India’s massive airline shake out

June 1st 2023

Print Friendly

To say India’s airlines are navigating never before seen turbulence is an understatement. Read More » To someone viewing the sector in January 2020 - pre-pandemic - and today, it is practically unrecognizable.

But before we attempt to forecast how the new skies of India will soon look, we must understand why India’s airlines always are on the brink of collapse. What is wrong with this business?

Over time, India’s airlines have been trapped in a vicious cycle of profitless growth. Most of them do not make much money, or almost no money, from their core business of flying passengers. Airlines operate various routes, tot up losses from core operations and then order more aircraft to fund their losses through sale and leaseback of aircraft.

Along the way, they occasionally earn revenue from non-aeronautical activities. Even airlines running their businesses quite well rarely are in the black.

India’s largest private airline, IndiGo, last reported a substantial profit in 2017-2018.

International factors have compounded the troubles of the country’s airlines. The pandemic, followed by the Ukraine war and its continuing fallout, rocketed oil prices skywards although the situation is less onerous than it was a year ago.

Carriers in India have borne the brunt of these geopolitical crises with aviation turbine fuel (ATF) prices across the country increasing by almost 542% since May 2020. This situation and other factors have produced combined airline losses of Rs 16,777 crore (US$20.93 billion) for fiscal year 2021 and Rs 20,000 crore in 2022. In the 2023 full year, they will exceed these numbers.

An absurd anomaly, peculiar to India, has made airline economics unviable. Airlines in India pay more for fuel than their foreign counterparts who refuel in India because local carriers are charged the import parity price and an 11% excise duty to the central government. This is compounded by additional state VAT, ranging from 3% to 25%, but averages around 20%. In states with high off take - Delhi, Maharashtra, Tamil Nadu and West Bengal - the rates vary between 20% and 25%.

Pleas to bring ATF under GST have fallen on deaf ears. In most other countries with developed aviation sectors, if and when a similar tax is applicable, airlines receive input credit on the tax paid. But not in India.

To finance the losses they routinely make, India’s airlines order aircraft to earn some money through the sale and leaseback of planes. This results in more and more capacity entering the market, which lowers fares further, making the economics even more unviable and resulting in more aircraft orders.

It is a vicious cycle of profitless growth. Worse, even this sale and leaseback income is on the decline. For every aircraft ordered, the difference that used to be US$8 million to $9 million has near halved. Nonetheless, this practice helps some airlines fund their losses from flying.

It is against this backdrop of unviable airline economics we can look at what is expected for the industry in coming months and perhaps the decade. Triggered by the sale of India’s national carrier, a massive shakedown is playing out in India’s skies.

The new Vistara and Air India combine

Fireworks are expected when the Tata run Air India completes its merger with Tata-SIA run Vistara, a move dreaded but accepted as a “fait accompli” by employees of both carriers. When finalized, India will have a new and serious international and domestic player that can wrest back some of the India traffic that flies overseas on Emirates, SIA and a clutch of foreign airlines in the absence of India offering these routes.

For this to happen, the Indian government needs to adopt a more conservative policy in granting of bilaterals while Air India, and the Tata’s for their part, need to offer a service comparable with the best in the world.

The latter remains a big if since this requires an across the board shift in the mindset and attitudes of Air India’s former public sector staff. It may be easier said than done.

The domestic arm of the Air India will act as a hub and spoke for the group, bringing in passengers from cities across India to fly directly to the destinations they desire.

A new well funded low fare player

Giving new and expectedly credible competition to India’s low-fare market leader, IndiGo, will be a new combined entity; the merged AIX Connect and Air India Express.

As things stand, AirAsia India, renamed AIX Connect in December 2022, is flying with 28 A320 planes (of which five are neos). It connects 18 destinations in India and commands a market share of 6% -7% Directorate General Civil Aviation (DGCA) data states. The airline has surprisingly low on-time-performance, especially at the metro airports, hovering around 60%-65% compared with most rivals. It remains loss-making. It also has been in the news for pilot training and safety violations. Recently, the DGCA took some action to bring it more in line with industry standards.

Air India Express, subsumed within Air India, flies with 26 B737NGs and primarily operates as a shuttle service between a clutch of Indian states and the UAE, Oman, Qatar and Doha, among other destinations. It caters to Indian unskilled and skilled labor heading to gulf regions in search of work.

Although cultural challenges of a 5000-odd combined staff will persist, the networks of the two airlines are likely to be quite complementary as there are no overlaps as of now. “AIX Connect is focussed on India domestic and AIX on short-haul regional routes and as such, the two do not compete”, pointed out an airline insider. He argued the merger is likely to be far smoother than the two biggies – the Vistara-Air India combination - which many are dreading, not just on account of its scale and size but also for their widely differing cultures.

The combined entity that emerges from this marriage will be a low fare airline operating with 54 aircraft (A320s and B737NGs), primarily in the Indian domestic and short haul regional routes space, and competing with the giant in this segment, IndiGo. Total capacity is divided half and half and while there may be minor adjustments, the capacity deployment post-merger is largely to remain unchanged.

The difference is likely to be in the capacity deployed on metro to metro connections, which in the case of IndiGo is almost 20%, whereas the new merged entity will focus more intensely on the metro to non-metro and non-metro to non-metro sectors.

By keeping its metro to metro capacity low, the new entity will ensure it is not in direct competition with IndiGo and other carriers. In due course, the fleet will be upgraded. Barring five A320neos, almost all the aircraft are pretty old.

As IndiGo changes its contours and colors

India’s largest private airline is on a solid wicket. With a market share of more than 50% and demand for flying bouncing back, the last two years of red ink on its balance sheet should soon be a blip, easily forgotten.

The fundamentals of the airline remain strong and unless the Indian authorities mess up in some major way, the fundamentals of the economy will fuel the airline’s future.

Fortunately, IndiGo is neither in denial nor incognizant of the new challenge it faces. The airline is pretty much a different creature from what it was in 2019. A lot of changes have taken place at the airline. Some for the good and some time will tell as it gears up to take on new competition.

This includes a virtually brand new team at the helm after some heavy weight exits, including former CEO Ronojoy Dutta. Perhaps the most critical question the airline’s board and management will need to answer is: where do we go from here?

Should IndiGo stick to its knitting? Or give in to the temptation of facing the new threat with all guns blazing? In other words, does it continue to doggedly focus on what it knows and does best? For this read the domestic market and tier 2 and 3 cities.

Or does it take the riskier path of altering its DNA, reinventing itself to become an Emirates Airline, a Singapore Airlines or even the new Tata hybrid? Should it metamorphose into a full service airline with wide-bodies, long-haul destinations and caviar on board? The answer only may be known after Air India becomes a credible rival.

The rest of the pack

But the Indian airspace remains full of surprises and one such surprise was, in the midst of all the gloom and doom in the aviation sector, a new low fare airline, Akasa, took to the skies. On August 7, 2022, it launched operations with two 737 MAX 8s and an order for 72 of the type.

Its fleet has grown to 20 aircraft. In May, it had a staff of 2,500. This is a record of sorts among the airlines in India. SpiceJet, AirAsia India and Vistara took five, four and three years, respectively, to reach the same size post launch. Only IndiGo managed it in around 18 months. Expectations for Akasa remain high as it starts with a clean slate and none of the baggage its rivals carry.

Meanwhile, following on the heels of erstwhile Jet Airways, Mumbai-headquartered Go First recently declared bankruptcy and many in the industry are uncertain that its closest rival airline, SpiceJet, will survive its past troubled history and stay afloat. Late last month, SpiceJet’s management issued a release that denied all rumors of its imminent closure and said it is setting its house in order, including bringing back some of its grounded fleet to scheduled flying.

Industry observers, however, argue survival for airlines with a market share below 10% in today’s environment will be increasingly challenging, Watch this space for developments.