Hits and failures of the aviation sector over 10 years

NEW DELHI: When the NDA led by Prime Minister Narendra Modi came to power in 2014, the domestic aviation industry was under intense pressure due to the grounding of Kingfisher Airlines. Massive losses, mounting debts, employee protests and promoter Vijay Mallya’s flight to the UK made headlines in the industry.

Against this backdrop, another private airline – Spicejet – faced turmoil when its new promoter – media baron Kalanidhi Maran – realized why many billionaires shy away from owning an airline. Less than a year after the new government came to power, SpiceJet was sold to Ajay Singh.

Fast forward to 2024 and the sector has not yet recovered from the crisis. Over the last 5 years, two major airlines – Jet Airways and Go First – have fallen into financial trouble, while many smaller players have disappeared as a result of the Covid-19 pandemic.

However, a big change for the industry was the privatization of Air India and the emergence of two strong players. After placing orders for over 1,100 aircraft, Tata Group-led Air India and Interglobe Aviation (IndiGo) have set themselves the target of defining the fastest growing aviation market in the world.

10% CAGR over 10 years

The Indian aviation industry has recorded a compound annual growth rate (CAGR) of 10% in domestic passenger traffic over the last 10 years, i.e., FY2014 to FY2024. This growth was supported by a growing economy, improved infrastructure and connections to regional centers. The number of operating airports has doubled from 74 in 2014 to 148 in April 2023.

Kinjal Shah, Vice President and Head, Collaborative Group, Corporate Ratings, ICRA Limited, said this growth should be looked at from two aspects – pre-pandemic, that is, between FY2014 and FY2020, domestic air passenger traffic recorded a CAGR of 15%. , while growth was impacted from FY21 onwards as pandemic-related restrictions halted passenger flows in FY21 and FY22. The recovery in passenger traffic was significant with a CAGR of 35% between FY22 and FY24.

“However, over the same period, capacity growth in terms of available seat kilometers or ASKM has increased at a CAGR of 8% and has been slower than passenger traffic growth,” Shah added. The main reason is the collapse of several carriers.

Pragya Priyadarshini, vice president of Primus Partners, said airlines had worked hard in the past to attract passengers but were now struggling to expand capacity, which had led to high ticket prices. Most airlines are already serving 85% or more passengers, indicating the need to increase capacity to meet demand, Priyadarshini added.

Big misses

While the government’s ambitious Regional Connectivity Scheme (RCS) – Ude Desh Ka Aam Nagrik (UDAN) and the privatization of loss-making Air India are touted as big positives for the industry, the collapse of many airlines in a difficult regulatory environment remains a big concern. Despite a long bankruptcy process, Jet Airways 2.0 has not yet launched, and hopes for Go First’s revival have been dashed.

Moreover, the credit profile of several existing players remains weak. “While some airlines have adequate liquidity and/or financial backing from a strong parent supporting their credit profiles, the credit metrics and liquidity profile of other airlines will remain under pressure in the near term, despite some improvement compared to the last few years,” added. said ICRA’s Shah.

Even the much-praised UDAN program has its drawbacks. The Comptroller and Auditor General (CAG) in August 2023 found that only 54 routes, or 7% of the total routes licensed under UDAN, managed to sustain operations beyond the three-year license period. CAG flagged that 52% (403 out of 774 routes) of allocated routes were unable to commence operations. Moreover, the main objective of the program to provide tickets at affordable prices was questioned.

Moreover, the most populous country’s ambition to become a global aviation hub remains a project on paper, with over 55% of international travel in the country still operated by foreign airlines. Recent efforts by IndiGo and Air India to introduce more wide-body aircraft are likely to reduce the dominance of foreign airlines in the country.

Two strong players

The Indian aviation market has become the playground of two strong players – IndiGo and Air India Group. While IndiGo still has over 60% of the domestic market share, the Air India group and its three airlines are fast approaching 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, further consolidation is unlikely to take place in the near future. However, factors such as market dynamics, regulatory changes, economic conditions and competition may continue to drive consolidation in the future, but perhaps not on the same scale,” said Priyadarshini of Primus Partners.

Of the remaining 11%, Spicejet (4.7%) and Akasa Air (4.4%) have a combined market share of over 9%. Most market experts believe that having two strong players is good for the industry, but it also leads to higher airfares due to reduced competition.

“The industry is characterized by high fixed costs. 35-42% of airline expenses, including operating leasing fees, aircraft parking fees, airport fees, aircraft maintenance fees and employee costs, are recurrent. However, the industry has recently seen greater pricing power, reflected in improved profitability and the spread between revenue per available seat kilometer and cost per available seat kilometer (RASK-CASK) for airlines,” said ICRA’s Shah. The rating agency expects passenger traffic to increase by 8-13% in the medium term.