Also, the higher, the better. This shows how the airline’s fleet is growing. And even if an airline is abandoning some of its aircraft, it is doing so because these are out of date or the lease has expired and thus are being replaced with new ones. Between January 2020 (about three months before the Covid-19 pandemic) and September 2021 (for which this data is available), these lists have three stories of advances and retreats.
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The first story is a calculated progress in a turbulent market: IndiGo (net addition of 35 planes) and Vistara (net addition of 12). The second story is that of conservatism: AirAsia (net addition of 5) and Go First (net addition of 1). The third story has booked today’s losses to fight another day: SpiceJet (net loss of 9 planes) and Air India (net loss of 17 planes).
These moves lay in the contours of the two axes that are set to slow it down and shape the next phase of Indian aviation. The market leader in one corner is IndiGo, which has consolidated its relative position in the sector during the pandemic. In the other corner is the Tata Group, which in just eight years has built up controlling interests in four Indian airlines: Vistara, Air India, Air India Express and AirAsia. Between them, IndiGo and Tata control about four-fifths of India’s domestic passenger segment and about one-third of its international segment.
Today, both IndiGo and Tata are blocking their intentions to serve them well, when the sector recovered from the Covid-19 pandemic, which hurt demand, and now the Russo-Ukraine war, which hurt their costs. Used to be. Each is adding aircraft, sizing up, appointing new CEOs and resolving old issues. In the medium to long run, India remains an aviation market, described by IndiGo promoter Rahul Bhatia recently as “the last bastion of huge growth globally”. When the wheel turns, they want to be able to ride it.
growth and profitability
They are all trying to crack an area that has remained elusive. A recent research report by airline consultancy CAPA-Center for Aviation cites a report by JPMorgan, which puts this quick finding into context. It says airlines are “deep serial value destroyers in the long run, owned only by those in the up-cycle. The long-term profitability of the network airline industry is fundamentally flawed.”
The CAPA report explains this in detail. It says: “‘Traditional’ airlines, or flag carriers, are supported by governments to a greater or lesser extent – if only by the protectionism inherent in the regulatory structure. In contrast, recent low-cost models are mostly independent and unsupported, which need to be increased. have to crash through obstacles. Yet all perpetuate the myth that they can work profitably.”
A major variable in this equation is fuel cost, where airlines are basically at the mercy of crude oil prices. For example, fuel accounted for 25 per cent of IndiGo’s total expenditure in the March 2021 quarter. During the quarter, Brent crude prices remained in the range of $50-70 per barrel. A year later, in the March 2022 quarter, it rose to between $78 and $133. For IndiGo, the share of fuel in the total cost increased from 25% to 33%, worsening its profitability.
For Indian airlines, except for profits, growth is expected to be in their favor in the long run. In a research report, major commercial aircraft maker Airbus forecast passenger growth for 143 geographic units and combinations globally, both domestically and internationally. It projected traffic flows within the Indian sub-continent—mainly the Indian domestic market—to grow fastest between 2019 and 2040, at 7% compounded annually.
According to the global airline grouping International Air Transport Association (IATA), India is currently the third largest domestic market in the world. In March 2022, India’s domestic travel accounted for 2.2% of the world’s total revenue passenger kilometres. But it is not patched on US Domestic (25.6%) and China Domestic (17.8%). Thus, while India presents a strong opportunity to grow, it is on a much smaller basis than the US and China.
pandemic turmoil
Furthermore, while the pandemic was bad enough, every domestic airline of importance faced internal realization during that period. Market leader IndiGo saw two of its key promoters collapse over governance issues, with one of them eventually agreeing to take a back seat and reduce its stake over five years.
The government eventually privatized Air India and its low-cost arm Air India Express. Their sale to the Tata group could improve utilization of their aviation assets such as aircraft, bilateral flight rights and airport slots. Then, Go First had to change its name to Go Air, reportedly due to a potential trademark dispute with its promoters. It was also filed to be made public and raised 3,600 crore in May 2021, but that issue is yet to happen. Funds are something that even SpiceJet desperately needs, which has slipped from a clear number two to a middle runner among domestic passengers; However, it has created a successful diversification in cargo.
These airlines will also have to deal with a new airline. Akasa, promoted by reputed investor Rakesh Jhunjhunwala, is likely to take to the skies in July and is targeting a fleet of 18 aircraft by March 2023. And even Jet Airways is trying to settle its bankruptcy proceedings and get flying again.
flight to the future
The big steps shaping the sector are coming from IndiGo and Tata. During the pandemic, IndiGo increased its domestic stake at the expense of Air India, SpiceJet and Go First. Its domestic share stood at 53.9% in the latest quarter. But at the same time, Tata-controlled airlines have a combined share of 24.5%, and this is the first time that IndiGo will be pitted against a challenger with strong intent and deep pockets.
IndiGo is one of the rare airlines in the world with a healthy record of profits. Those reserves help to weather adversity better. In May 2022, IndiGo was ranked eighth among all world airlines in terms of number of flights, according to travel data provider OAG. In addition, it was the only airline out of eight to increase flight frequency in the pre-pandemic month of May 2019.
Even as it continues its domestic march, IndiGo is preparing for a big international game. That international ambition has been cited as a reason for the choice of Peter Albers as its next CEO. Albers is a 30-year veteran of Dutch airline KLM, who rose to become its CEO. In 2019-20, the last regular year before the pandemic broke out, the international segment accounted for only 18% of IndiGo’s revenue. But IndiGo’s international revenue grew by 70% and domestic by 18%.
While IndiGo takes it forward from an established leader position, Tata’s recent actions revolve around the objective of bringing more orders to a diversified household. Tata may merge its airlines to make it a power player. In the past one month, it has approached India’s competition regulator for approval to merge AirAsia with Air India. It has launched a voluntary retirement scheme to reduce the bloated workforce of Air India. It has transferred senior Vistara executives to Air India in key functions such as network planning, IT and inflight services.
Like IndiGo, the next CEO of Air India is also an expatriate: Campbell Wilson, former CEO of Scooter, the low-cost arm of Singapore Airlines. In 2019-20, the international segment accounted for 35% of Air India’s revenue. Air India has good international assets like route rights and airport slots, and this will aim to make them sweat more. And although it is dropping planes, it should be seen as a move to right-size its fleet, especially in its new context, where it is part of a bouquet of four airlines. How IndiGo and Tata shape up will determine the next phase of Indian aviation.
four stages of aviation
The Indian aviation sector, in its brief history of re-allowing private airlines, has been littered with tales of colossal ambition and spectacular failure. This journey can be divided into four phases. The first phase started in 1991. As part of the liberalization of the economy, aviation was reopened to the private sector. New entrants include Jet Airways, Damania, East-West, Modiluft and Air Sahara. Although aviation expanded, it remained a premium service, which limited the expansion of the market.
The entry of Air Deccan in 2003 changed this and defined the second phase. India’s first low-cost airline set out to change the premium nature of air travel by getting rid of value-added ones like food and business class. This forced other airlines to offer lower-cost sports. It expanded the market with annual domestic passengers tripling over a six-year period between 2002-03 and 2007-08.
But airlines also competed relentlessly on price, and dragged each other to a loss. The third phase between 2007 and 2019 was that of consolidation. First, two major low-cost airlines were bought by the full-service ones: Air Deccan by Kingfisher and Air Sahara by Jet Airways. Over time, both buyers went bankrupt. Amidst all this, IndiGo has shown how to ace the low-cost model and run the airline profitably in India. It also shaped the expansion of the overall market, which tripled in the 11-year period between 2009-10 and 2019-20.
The outbreak of the COVID-19 pandemic in March 2020, which led to a complete shutdown followed by a gradual opening, marked the fourth phase. As the recovery progresses, the fifth phase of post-liberalisation Indian aviation awaits, amid a cloud of high fuel prices.
flight 5.0
In its April 2022 report titled Airlines in Transition, CAPA listed key trends likely to shape global aviation in a post-pandemic world. One, it believes that business travel—a key segment for airlines—will be slow to recover, and will render the full-service, long-haul model unusable. Two, narrow-bodied aircraft with greater fuel efficiency will shape point-to-point operations. Their greater fuel efficiency means they can cover a range of 5-8 hours. Their narrow body means they can fly to more airports. IndiGo is said to be looking at the A321XLR, a narrow-bodied aircraft launched last month, to expand its international reach.
Third, the low cost model would be the “model for the time being”. According to the report, globally, the share of low-cost capacity in total operations has increased from 27.5% in 2011 to 35% in 2020. With four, affected by the pandemic, conditions are favorable for new entrants with financial muscle. Between the beginning of 2020 and the middle of 2021, 46 new airlines started, it adds. In India too, as there is one Akasa. But can it match the strength of Indigo and Tata?
(howindialives.com is a search engine for public data.)