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CHAPTER -1
INTRODUCTION
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Strategic Management
INDIGO AIRLINES
1.1Organisation Indigo Airlines formed in founded in1997 .
1.2Objectives or purpose of the study
The objective of this report is to study the external environment of the Aviation
Industry in India. Subsequently, internal environment analysis is conducted for
IndiGo Airlines. With the help of this comprehensive study, we have suggested
recommendations that can be adopted by IndiGo to sustain its competitive
advantage by utilizing its cost leadership strategy.
study the compititon faced by other companies in the market.Study IndiGo
airlines Rise to become India's largest airline
1.3 Research Methodology of the study
To understand the important factors responsible for the formulation of
corporate strategy, weave utilized Strategic Management tools like Porters
Five Forces model, Value Chain analysis, TOWS matrix etc.
1.4 Limitations of the study
Due to confidentiality clause and corporate policies of the company, accurate
financial data could not be obtained for IndiGo Airlines. However, most recent
and reliable data sources have been referenced for the analysis of this case.
1.5 Findings
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IndiGo airlines entered the low cost carrier market in aviation industry in 2006.
It has been able to achieve its break even within two years of its launch and has
reported gross revenue of 60 cores this year. Despite the decline in the aviation
industry and global economic slowdown, IndiGo has accelerated its growth
rate. Also, IndiGo being a new entrant has managed to become a cost leader in
its sector.
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Chapter -2
Company profile
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Strategic Management
Introduction
India is one of the fastest growing aviation industries in the world. Because of
the introduction of liberalization policy in the Indian aviation sector, the
industry has witnessed vast difference with the entry of the privately owned full
service airlines and low cost carriers. In 2006, the private carriers accounted for
around 75% share of the domestic aviation market. Besides, there was
significant increase in the number of domestic air travel passengers. Some of
the factors that have resulted in higher demand for air transport in India include
the growing purchasing power of middle class, low airfares offered by low cost
carriers and the growth of the tourism industry in India. In addition to the
liberalization policy, the deregulation policy has also played a major role to
encourage private players in the aviation industry. Below graph shows the
gradual growth in the domestic air traffic: The growth in the aviation industry
looked promising and hence attracted many low cost carriers like Spice Jet, Go
Air and IndiGo after the success of Air Deccan in 2003.On one hand, the
booming opportunities incited players to expand capacity but on the other hand,
rising fuel costs and taxation rates, increased the operational costs. Thus the
low-cost players found it difficult to maintain their commitment. In their urge
to survive, they were compelled to increase prices, add free refreshments and
beverages on-board, etc. Some players sought refuge in mergers, whereas some
survived by modifying their business model. However, amidst this aviation
turmoil, IndiGo continued to fly high. In its Endeavour to consistently maintain
low costs, IndiGo resorted to measures like outsourcing and having
homogeneous fleet. These efforts helped IndiGo to offer its passengers low air
fares. IndiGo is the latest entrant as a low cost carrier in the aviation industry of
India. It started its operations on August 4, 2006. Interlope Enterprises, a
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renowned travel corporation, is the owner of IndiGo. The IndiGo team uses all
of these resources to design processes and rules that are safe and simple, that
make sense, and that cut waste and hassles, which in turn ensures a uniquely
smooth, seamless, precise, gimmick-free customer experience at fares that are
always affordable. It was awarded the title of
Best Domestic Low Cost Carrier
In India for 2008. The airline currently operates 120 daily flights with a fleet of
nineteen brand newAirbus A320 aircraft and flies to 17 destinations. IndiGo
plans to serve approximately 30Indian cities by 2010, with a fleet of
approximately 40 A320s.
1 Below are the key factors of the business model of IndiGo airlines:
A single passenger class.
Single type of airplane to reduce training and service cost.
No frills such as free food/drinks, lounges.
Emphasis on direct sale of ticket through Internet to avoid fee and
commissions paid to travel agents.
Employees working in multiple roles.
Unbundling of ancillary charges to make the headline fare lower. In this report,we will analyze what strategies IndiGo followed to enter the aviation industry.
Also, we will discuss how IndiGo implemented the low cost strategy to gain
competitive advantage and provide recommendations to sustain its competitive
position in the long-term. To know about the industry attractiveness of aviation
and the factors that helped IndiGo enter this market, we will use the Porters
Five Forces model. This will be useful in gaining insight about the entry
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barriers, power of buyers and suppliers, competition among the existing players
and the feasible alternatives in aviation industry. SWOT analysis of the
company will help us understand the current positioning of the company based
on the analysis of external and internal environments. For internal analysis, we
will study the criteria for sustainable competitive advantage as well as the
Value Chain Analysis. This will help identify the strengths and weaknesses of
the company. Further, the analysis of government policies, competitors
strategies and other variables like fuel prices, increasing domestic traffic,
economic downturn etc will lead us to the external influences that affect the
aviation industry of India. Hence, using the external environment study, we can
come to know about the opportunities and threats for IndiGo airlines. Thus, the
consequences and influence of the all factors of SWOT taken together will aid
in the formulation of alternative strategic actions that IndiGo may consider to
sustain its competitive advantage
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Chapter-3 Finding and
analysis
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Strategic Management
External Analysis
Airline Industry Attractiveness
1.Foreign equity allowed:
Foreign equity up to 49 per cent and NRI (Non-Resident Indian) investment up
to 100per cent is permissible in domestic airlines without any government
approval
2.Attraction of foreign shores:
After five years of domestic operations, many domestic airlines too will be
entitled to fly overseas by using unutilized bilateral entitlements to Indian
carriers.
3. Rising income levels and demographic profile:
Demographically, India has the highest percentage of people in age group of
20-50among its 50 million strong middle class, with high earning potential.
4. Untapped potential of India's tourism:
Tourist arrivals in India are expected to grow exponentially, especially due to
the open sky policy between India and the SAARC countries and the increase
in bilateral entitlements with European countries, and US.
5. Glamour of the airlines:No industry other than film-making industry is as glamorous as the airlines.
Airline tycoons from the last century, like J. R. D. Tata and Howard Hughes,
and Sir Richard Branson and Dr. Vijay Malaya today, have been idolized.
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Porters Five Forces strategy for Airline Industry
1.Threat of New Entrants
Product differentiation:
In low cost carriers, there is not much differentiation in the basic service that is
being provided to the customers. Differentiation can only be achieved by Value
Added Services. IndiGo provides check-in kiosks, stair-free ramps, and Q-
Busters. Hence this argument works in favor of IndiGo.
Switching cost:
1. The switching cost is not high. Customers can easily choose other low cost
carriers.
2. The switching cost of an airline company to other business/industry is high
as the exit cost is high.
Strategic Management
In aviation industry the major entry barriers can be:
Government regulations:
1. The government's open sky policy has encouraged many overseas players to
enter the aviation market.
2. Aviation was primarily a government owned industry. Due to liberalization
Indian aviation industry is now dominated by privately owned full-service
airlines and low-cost carriers. Private airlines account for around 75 per cent
share of the domestic aviation market.
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2. Indian Civil Aviation Policy:
3. Private sector is allowed to operate scheduled and non-scheduled services.
4. Operator should be a citizen of India or a company or a body corporate
which is registered in India and whose principal base of business is in India.
5. Chairman and at least twothirds of its Directors are Indian citizens.
6. Foreign equity participation up to 49 percent and investment by Non-
Resident Indians (N.R.I), Overseas Corporate Bodies (OCBs) up to 100% is
allowed. The representation of the foreign investing institution/entity on the
Board of Directors of the company shall not exceed one-third of the total.
7. Foreign airlines are not permitted to pick up equity. Foreign financial
institutions other entities who seek to hold equity in the domestic air transport
sector shall not have foreign airlines as their shareholders.
8. As regards safety and security arrangements, the operators must ensure
compliance with relevant regulatory requirements stipulated respectively by the
Director General of Civil Aviation (DGCA) and the Bureau of Civil Aviation
Security (BCAS).
9. For green field airports, foreign equity up to 100 percent is allowed throughautomatic approvals. For upgrading present airports, foreign equity up to 74
percent is allowed through automatic approvals and 100 percent through special
permission (from FIPB).
Setup costs:
Nowadays, venture capital of $10 million or less is enough to launch an airline.
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1. In order to overcome the shortfall of aircrafts during the peak seasons,
airlines can utilize an ACMI lease agreement for the extra aircraft. If the airline
has many aircrafts, either owned or leased, then they can offer their surplus
aircrafts in their low season to another airline that is facing peak season
2. An airline company will bear the cost of purchasing an aircraft if it wants to
start or expand its fleet, leasing allows the cost to be spread across several
years. At the lease term end, the lease can be renewed or aircraft can be
returned, to be replaced with more modern aircraft.
Fuel prices:
Domestic ATF prices have increased by over 160 per cent from the beginning
of 2005 till last year and by over 80 per cent from a year-ago levels. In India,
oil companies do not import ATF directly; instead they refine it from imported
crude oil. With rising crude oil prices, imports are becoming expensive day by
day and at the same time, the governments unable to pass on the full impact of
this rise to the consumer. As a result, the state owned oil marketing companies
(almost 95 per cent of the market is with state owned firms) are forced to sell
diesel, petrol, kerosene and LPG at way below cost, a cost they are trying to
somewhat make up by raising the price of ATF, which is under their control. As
a result prices of ATF in India are much higher than some of the other Asian
countries.
Resource:The aviation industry in India suffers a shortfall of pilots. The reasons are:
1. The aspirants can receive Commercial Pilot License (CPL) only if they
undertake attaining abroad.
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2. The reason being that in India, there is a lack of dedicated flight Instructors,
decade-old aircrafts and poor quality training offered at a price much higher
than what is offered by flying schools in USA, Canada and Australia.
3. Indian institutes provide training with the help of their training partners in the
foreign countries like U.S.A; U.K etc.Private airlines hire pilots; get expatriates
or retired personnel from the Air Force or PSUairlines in senior management
positions. Airlines can contract employees such as cabin crew, ticketing and
check-in staff members. In airline sector, finding appropriate labor-force is very
costly. Moreover, due to the liberalization of policies by government, foreign
and private players often poach work-force of competitors which leads to
talent-drain and thus losses.
2. Bargaining Power of Suppliers
Any airlines in general face a duopoly of two major suppliers of aircrafts i.e.
Airbus and Boeing. There are other suppliers like Dauphin,Dronier,Bell,ATR-
42 but do not meet the requirements to serve the low cost commercial aircraft
carriers, particularly Indigo airlines. Fleet Forecast for the India-Region 2006-
2011 shows that there will be approx. 85% growth in the order rate of air
carriers.
Thus, suppliers are few and thus in better position to bargain as they always
finds customers for their aircrafts.
IndiGo fleet comprises of Airbus-A320 and the switching cost is high due to
the limited number of suppliers.
Due to shortage of commercial aircraft pilots in India the supply of pilots is
concentrated, hence increasing their power.
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There are only four suppliers for ATF (Aviation Turbine Fuel); IOC,
Hindustan Petroleum Corporation, Bharat Petroleum and ONGC and since their
number is limited, they possess more power.
The proof of evidence for high power enjoyed by ATF suppliers lies in the fact
that the ATF prices constitute 35-40% of the costs in India compared to 20-
25% globally.
The brand value of suppliers is high due to their less number and results in
higher bargaining power for them.
The airlines also face a threat of forward integration since the suppliers are in
close contact and are familiar with the knowhow of the aviation industry.
The suppliers are few and thus in better position to bargain as they always
finds customers for their aircrafts.
3. Bargaining Power of Buyers
Buyers in airlines industry are large in number and highly fragmented thus
lowering their power .With the growing Indian economy and increasing low
cost carriers, the buyers have increased and so have the growth opportunities.
The switching cost is minimal since there are multiple alternatives available. It
is not difficult to move from one airline to another or to switch to a substitute.
Furthermore the players in the particular strategic group do have minimalistic
differentiating points.
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Backward integration from the buyers end is very difficult and next to
impossible.
4. Competitive Rivalry
The aviation industry is a highly competitive industry because of which it is
difficult to earn high returns in this sector. Below are the major reasons for the
high competition in the low-cost carrier airlines:
Very little scope for differentiation between competitors products and services
Strategic Management
Aviation is a mature industry with very little growth. The only way to grow is
by stealing away customers from competitors
Suppliers of aircrafts are the same, i.e., Boeing and Airbus. Hence suppliers
bargaining power is high.
Switching cost of customers is high for low cost carriers, i.e., there is no brand
loyalty. Closest competitor of IndiGo is Spice Jet followed by Go Air
. Below is brief description about each of them:
Spice Jet is a low-cost airline based in New Delhi, India. Spice Jets mission is
tobecome Indias preferred low cost airline, delivering the lowest air fares with
the highest consumer value, to price sensitive consumers. Its vision is to ensure
that flying is no longer confined to business travelers, but is affordable for
everyone and thus the tagline flying for everyone
Spice Jet airways began its operations in May 2005. Spice Jet has chosen a
single aircraft type fleet which allows for greater efficiency in maintenance, and
supports the low-cost structure. It has a fleet of 6 Boeing 737-800 in single
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class configuration with 189 seats. Spice Jets new generation fleet of aircraft is
backed by cutting edge technology and infrastructure to ensure the highest
standards in operating efficiency. Spice Jet currently flies to 11 destinations.
4. GoAir Airlines
Owned by Wada Group, is a low-cost budget airline based in Mumbai, India. It
has been showcased as
The People's Airline.
GoAir is looking at
'commoditisingair travel'
By offering airline seats at marginally higher train prices to all cities in India.
TheAirlines theme line is
Experience the Difference
And its objective is to offer its passengers quality consistent, quality assured
and time efficient product through affordable fares. GoAir's business model
has been created on the
'punctuality, affordability and convenience'
Model. Go Air operates four A320 aircraft with a single class, 180-seat
configuration, and plans to expand its fleet to 33 aircraft in three years.
5. Thus, we can summarize from above data that all the three players are trying
to follow cost leadership strategy by bringing down the ticket rates to the
minimum possible value. However, it is clear that, to sustain in this cutthroat
competition, each player will have to come up with different strategies to
improve the non price factors.
5. Availability of Substitutes
The substitute for low cost airline company is the railways. But this substitute is
not very powerful due to the following reasons: 1.
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Customers use airline transport as it is convenient and saves travelling time. So
trains cannot work as a substitute to save time.2.
Secondly, many customers use airlines as a status symbol. So again, trains
cannot substitute for prestige. So if we consider IndiGo airlines, the direct
substitutes are the other low cost carriers likeSpiceJet and GoAir. So in
this case, threat of substitutes is high as the switching costbetween low cost
carriers is low.
Opportunities
IndiGo airlines have not ventured into the huge air freight market which
cancontribute a sizeable portion of the revenue. A study by Centre for Asia
PacificAviation or CAPA
6. An aviation consulting firm estimates the cargo services of 3.4million tonnes
per annum.
According to a research conducted by PhoCus, Indian domestic traffic will
touch 86.1million by 2010, up from 32.2 million in 2007
7. The flight density of IndiGo airlines is limited in domestic market; hence
there is a big scope to increase the flight frequency
The huge untapped international sectors should be explored once IndiGo hasconsiderable presence in the domestic market.
IndiGo currently does not have too many long haul aircrafts and as per CAPA
studyby 2020, Indian Airports are expected to handle more than 100 million
passengers. IndiGo airlines should focus on long haul aircrafts both for
domestic and international sectors.
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The chartered flight services still remain an area not exploited by Indian
aviation industry and IndiGo airlines can play a major role in tapping the
potential in that particular market.
Strategic Management
Threats
ATF (Air Turbine Fuel) prices have increased radically since 2005.
Foreign and private players often poach work-force of competitors.
Extensive Government Interference can affect the accountability of the
organization. In aviation industry, government has control over fuel prices,
foreign investments (e.g. FDI policies), tourism laws, taxes etc. This can greatly
affect the day to day business in the airline industry.
Like every other industry, recession has hit aviation industry as well. People
have cut down on tourism and corporate travels have also been slashed down.
The shortage of trained pilots, co-pilots and ground staff is severely limiting
the growth prospects of all the airline companies.
Barriers to exit in aviation industry are high because of high capitalinvestment, nongovernment restrictions and loss of brand image
Strategic Management
Internal Environment Analysis
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Resources, Capabilities and Core Competencies are the key elements of the
Internal Environment. The resources are tangible and intangible.
Tangible resources
Aircrafts:
The airline currently operates 120 daily flights with a fleet of nineteen brand
new AirbusA320 aircraft and flies to 17 destinations.
Human Resources:
1. The human resources are the pilots, crew members and ground staff.
2. No airline can recruit a trainee pilot and directly assign him to fly an airplane
carrying around 500 passengers. The labor-force has to be trained and then
assigned with tasks to perform after proper evaluation.
Fuel:
1. Porters five forces model does not cover the importance of complementary
product.
2. ATF is the complementary product for airplane and it constitutes
approximately 35%of the production costs.
Intangible resources
Brand Equity/Reputation
IndiGo is the most reputed low cost carrier due to the following reasons: 1.
On time arrivals is the key differentiating factor for IndiGo Airlines.
2. IndiGo keeps implementing new and innovative ideas to increase the quality
of customer service. Recent example is: IndiGo has roving check-in counters
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where passengers with only cabin baggage can check-in with an IndiGo official
with handheld device, rather than lining up at the check-in counter.
3. It gives the customers the freedom to carry their own eatables and snacks on
board.
4. Compared to the direct competitors, that is, the other low cost carriers like
SpiceJet, Jetlite, etc. IndiGo offers the lowest airfare.
Social Capital:
1. IndiGo has amicable relationship with the other organizations that contribute
to the value addition for the service provided to the customers.
2.IndiGo has engaged many Travel web-portals and regional travel agents with
incentives like booking commissions, etc. There have been no instances of
distress between IndiGo and its other collaborators, that is, suppliers
3. Collaboration with hotels: Mumbai-based hotel chain operator Samovar
Hotels and Indigo Airlines announced a marketing tie-up for frequent travelers.
The highlights are
A:The arrangement will allow guests staying at select Sarovar Hotels across 26
destinations in India to avail a 10 per cent discount on their next travel booking
with IndiGo.
B:While IndiGo flyers can avail up to 25 per cent discount on published room
tariff, 10 per cent discount on holiday stay packages and 10 per cent discount
on restaurant dining at select Sarovar properties
8. Hence IndiGo has a remarkable Social Capital.
Brand Awareness:
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IndiGo is a well known Low Cost Carrier in India. The following points
contribute to the brand awareness of IndiGo:
1. Advertising using print media like newspapers, billboards, etc.
2. It may not pay for an advertisement in a newspaper, but has been covered in
news forits low cost strategy implementation.
3. As IndiGo provides better value added services to the customers, Word of
Mouth promotion also works in its favor.
Employee Relationship:
Good Employee Relationship is a key factor to sustain competitive advantage.
Indigo provides several incentives to its employees. As per the news article
published in The Hindu Business Line:
IndiGo officials claimed that they have been seeing a healthy growth in
passenger numbers and had no plans to defer delivery of any of the 100 Airbus
it has ordered.Hence, it is clearly evident from the above statement that IndiGo
is optimistic about its long term growth. Also, it is planning to expand its
employee strength and at the sometime there is no indication of downsizing the
current staff. Quoted below are some comparisons about the different
approaches implemented by various airlines at the time of recession stated in
the same article:At a time when several domestic airlines are looking to prunetheir staff strength, the Delhi-based low cost airline, IndiGo, is on the lookout
for more pilots, cabin attendants, customer service and airport service
agents.In the recent past, both Kingfisher Airlines and Jet Airways have
asked their staff to leave. While Jet Airways offered a voluntary retirement
scheme to more than 300 of its staff, it was also planning to lay off about
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1,900 of its staff. In late September, Kingfisher announced that 300 employees
had parted ways with the company
9. The above facts show that IndiGo has taken a positive approach while
dealing with its loyal employees at the time of economic slowdown.
IndiGo has high brand awareness and brand equity.
Cost leadership: Successful implementation of low cost strategy.
Highly efficient management that ensures high rate of on- time arrivals.
Continuous innovation to improve on non price factors.
Tie-up with hotels.
Ease ofticket booking for customers.
Weaknesses
Scope of product differentiation is less.
Benefits of the innovations implemented by IndiGo to provide better services
to the customers are short-lived, as these can be easily imitated by the
competitors.
IndiGo is not exploring the untapped domestic air cargo market
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Chapter -4
Suggestions
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Feasible Alternatives
1. Increase domestic operation
There are a number of initiatives taken up by government to encourage aviation
industry,e.g., promotion of regional air connectivity
10. Open Sky pol icy
11.and policy of Greenfield airports
12. In addition to this, government has also made plans for the development
of airport infrastructure
13. 35 airports have been selected for this purpose, of these 24 airportswould be
taken up for city side development through PPP including maintenance
andoperation of the terminal buildings, cargo operations and real estate
development
14. All these factors indicate towards a favorable environment for growth in the
domestic aviation sector. Hence it would be a wise option for IndiGo to
increase its domestic operations. IndiGo must increase the number of
destinations and can start long haul aircrafts.
2. Extension
Currently, IndiGo is concentrating only in domestic passenger flights.
However, the freight/cargo market and charted plane service are the areas that
can prove to be good potential market for IndiGo. As per the reports from an
economic survey this year, it was stated that domestic cargo showed a growthof 14.55%15. Besides, chartered flight services are an untapped market for
IndiGo. Thus, IndiGo has a huge opportunity to expand in both these arenas.
10To expand air connectivity on Tier II and Tier III cities and to promote
regional air connectivity a separate category of permit, Scheduled Air Transport
(Regional) Services had been introduced.
11
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The `Open Sky' policy encourages the promotion of Regional Airlines, lower
fares to make aviation affordable and remove price monopolies in respect of
Aviation Turbine Fuel (ATF).
12
The Policy aims to have an approval mechanism for setting up of new airports.
Guidelines for granting technical approvals by various agencies involved in
setting up of an airport would be provided upfront to provide clarity, Airport
Authority of Indiawww.airportsindia.org.in
13
Airport infrastructure has been undertaken through the PPP route in major
metro cities like Delhi, Mumbai, Bangalore and Hyderabad. Modernization of
the Kolkata and Chennai airports is being undertaken by the AAI.For the non-
metro airports AAI are responsible for the airside development.
Strategic Management
Final Recommendation
As inferred from the above two solution analysis, we recommend that IndiGo
must increase its domestic operations by starting flights connecting to new
destinations and long haul flights. As the opportunities are vast for this purpose,
the other low cost carriers may also venture in this area. So using the cost
leadership strategy, IndiGo can gain competitive advantage over its competitors
as the first mover. Once the above strategy is successful and results in
promising revenue growth, IndiGo cause extension to freight and chartered
services as the next objective for further expansion