India’s aviation sector will boom under Modi 3.0, but ’emerging duopoly’ could harm consumers

JM Financial said there will be a recovery in the aviation industry given the government’s focus.

“With a strong focus on transforming India into a global aerospace manufacturing hub and introducing the Amrit Kaal Civil Aviation Master Plan (BJP Manifesto), the BJP’s return to power could accelerate the growth of India’s underpenetrated aerospace industry,” a note said this week.

The investment banking firm added that the number of airports has doubled from 74 to 149 over the last decade – the first two terms of the Narendra Modi-led government – and is expected to reach 220 in the next five years. Moreover, significant new aircraft orders from Indian airlines, expected to be delivered over the next few years, will further strengthen the aviation sector, he said.

“The order for 1,124 aircraft by Indian airlines in FY24 and a capital expenditure plan of Rs 1 lakh crore could accelerate the growth of the Indian aviation industry,” it noted.

Separately, Nuvama Institutional Equities added that the Indian aviation industry is set for growth, with domestic passenger traffic expected to grow by 8-13 per cent in the current financial year, reaching 150-155 million and exceeding pre-pandemic levels.

She noted that this happened despite headwinds such as grounding of planes, supply chain issues and curtailment of SpiceJet and Go First’s operations.

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Strong growth in air traffic

In April 2024, air passenger numbers increased 8 percent year-on-year to 15 million passengers, supported by strong demand for international travel and continued demand for domestic travel. The total number of scheduled flights rose 8 percent to 90,000 in June, mainly due to an increase in international travel, although the increase was partially offset by aircraft groundings.

Given the growing travel demand in India, international airlines are also considering expanding their presence in the country. For example, in an interview for CNBC TV-18Le Hong Ha, president and CEO of Vietnam Airlines, said the airline intends to expand its presence in the Indian market as the market has huge potential.

Reports suggest that Hungary-based Malaysia Airlines and Wizz Air are also considering expansion into the Indian market.

The emerging duopoly may harm consumers

However, amid strong demand, Nuvama Institutional Equities expects a “duopoly-like industry structure” that could impact consumer interests and competition in the near term.

“With much of the Go First fleet grounded due to engine shortages, the resumption of Go First operations remains unclear,” the memo said. “Despite plans for an initial public offering and fundraising efforts, challenges remain, including engine delivery delays and financial strains.”

Nuvama added that Go First’s market share has been steadily declining and operational hurdles are hampering its recovery.

Moreover, despite the NCLT tribunal granting Go First a third extension of 60 days to complete the company’s insolvency process in early April, the Delhi High Court later that month ordered the DGCA to deregister all 54 aircraft leased by the airline, further dimming any chance of revival .

While India’s total aircraft fleet at the end of FY24 is estimated at 790 aircraft – 100 more than the previous year – led mainly by Air India and Indigo, the actual operational fleet is estimated to be much lower and will grow by just 12 aircraft to 588 due to the increase in the number of grounded aircraft.

“The total number of grounded aircraft is expected to increase to 200 from 165 currently, mainly due to supply chain issues, P&W engine issues and operational weakness of SpiceJet (SJ) and suspension of Go First and SJ,” Nuvama said. “Indigo and SJ have resorted to introducing wet-leased aircraft to address capacity shortages. Up to 30 wet-leased aircraft are expected to be operated by Mar-24E.

Under a wet lease agreement, the lessor provides the aircraft along with crew and maintenance.

Go First and SpiceJet’s troubles benefit market leaders

Nuvama added that since the entire Go First fleet is expected to remain grounded (54 aircraft) and SpiceJet’s operational capacity is also likely to decline by 70 percent by March 2024, there will only be two large players in the industry with a combined share of domestic market amounting to over 75%.

“IndiGo is likely to benefit from market share gains across categories amid weakening small players such as Go First and SJ (SpiceJet),” Nuvama said. “The industry could consolidate into two or three players, which will have a critical impact on consumer interest and competition in the near future.”

Meanwhile, JM Financial noted that the Air India-Vistara merger, approved by the NCLT, creating India’s largest international carrier and second-largest domestic carrier, is likely to lead to increased competition intensity from Air India.

This week, Air India announced plans to introduce a three-class configuration across its full-service single-aisle (A320neo) fleet in the coming year. With this, the airline will offer business class, premium economy and economy cabins on domestic and short international routes.

Nuvama said the likely duopolistic structure of the industry dominated by Indigo and Air India “will encourage pricing discipline, thereby enhancing profitability in the long run.”

He added that aggressive capacity expansion and strong demand will drive passenger growth.

Nevertheless, some relief for airlines is expected in the near future. JM Financial expects a reduction in aviation turbine fuel (ATF) prices, which could help the sector grow.

“ATF, which constitutes the major part of operating expenses (i.e. 45-50 percent), saw a price reduction in the fourth quarter after a sharp increase in the second and third quarters and in the third quarter. On June 24, the price was further reduced by Rs 7,000,” it said. “Because of this, airlines may experience lower costs and higher margins.”

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