In a Flux: Changing dynamics of the airline industry

Changing dynamics of the airline industry

In the past two years, the airline industry has seen phases of highs and lows from record profits being booked in 2017-18 to mega losses being clocked the year after. After Jet Airways ceased operations, almost all the carriers have been vying for its prime slots. In an effort to bridge the resulting huge capacity gap, airlines have been expanding their fleet and adding new routes. Meanwhile, stiff competition among carriers has kept airfares in check. This, coupled with fluctuations in aviation turbine fuel (ATF) prices and the depreciation of the rupee, hit the profit margins of airlines in 2018-19.

IndiGo and SpiceJet gain from Jet Airways’ closure

The grounding of Jet Airways in April 2019 was a boon for its competitors with IndiGo being the biggest beneficiary. As per the Directorate General of Civil Aviation (DGCA), in July 2019, IndiGo stood tall with a market share of 48 per cent (in terms of passengers carried on domestic routes), distantly followed by SpiceJet (15.5 per cent), Air India (12.4 per cent), GoAir (11.1 per cent), AirAsia (6.5 per cent) and Vistara (6 per cent). Jet Airways, once the single largest full-service carrier in the country, saw its market share declining from 14 per cent in July 2018 to 12 per cent in January 2019, and then plunging to 4.6 per cent in March 2019.

IndiGo and SpiceJet have been capitalising on the void created by Jet Airways, as is evident from the increasing capacity deployment by both airlines on international routes. However, airlines continue to underperform on international routes with their market shares on these routes declining year on year to about 32 per cent in July 2019. Meanwhile, growth in domestic air passenger fell by 1.8 per cent in July 2019 following the end of the tourist season, while the cumulative growth in traffic during the 2019-20 April-July period stood at a mere 1.6 per cent.

Volatility in fuel price

Jet fuel prices constitute about 40 per cent of costs for an airline and are taxed higher in India than in any other country in the world. The year 2019 started on a good note with substantial relief on account of lower ATF prices, as crude oil prices were relatively lower then. ATF prices then rose by 9 per cent between January and March 2019, as per data from Indian Oil Corporation Limited. However, prices declined in June and July 2019. Meanwhile, the launch of new flights and routes and the opening up of Pakistan’s airspace led to the normalisation of fares. This has helped in bridging the recent capacity gap, primarily created by the grounding of Jet Airways. The opening up of Pakistan’s airspace for civilian flights from July 16, 2019 also helped bring down fares to North America and Europe, as airlines no longer need to take a long detour, leading to fuel savings. However, the recent attack on Saudi Aramco’s processing facilities has led to a cut in oil supply, followed by a spike in crude oil prices globally. A rally in crude oil prices may increase ATF prices for domestic airlines, thus denting their bottom lines.

Air India

After the failed disinvestment attempt in May last year, the government has decided to reinitiate its efforts to privatise the national carrier Air India. It is expected to reconstitute the Air India Specific Alternative Mechanism soon, following which it will issue bid documents for expressions of interest. With the liberalised terms and conditions, at least 95 per cent stake of Air India will be up for sale, while at most 5 per cent will be retained for the employee stock option. Previously, the government had decided to retain 24 per cent in the airline, and this was one of the primary reasons for tepid interest from buyers, the other being high debt.

The process of cleaning up Air India’s books began with a special purpose vehicle (SPV) being created to park a part of the airline’s debt of over Rs 580 billion. The SPV, Air India Assets Holdings Limited (AIAHL), recently raised Rs 70 billion through a bond sale and the issue was oversubscribed more than 20 times. The funds will be utilised to partly repay Air India’s debt. Further, AIAHL will issue 10-year bonds worth Rs 150 billion soon.

Recently, oil marketing companies (OMCs) stopped supplying fuel to Air India flights in Pune, Visakhapatnam, Cochin, Patna, Ranchi and Mohali and threatened to stop fuel supply at Hyderabad and Raipur airports as well over non-payment of dues. However, fuel supply was restored following government-mediated talks after which the OMCs decided to go soft on the national airline.

Grounding of aircraft

Recently, IndiGo’s A320neo aircraft have faced severe technical glitches. The Pratt and Whitney (P&W)-geared turbo fan engines that power the planes have had constant issues since they were pressed into service, leading to several planes being grounded last year and this year. The pending order book of aircraft for domestic airlines comprises over 500 aircraft with the P&W engine. Delays in resolution of these technical issues are likely to result in delays in deliveries or cancellation of orders by airlines, further impacting the industry’s capacity. Meanwhile, GoAir has also grounded at least 10 of its 48 planes for want of a network to fly them.

In March 2019, the DGCA banned B737 Max planes after aviation regulators worldwide grounded the plane following the crash of an Ethiopian Airlines 737 Max and a Lion Air 737 Max. Following this, SpiceJet had to ground 12 B737 Max aircraft.

In the past few months, there has been a considerable surge in the import of aircraft to cater to the increasing demand. While fears of an acute capacity shortage post the grounding of Jet Airways loomed large, with the large aircraft order book of other operating airlines, the situation was restored to normal within a span of two months. Several aircraft were inducted and, at present, the fleet strength stands at almost the same number as that prior to the grounding of Jet Airways.

Pilot shortage

CAPA estimates the current number of pilots in the country at 7,963. Over the next decade, airlines will have to hire another 17,164 pilots. The projected growth in capacity, because of aircraft orders, will lead to a 14 per cent shortfall in commander pilots. A part of this gap will have to be met by more expensive expatriates (expats), leading to a rise in the wage bill, which is the second biggest cost component for airlines after fuel. The gap between crew and fleet will only widen in the coming years, leading to higher dependence on expats, which still may not be able to plug the gap entirely.

Instability at the top

IndiGo has been making headlines with news about a dispute between its two founders over corporate governance lapses in InterGlobe Aviation. While the founders called a truce in August 2019, the feud resurfaced recently. Amidst this scenario, interestingly, the airline’s business has not been affected as evidenced from the airline’s growth in terms of expansion of flight services and fleet addition. GoAir too witnessed the exit of as many as 15 senior management personnel in a span of nine months beginning last July due to various reasons.


According to ICRA, the domestic space will continue to remain key for carriers as it offers sizeable potential as well as feed-in traffic for international routes. As airlines continue to expand their fleet, there will be a gradual correction in the demand-supply imbalance and thus a further moderation in airfares. Meanwhile, IndiGo, SpiceJet and GoAir will increase their focus on international routes in the near future to tap the opportunity. A large number of aircraft, which were taken back by Jet Airways’ lessors, have now been leased to SpiceJet. This will strengthen the airline’s position in the market.

According to CAPA, low-cost carriers IndiGo, SpiceJet and GoAir are likely to report profits in 2019-20. With Air India inching closer towards a healthy operating profit, the disinvestment plans are expected to spell success this time. Air India is also expected to break even or incur a relatively lower loss, thereby setting a positive note for its disinvestment. The airline could also leverage opportunities in the international sector as the domestic market will continue to remain competitive.

Weak consumer sentiment across the economy has hit industries such as automobiles and fast-moving consumer goods, and the aviation market is no different. However, with the market correcting itself once economic growth recovers, the aviation industry is slated to soar high once again.