NEW DELHI: When Prime Minister Narendra Modi-led NDA came to power in 2014, domestic aviation industry was reeling under severe pressure following the grounding of Kingfisher Airlines. Huge losses, piling debts, employee protests and promoter Vijay Mallya fleeing to the United Kingdom made all the wrong headlines for the sector.
Against the backdrop, another private airline - Spicejet - was facing turbulence as its new promoter - media baron Kalanidhi Maran - realised why many billionaires avoid owning an airline. In less than a year since the new government came into power, SpiceJet was sold back to Ajay Singh.
Fast forward to 2024 and the sector is yet out of the woods. In the last 5 years, two major airlines – Jet Airways and Go First - succumbed to financial woes while many smaller players vanished in the covid 19 pandemic.
The big change for the industry, however, has been the privatisation of Air India and the emergence of two strong players. Having made combined orders of more than 1100 planes, the Tata Group-led Air India and Interglobe Aviation (IndiGo) have set ambitions to define the world’s fastest-growing aviation market.
10% CAGR in 10 years
India’s aviation industry has witnessed a compounded annual growth rate (CAGR) of 10% in domestic passenger traffic in the last 10 years i.e. between FY2014 and FY2024. This growth was supported by a growing economy, improvement in infrastructure and connectivity to regional centres. The number of operational airports doubled from 74 in 2014 to 148 in April 2023.
Kinjal Shah, Vice President & Co-Group Head - Corporate Ratings at ICRA Limited, said that this growth has to be looked at in two parts – pre-pandemic, that is, between FY2014 and FY2020, the domestic air passenger traffic reported a CAGR of 15%, while the growth was impacted since FY21 as the restrictions associated with the pandemic stalled passenger movement during FY21 and FY22. The recovery in passenger traffic was significant with a CAGR of 35% between FY22 and FY24.
“However, over the same period, the growth in capacity, as denoted by available seat kilometers or ASKMs grew at a CAGR of 8% and has lagged the passenger traffic growth,” added Shah. The main reason for this is the collapse of several carriers.
Pragya Priyadarshini, Vice President at Primus Partners, said that in the past, airlines worked hard to attract passengers, but now they are struggling to add more capacity, which has led to high fares. Most airlines are already operating at 85% and above passenger load capacity, indicating the need for increased capacity to meet demand, added Priyadarshini.
The big misses
While the government’s ambitious regional connectivity scheme (RCS) – Ude Desh Ka Aam Nagrik (UDAN) and privatization of highly loss-making Air India are touted as the big positives for the industry, the collapse of numerous airlines in a tough regulatory environment remains a big concern. Despite a lengthy bankruptcy process, Jet Airways 2.0 is yet to take off and hopes of Go First revival have crashed.
Further, the credit profile of a few existing players remains weak. “While some airlines have adequate liquidity and/or financial support from a strong parent, supporting their credit profiles, the credit metrics and liquidity profile of others will remain under stress over the near term, despite some improvement relative to the last few years,” said Shah of ICRA.
Even the much-applauded UDAN scheme has its shortcomings. The Comptroller and Auditor General (CAG) in August 2023 had said that only 54 routes or 7% of all awarded routes under UDAN have managed to sustain operations beyond the three-year concession period. CAG had flagged that out that 52% (403 out of 774 routes) of the awarded routes were unable to commence operations. Additionally, the scheme’s main goal to provide tickets at affordable prices has been questioned.
Further, the most populous nation’s ambition to become a global aviation hub remains a project on paper and more than 55% of its International travel is still catered by foreign airlines. The recent effort by IndiGo and Air India to induct more wide-body aircraft is likely to reduce foreign airlines’ dominance here.
Two strong players
India’s aviation market has become a playground of two strong players - IndiGo and Air India Group. While IndiGo continues to have a market share of more than 60% in the domestic market, Air India group with its three airlines, is rapidly inching towards the 30% mark. In April, Air India, Vistara and Air India Express had a combined market share of 28.8%.
“With the consolidation of Air India, Vistara, Air Asia and Air India-Express, it is unlikely for any further consolidation to take place in the near future. However, factors such as market dynamics, regulatory changes, economic conditions, and competition could still drive consolidation in the future but perhaps not on the same scale,” said Priyadarshini of Primus Partners.
Within the remaining 11%, Spicejet (4.7%) and Akasa Air (4.4%) have a combined market share of more than 9%. Most market experts believe that while having 2 strong players is good for the industry, this has also led to higher airfares due to reduced competition.
“The industry is characterized by high fixed costs. 35-42% of the airlines’ expenses, including operating lease payments, aircraft parking charges, airport charges, aircraft maintenance charges, and employee costs are fixed. The industry, however, lately has witnessed improved pricing power, as reflected in the improved yields and the spread between revenue per available seat kilometer – cost per available seat kilometer (RASK-CASK) for the airlines,” said Shah of ICRA. The rating agency expects passenger traffic to grow 8-13% in the medium term.
