bound by confidentiality requirement, thus not sharing any further details.

Current shareholding of IndiGo

The shareholding of IndiGo, at the end of March 2020 – which has been published on the airline website, shows InterGlobe Aviation Limited, the parent of IndiGo having a shareholding of 74.84 percent by the promoter and promoters group while the rest 25.14 percent is held by the public as a listed entity.

The 74.86 percent is split between the Chinkerpoo Family Trust – where Shobha Gangwal and JP Morgan Trust Company Of Delaware are trustee and hold 13.58 percent, Rakesh Gangwal and Shobha Gangwal hold 23.06 percent, Individuals/HUF comprising the Bhatia family hold 0.35 percent while InterGlobe Enterprises Private Limited holds 37.87 percent and is the single largest shareholder in InterGlobe Aviation which operates the brand IndiGo.

What does this mean for IndiGo?

While this does not have any direct impact on IndiGo, it could have an impact on many other things. The two promoters/promoter groups of IndiGo – Rakesh Gangwal and Rahul Bhatia — have been locked in a bitter battle primarily over corporate governance where Gangwal alleged issues with Related Party Transactions (RPT) and went ahead with a separate website to highlight those, getting the issues in public for what was till then considered a model entity of partnership in Indian aviation.

While IGE and IndiGo are separate entities and it is widely believed that IndiGo will not need any cash infusion thanks to its Rs 20,000 crore cash balance being able to tide over the current crisis, an investment somewhere else could possibly put a strain on the promoters’ ability to infuse cash if the need be.

A successful bid could also open up partnership between the two airlines in future with a transfer hub at Singapore.

Australian market is not easy

The Australian market is divided between airlines led by the Qantas group and those by the Virgin group. Primarily a duopoly market amongst two big groups, there are small regional operators which make little impact on the market or the larger groups with a lot of their network dependent on government-sponsored and subsidised routes to connect remote regions in the country.

While Qantas operates majority of its services, it holds a 100 percent stake in JetStar and Eastern Australia Airlines. Additionally, the airline holds equity in Alliance Airlines. While Sunstate airlines and Cobham provide part of their services as QantasLink – the feeder network of Qantas.

The Virgin Holdings Australia group operates three airlines – Tiger Air, Virgin Australia and Virgin Australia Regional – of which Virgin Australia is the one which has entered voluntary administration.

And if you thought the Australian market was complex, wait until you hear about Virgin Holdings Australia. The entity is co-owned by Etihad, Singapore Airlines, Virgin Group, HNA and Nanshan group.

Tail Note

With nearly 20 suitors lined up for Virgin Australia, IGE will be up against private equity players, other airlines, existing shareholders who would want to influence the process and more to get a pound of flesh of the Australian market.

Even if the idea is to get a foot inside the door and not really a foothold of the market, this is a bold and unexpected step from IGE-which has been in business for over 30 years and has interests in aviation, hospitality, travel commerce and real estate amongst others.

Is IGE testing waters to see how the corporate issues play out in India? Is IGE serious in running another airline or having a stake in another airline or this is just a ploy to get insights into the Australian market with a long term view? We will know in a few months.

Ameya Joshi runs the aviation analysis website Network Thoughts.