Indigo Partners A320neo order gives Frontier, Volaris, Wizz & JetSMART platform to accelerate growth

Four ultra-low cost airlines from four distinct markets are planning rapid expansion under an ambitious order placed by LCC specialist equity group Indigo Partners. Indigo signed an MoU at the 15-Nov-2017 Dubai Airshow for 430 A320neo family aircraft which are intended for US-based Frontier Airlines, Hungary-based Wizz Air, Mexico-based Volaris and Chilean start-up JetSMART.

The order from Indigo is intriguing in that Indigo only owns a minority stake in Volaris and Wizz. The deal therefore could be viewed as a combined order from four loosely aligned airlines that are keen to leverage the economies of scale associated with a bulk aircraft order. The "order" is essentially a series of four MoUs between Airbus and each individual airline. In the case of Wizz and Volaris,  approval from all of the shareholders is needed. Frontier and JetSMART, by contrast, are wholly owned by Indigo.

Indigo is likely taking advantage of attractive pricing during a down year for aircraft orders. The investment firm appears confident the four airlines can absorb 430 new aircraft, given the strength of their home markets and the ULCC model, but could also eventuate in allocating aircraft to new ULCCs that have not yet been established.

Indigo Partners bulk order is vastly different from AirAsia or Lion bulk orders

In a surprise order at the 2017 Dubai Airshow, Indigo Partners signed on 15-Nov-2017 an MoU with Airbus for 273 A320neos and 157 A321neos. If confirmed, the agreement would be the largest single order in industry history in terms of number of aircraft with one manufacturer. If converted for a firm order by the end of December, Airbus would more than double its total order tally for 2017 and could potentially surpass Boeing in what has generally been a weak year for orders.

LCC groups AirAsia and Lion previously have placed larger bulk orders intended for multiple airlines. However, the Indigo deal is different as it outlined exactly how many aircraft each airline will receive and was witnessed by the CEOs of all four airlines.

Breakdown of the Indigo Partners order by airline

  • Wizz - 72 A320neo, 74 A321neo
  • Frontier - 100 A320neo, 34 A321neo
  • JetSMART - 56 A320neo, 14 A321neo
  • Volaris - 46 A320neo, 34 A321neo

The four airlines likely had to agree upfront to a specific number of commitments given the structure of Indigo Partners. AirAsia and Lion own at least 40% of all their overseas affiliates but Indigo has only a 21% stake in Wizz and a 18% stake in Volaris.

While Airbus billed the deal as the largest order ever, the order book will end up belonging to each of the four Indigo affiliated airlines. Indigo affiliated airlines have previously pooled to jointly buy goods and services but this represents by far their largest joint procurement.

The Indigo affiliated airlines have generally sourced aircraft independently of Indigo or any of their other shareholders. For example, Volaris has never sourced aircraft from TACA or Avianca despite some common ownership.

Volaris and Wizz both earlier already ordered A320neo family aircraft with deals directly with Airbus. None of the AirAsia Group or Lion Group affiliates have ever placed their own orders with Airbus or Boeing.

Volaris A320neo family commitments increase to over 120 aircraft

Volaris initially committed to 30 A320neos in 2014 in a deal that also included 14 additional A320ceos. Volaris later that year committed to another six A320neos and 10 A321neos as part of a deal with lessor AerCap, lifting its total A320neo family commitments to 46 aircraft.

Volaris took delivery of its first A320neo in Sep-2016 and currently operates five of the type, according to the CAPA Fleet Database. It therefore has 41 outstanding A320neo family orders from prior commitments. The 46 A320neos and 34 A321neos allocated to Volaris from the new Indigo Partners order lifts Volaris’ A320neo family commitment from 41 to 121 aircraft. 

Volaris Group fleet summary: as of 16-Nov-2017

Aircraft In service On order
Airbus A319-100 12 0
Airbus A320-200 43 0
Airbus A320-200neo 5 81
Airbus A321-200 10 0
Airbus A321-200neo 0 40
Total: 70 121

Volaris stated in its own announcement the additional aircraft would be delivered from 2022 to 2026 while the 41 aircraft that were acquired earlier will be delivered from late 2017 through 2021.

Volaris currently operates 62 A320ceo family aircraft alongside the five A320neos. The group has 65 A320ceo family aircraft when including the two A320ceos and one A319ceo subleased to Volaris Costa Rica.

Volaris Costa Rica could end up operating aircraft under the Indigo Partners order

Volaris Costa Rica launched services in late 2016 and is 100% owned by the Volaris parent Controladora, which is publicly traded with listings in Mexico City and New York. Indigo therefore owns an indirect 18% stake in Volaris Costa Rica.

While Volaris Costa Rica did not participate in the Dubai Airshow signing ceremony Volaris Mexico could potentially allocate its Costa Rican affiliate aircraft from the new order given that so far Volaris Costa Rica has sourced aircraft from its parent.

The Volaris Group fleet will roughly double in size over the next decade based on the group’s increased order book and assuming most of the existing older model aircraft are retired. This is a reasonable growth rate given the opportunities in the Mexican market and in neighbouring Central America, where LCCs have just started to penetrate.

See related reports:

Indigo Partners has been involved with Volaris since 2010

Indigo Partners managing partner William Franke and his son Brian Franke have been on the Volaris board since 2010, when Indigo Partners first acquired a stake in the Mexican airline. According to SEC filings, Indigo has a 15.9% stake in Volaris based on ordinary Series A shares. It also holds a 32.2% share of Series B shares. Indigo has approximately an 18% stake of total shares when including both types of shares, which makes it the largest single shareholder in Volaris. 

Roberto Kriete, formerly the CEO of TACA and the chairman of Avianca Holdings, is also on the Volaris board. The Kriete family, which owned Central American airline group TACA and has been a major shareholder of Avianca since TACA merged with Avianca in 2009, has been a major shareholder of Volaris since the airline was launched in 2005. 

Kriete and Franke have maintained their stakes and involvement in Volaris in the four years since the airline’s Sep-2013 initial public offering. Indigo Partners often has sold its stakes in LCCs following IPOs, including with Singapore based Tiger Airways Holdings.

Indigo was a founding shareholder of Tiger with a 24% stake when the airline launched in 2004. However, Indigo reduced its stake in Tiger after Tiger’s IPO in 2010, at which point it had evolved to become a group with a subsidiary in Australia. Tiger Airways Holdings later established affiliates in Indonesia and the Philippines – although by then Indigo had sold all its shares. Tiger was delisted in 2016 and is now 100% owned by the Singapore Airlines Group.

Indigo has been closely involved with Wizz since inception

Indigo also sold its initial 18.7% stake in Wizz in Jul-2017, or slightly more than two years after its IPO. However Indigo held onto convertible shares which it converted into ordinary shares and now has a 20.9% stake in Wizz.

Indigo was a founding shareholder of Wizz and William Franke has been the airline’s chairman since its launch in 2004. Mr Franke is still the chairman of the Wizz board and is therefore still very closely involved with the airline, which has expanded rapidly to become the largest LCC in Central/Eastern Europe.

See related report: Wizz Air: Central/Eastern Europe's largest airline turns 13; profit margin dip not auspicious

Wizz initially ordered 110 A321neos in 2015. Wizz currently operates 87 A320ceo family aircraft and is planning to take the first A321neo from its 2015 order in 2019.

Wizz Air to triple fleet following Indigo backed order

Wizz’s commitment to 146 additional A320neo family aircraft as part of the Indigo order raises its total A320neo family commitment to 256 aircraft.

Wizz also has 26 remaining A320ceo aircraft on order which will be delivered from late 2017 to early 2019. Wizz stated in its own announcement that deliveries of the additional aircraft will start in 2022 and “the bulk of the aircraft will be delivered in 2025 and 2026”. 

The Wizz Air Group currently consists of just one airline, operating several bases in the EU using the Hungarian registry. The group had a separate airline in Bulgaria until 2011 and in Ukraine until 2015.

Wizz Air Group fleet summary: as of 16-Nov-2017

Aircraft In service On order
Airbus A320-200 64 8
Airbus A320-200neo 0 72
Airbus A321-200 23 18
Airbus A321-200neo 0 184
Total: 87 282

Wizz will likely have a fleet of approximately 300 aircraft in 2027, assuming the phase out of most of its current fleet. While a tripling of the fleet over the next decade seems ambitious, the growth is staggered over a long period and there are ample opportunities in the Eastern European market to support the projected growth.

Indigo plans rapid fleet expansion for Frontier Airlines

Indigo Partners own 100% stakes in the other two airlines in its portfolio – Frontier and JetSMART. Having 100% stakes gives Indigo flexibility to reallocate aircraft between the two airlines and potentially to any new airline the group launches. However, Indigo would likely need to fix an allocation for Frontier if it moves forward with IPO plans.

Indigo purchased a 100% stake in Frontier Airlines in late 2013 from Republic Airways Holdings. As part of the deal, Republic assigned to Frontier all of the rights under agreements relating to Republic’s 2011 order for 80 A320neo family aircraft.

Frontier took delivery of its first A320neo in Oct-2016 and currently operates 13 of the type, according to the CAPA Fleet Database. Therefore, Frontier has 67 A320neo family aircraft remaining under the original order. Frontier’s allocation of 134 additional under the new Indigo deal lifts the total A320neo family commitment for Frontier to 201 aircraft.

Frontier also still has an outstanding order for one A321ceo. The Denver based airline currently operates 60 A320ceo family aircraft alongside the 13 A320neos, according to the CAPA Fleet Database.

Frontier said in its own announcement the 134 additional A320neo family aircraft will be delivered from 2021 to 2026. Frontier announced that as part of the deal for additional aircraft it has converted 18 A319neo orders, which were initially placed in 2011 under Republic, to A320neo orders.

Frontier Airlines fleet summary: as of 16-Nov-2017

Aircraft In service On order
Airbus A319-100 18 0
Airbus A320-200 24 0
Airbus A320-200neo 13 166
Airbus A321-200 18 1
Airbus A321-200neo 0 35
Total: 73 202

Frontier’s fleet will more than triple in size over the next decade, reaching approximately 215 aircraft by 2027, based on its newly increased order book and assuming the phase out of its A320ceo family fleet. While this is ambitious growth for an airline in a mature market, Indigo is confident there are huge opportunities for growth in the US under the ULCC model.

See related reports:

Indigo has been a pioneer for the ULCC model

Indigo has converted Frontier to a ULCC since acquiring the airline, adopting the model Indigo initially used at Spirit Airlines. Indigo sold its stake in Florida-based Spirit in 2012, one year after Spirit’s IPO. Indigo acquired Spirit in 2006 and subsequently converted Spirit’s model from LCC to ULCC.

William Franke resigned as Sprit’s chairman when selling the Indigo stake in 2012. It is no coincidence that Frontier’s current CEO, Barry Biffle, is a former Sprit executive.

William Franke also played a leading role in transitioning Volaris from the LCC to ULCC model and in deciding to pursue a ULCC model at Wizz. Indigo’s latest airline investment, JetSMART, is similarly following the ULCC model.

Chile’s JetSMART to benefit from Indigo’s bulk order

JetSMART launched in Jul-2017 with full ownership from Indigo, which in part selected Chile for its latest venture given the country’s favourable regulatory environment. Chile allows 100% foreign ownership of local airlines.

See related report: JetSMART cites numerous opportunities for expansion

JetSMART currently operates three A320s and plans to end 2017 with a fleet of five A320s. It has so far sourced new A320ceos from leasing companies.

JetSMART could benefit more from the Indigo bulk order than the other three airlines as it would not be able to negotiate a great deal with manufacturers given its small size. However, committing to 70 aircraft is extremely ambitious for an airline that is only four months old and operates in a rather limited and extremely competitive market  

JetSMART fleet summary: as of 16-Nov-2017

Aircraft In service On order
Airbus A320-200 3 0
Airbus A320-200neo 0 56
Airbus A321-200neo 0 14
Total: 3 70

Chile has a population of approximately 18 million and already enjoys a relatively high propensity for travel, particularly for Latin America. In the first nine months of 2017 there were 16.3 million passengers in Chile – including 8.3 million domestic passengers and 8 million international passengers (based on Chile JAC data).

JetSMART currently only operates domestic services and accounted for a 5.5% share of domestic passenger traffic in Chile in Sep-2017, the most recent month with available JAC data. LATAM accounted for a 64.9% share of domestic traffic in Chile in Sep-2017 followed by Sky Airline with a 27.3% share.

There are currently 138 narrowbody and widebody passenger aircraft on the Chilean registry, including 110 at market leader LATAM, 15 at low cost airline Sky, three at JetSMART and 10 at other airlines (according to the CAPA Fleet Database). A fleet of 70 aircraft would give JetSMART more narrowbodies than LATAM currently operates in Chile. It is hard to imagine all 70 aircraft now earmarked for JetSMART ending up in the Chilean market.

Indigo could also allocate aircraft to new startups

Indigo could eventually reallocate a large portion of the JetSMART aircraft to new ULCCs that have not yet launched.

Indigo has been looking at potentially launching a new ULCC in Southeast Asia, where it has not had a presence in several years, and in other South American markets to complement JetSMART. Over the last year Indigo also been discussing a potential investment in a Canadian ULCC start-up.

Southeast Asia has become an intensely competitive market due to rapid LCC expansion over the last decade. However, Indigo believes there could be room for a ULCC given that the LCCs in Southeast Asia are no longer following pure LCC models. In addition to its involvement during the initial years of Tiger, Indigo had a stake in Indonesia’s Mandala from 2006 to 2011. (Tiger also had a stake in Mandala for 2012 to 2014 but that was after Indigo exited Tiger.)

See related report: Indigo Partners assesses ultra-low cost airline (ULCC) investment opportunities in Southeast Asia

Indigo Partners has been active in the global LCC industry since shortly after Bill Franke resigned as CEO of America West Airlines in 2001. Indigo and Mr Franke have since been involved in nearly 10 LCCs based in four major regions – Asia, Europe, North America and Latin America.

Indigo Partners bulk order is sensible and not overly ambitious  

The always astute Mr Franke likely recongised an opportunity to negotiate an attractive aircraft deal on behalf of the four airlines he is currently involved with. Coming to the table with a 400 plus aircraft requirement in a down year for aircraft orders obviously captured Airbus’ attention, resulting in prices that none of the airlines would likely have been able to negotiate individually.

Committing to 430 aircraft may seem overly ambitious, but becomes more proportionate when considering the orders are spread across four growing airlines. Indigo also has the flexibility, at least with the Frontier and JetSMART part of the order, to allocate aircraft to its future ULCC projects. If necessary Indigo could also establish a leasing company, following the lead of AirAsia and Lion – and benefitting from the fact Indigo would have secured lower prices than any independent lessor.

This historic order could go down as Mr Franke’s best move yet in an already illustrious career. It is certainly his biggest, at least in dollar terms.

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