Changing Dynamics: A paradigm shift in the Indian airline industry

The past two years have been quite eventful for the Indian civil aviation industry. The sector’s V-shaped recovery has been supported by a robust demand for air travel. The development of new airports and expansion plans of airlines will ensure sustained growth of the world’s third largest aviation market. The airline industry has undergone transformative changes due to the entry of a new player, the ta­keover of existing ones, and financial and safety concerns of certain airlines. Further, in their efforts to cater to both global and domestic markets, airlines such as Air India and Indi­Go have placed significant aircraft orders.

Return of the Maharaja to Tata

The year 2022 will be marked as the year when Air India returned to the Tata Group, almost 70 years after its nationalisation. The Tata Group took over Air India in January 2022, with the co­mplete transfer of shares and management control. The salt-to-aviation conglomerate re­cei­ved approval from the Competition Commis­sion of India for the merger of AirAsia India with Air India Express and the merger of Vistara with Air India.

AirAsia India has been allowed to operate flights under the Air India Express brand, enab­ling synergies in route planning, advertising and ticket sales as a single entity. The Tata Gr­oup aims to create a larger low-cost entity by merging the two entities. Vistara, a 51:49 joint venture between Tata Sons and Singapore Air­lines, was established in 2013. Following the consolidation, Singapore Airlines will hold a 25.1 per cent stake in Air India.

Following its takeover by the Tata Group, Air India has outlined a digital roadmap to re­vamp its systems and processes. To this end, the airline has made significant investments. The airline’s comprehensive five-year transformation plan, Vihaan.AI, envisions digital technologies as a key differentiator for the airline, which aspires to be an industry leader in technology adoption.

In one of the largest aircraft orders, Air India finalised a purchase order of 470 aircraft from Airbus (250 aircraft) and Boeing (220 aircraft) worth $70 billion at list prices. This ranks second to IndiGo’s order of 500 Airbus A320 family aircraft, which is the largest-ever single aircraft purchase by any airline from Airbus.

The Tata Group’s focus extends beyond expanding Air India’s network, but also inclu­des improving safety, reliability and on-time performance of the airline, which was known for its frequent delays and poor customer service.

IndiGo has firmly held its position as a market leader over the past few years. Its share has been steadily rising from 37 per cent in 2015 to 63 per cent in 2023 (as of August). In contrast, the domestic market share of state-run Air India has consistently declined over the years. It dropped to 12 per cent in 2021 from 16.4 per cent in 2015. Following its acquisition by the Tata Group, the combined market share of Air India, Vistara and AirAsia India now stands at over 25 per cent as of August 2023, taking Air India to the second position in the country.

New player on the block

Akasa Air, launched in August 2022, is the latest entrant in the country’s civil aviation market. In less than a year, the airline has acquired almost 5 per cent market share, operating with 20 aircraft. It has made a purchase order of 72 Boeing 737 MAX aircraft, a remarkable achieve­ment for a fledgling airline. It recently expanded its aircraft order with four more airplanes and is looking at a potential order of 100 plus aircraft by the end of the year. This is part of the airline’s plan to rapidly expand its network within India and start international operations. However, around the time of its anniversary, Akasa Air faced difficulties, with over 40 pilots quitting without serving their mandatory contractual period. This led to flight cancellations and a consequent loss of market share too, which declined to 4.2 per cent in August 2023 from 5.2 per cent in the previous month.

Airlines’ financial woes

After more than 25 years of operation, Jet Airways, which was the single largest full service carrier in the country till 2017-18, was grou­nded in 2019 due to a severe cash crunch, leading to insolvency proceedings. The Jalan-Kalrock consortium (JKC) won the bid to take over the airline and has since infused Rs 2.5 billion into it. While Jet Airways’ flying permit has been renewed, its future still remains un­certain as JKC requires more time to repay the defunct airline’s creditors.

Following Jet Airways, insolvency proceedings were initiated for Go First (originally GoAir) due to faulty engines causing operational and financial issues. The low-cost carrier states that the percentage of grounded aircraft due to faulty Pratt & Whitney engines grew from 7 per cent in December 2019 to 50 per cent in December 2022. This led to a loss of revenue and additional expenses, weakening Go First’s ability to meet its obligations and prompting the airline to file for insolvency in May 2023. Consequently, its market share fell from 11 per cent in 2019 to 6.4 per cent in 2023 (as of April). Further, lessors have applied for the deregistration of a total of 54 aircraft leased to the airline.

SpiceJet’s challenges seem unending – from the grounding of the Boeing MAX aircraft globally after two fatal crashes in 2019, followed by the pandemic-induced shutdown of operations, grounding of its aircraft on account of safety issues and now to operational creditors filing for insolvency pleas due to non-payment of dues. Reportedly, the airline will allot around 48 million shares to aircraft lessors to clear outstanding dues worth around Rs 2.3 billion. The cash-strapped airline improved its financial position by hiving off its cargo business and converting Carlyle Aviation Partners’ outstanding dues into equity and compulsorily co­nvertible debentures. SpiceJet’s domestic market share in terms of passengers carried significantly declined from 15 per cent in 2019 to 4.4 per cent in 2023 (as of August).

Despite equity infusion by promoters and the government’s Emergency Credit Line Gu­arantee Scheme, beleaguered budget carriers SpiceJet and Go First are walking a tight rope and need to strengthen their market positions in a highly competitive airline industry, especially after losing shares to Tata-acquired Air India and newly launched Akasa Air.

Global headwinds

Pratt & Whitney has decided to inspect around 1,200 engines worldwide due to identified defects. This will have a significant operational impact on airlines, including Indian carriers, which will be forced to ground fleet and source spare parts and engines to avoid flight disruptions, especially during peak seasons. Even when aircraft is grounded, maintenance costs are incurred, along with additional costs in case of leasing more aircraft. This could have a negative impact on the cash flow generation of airlines, given the high fixed-cost nature of the aviation industry. IndiGo is expected to be affected as it has a large number of A320 aircraft, which are powered by the Pratt & Whitney engine. However, the airline is actively working to minimise its impact.

As per ICRA’s estimates, in 2022-23, the India aviation industry is estimated to have incurred a net loss of approximately Rs 110 billion-Rs 130 billion, primarily due to elevated aviation turbine fuel (ATF) prices and depreciation of the Indian rupee against the US dollar. With fuel cost constituting 40-50 per cent of the airlines’ operating expenses, rising ATF pri­ces have significantly impacted the margins of domestic carriers. Looking ahead, the net loss is projected to decrease to Rs 50 billion-Rs 70 billion in 2023-24 as airlines continue to experience robust passenger traffic growth, according to ICRA.

Bright road ahead

Touted as the fastest growing aviation market in the world, the Indian aviation industry has achieved a growth rate of almost 10 per cent over the past decade, almost 2.5 times that of the global average. This growth is being supported by the expansion of airport infrastructure to ha­ndle the rising passenger footfall and improve regional connectivity. Given an eventful 2022 for the civil aviation industry, with airlines formulating robust expansion plans, it will be interesting to observe the evolving market dynamics, particularly as Indian carriers strive to establish a significant international presen­ce. Until then, bon voyage!

Ishita Gupta