New Delhi, 19 May 2022: The Indian aviation sector was struggling even prior to the advent of COVID. The industry had failed to capitalise on the exit of the country’s second largest carrier, Jet Airways, to rationalise capacity and introduce pricing discipline. As a result, most carriers entered the pandemic with poor financials and weak balance sheets.
The challenges that ensued over the next two years were unprecedented in scale and severity. In FY2021 and FY2022, Indian carriers have incurred further massive losses estimated at USD7-8 billion on an unadjusted basis, contributing to total accumulated losses of around USD27 billion since FY2004.
Such losses have inflicted deep and structural wounds on the industry and yet this is being ignored as though nothing has happened.
To compound the situation, the recovery from COVID is taking place against a very challenging and uncertain backdrop. Aside from the fact that the virus itself remains an ever-present threat, fuel prices in Indian rupees are at record levels (around 70% higher in local currency terms than when Brent Crude approached USD150/barrel in 2008); the currency is the weakest it has been; geo-political tensions have risen with the Russia-Ukraine conflict; the threat of a global recession is increasing; and several emerging markets are facing the prospect of economic and social upheaval as a result of falling into a debt trap.
The operating environment is far more challenging than it was when COVID arrived on the scene, and yet everybody is significantly weaker. In fact, some airlines are in dire need of significant solvent capitalisation, but this is not being addressed.
These are exceptional circumstances, arguably the most challenging in the history of Indian aviation. It was widely expected that the fraught conditions of the last two years would have resulted in market consolidation. Instead, India will soon have two more strong and well-capitalised airlines joining the fray, while all the incumbent carriers continue to operate.
In this context, one critical, recent development will potentially have a very significant and strategic impact on the direction of the industry. In 2021 the domestic market was dominated by IndiGo with a market share of around 55%. The balance was fragmented among five other airlines with no strong number 2 to challenge the market leader.
The privatisation of Air India has changed the game. With four carriers under one umbrella, the Air India Group has a market share of around 25%. IndiGo and Air India Group combined account for around 80% of the domestic market at present, which could moderate over time to around 75%. These carriers will become the two core pillars of the industry going forward.
But what about the rest? If Go First (formerly GoAir), SpiceJet and new entrants Akasa and Jet Airways 2.0 were to battle it out for the remaining 25% of the market, they will each at best be able to secure 5-10% of traffic. This is a no-man’s land which leaves them neither competitively relevant in the general market, nor occupying a specific niche. It is a position that makes the success and survival of each individual carrier more challenging and increases the prospect of two strong pivots emerging.
Given this prospect, there is a need to create a viable third pillar in the market in the near-term. If they are prepared to adopt a pragmatic approach, Go First and SpiceJet are best placed to play this role by coming together either 1) by forming an alliance with coordinated operations and marketing, but still maintaining two separate AOPs; 2) a formal merger of the two carriers; or 3) an investor-led integration of the airlines.
An industry with three pillars could, for illustrative purposes, result in near-term market shares of IndiGo at 50%, Air India Group at 25%, Go First/SpiceJet at 20% and start-ups at 5% (increasing over time as others rationalise). This would restore order in the market, and likely deliver a level of competition that is positive for consumers and the economy, but with rational capacity and pricing decisions that are positive for shareholders, employees and the entire aviation value chain.
With Akasa being a very capable and well-capitalised start-up, and the re-emergent Jet Airways bringing a strong brand and experience, these two carriers will inject a level of energy and dynamism that will continue to push the incumbents to innovate. In fact, if Go First/SpiceJet are able to come together, Akasa and Jet Airways will also be better-positioned to compete in the resultant market structure which will likely be more stable and rational.
But achieving this requires Go First and SpiceJet to come together in some shape or form. If a third pillar does not emerge in this manner, then IndiGo and Air India are likely to become much stronger and dominant, because it will take time for Akasa and Jet Airways to achieve the scale to become meaningful competitors. And global experience indicates that once two key pivots have become entrenched, it may become more difficult for a third pillar to emerge at a later stage.
Viability should be the hallmark of the next phase of Indian aviation. We can longer continue to celebrate profitless growth. Being the world’s fastest growing aviation market has no value beyond the headlines that it generates. That viability needs to be achieved by means of a stable market and a competitive cost structure. Every stakeholder must play a role in building this architecture.