The Indian airline industry seems quite optimistic about the upcoming summer.
With demand returning and strong yields, the preliminary picture looks favorable for growth. Strong domestic demand is expected to continue and the baseline forecast predicts that 135-140 million domestic passengers and an additional 30 million international passengers will take to Indian skies in 2022.
Most flight restrictions have been lifted and schedule filings show aggressive capacity wars ahead. Collectively, the six largest airlines have forecast a 29% increase in domestic capacity rollout from the summer 2020 schedule. Even so, that’s only part of the picture. Cash and credit continue to be tight and looking at input costs, particularly fuel, exchange rates and funding, a turbulent race lies ahead. And into this fiercely competitive arena will enter two other airlines – a start-up and a post-bankruptcy airline. Pricing wars, ability wars, and talent wars are inevitable. The jury is out on whether all airlines will be able to survive the summer. A rebalancing that will begin to clearly reveal winners and losers is in sight.
A market structure tending towards a duopoly:
The pandemic has laid bare the flaws within Indian airlines. Just like their global counterparts, all Indian airlines have parked planes, cut capacity and renegotiated contracts – all just to save money. But the period has been particularly difficult for the weakest airlines – defined as those with fragile balance sheets, without parent company support and without alternative sources of income. The sale of the national airline, Air India, to the Tata Group has further changed the situation and at present the Indian market currently has two full-service carriers Air India and Vistara and four low-cost carriers: IndiGo, SpiceJet, GoFirst and AirAsia India. Entering this fray will be a newly well-capitalized start-up (Akasa) and a seventh player – Jet 2.0, which is still trying to find footing after bankruptcy. Market leader IndiGo has a monopoly market share of over 50%, while the combined Tata Group airlines are expected to have a domestic market share of 25-28%. The structure of the market tends towards a duopoly. With airlines owned by IndiGo and Tata on one side and the others competing on the sidelines.
Fundamental structural challenges persist
For Indian airlines, fundamental structural challenges persist. These are glossed over because of growth prospects, as is still the case. Leading the way are large aircraft orders and the financing of those orders. Sale-leaseback continues to be a core financing strategy for many airlines, but it’s a double-edged sword. Indeed, contract terms imply minimum delivery commitments and some of the weakest airlines fly in to unlock sale-leaseback cash flow only to find themselves deploying unprofitable capacity. It’s a situation that won’t end anytime soon.
As far as credit is concerned, the market oscillates between strong credit and weak credit. There is no middle ground. Parent company support has helped, but for players where this support is weak or non-existent (usually evidenced by lack of equity injections or inability to commit), default risks are high . Individual balance sheets are far too weak to reassure lenders. In fact, asset-light balance sheets, once touted as management mantras, are now haunted by limited assets that can be collateralized or leveraged. Liens on these cash flows are not viable due to the uncertainty of the cash flows. Political uncertainty and upcoming capacity wars only exacerbate the situation. This forces lenders to limit risk by requiring collateral. The warranty that is missing.
Indian airlines also face the troika of fuel, currency and financing. Fuel, especially jet fuel, as it is taxed as a luxury and regulated as a commodity; FX – because the rupiah-dollar spread has gradually widened with no sign of stabilizing; and financing because the cost of capital continues to be high.
A rebalancing is on the horizon
Indian aviation continues to be a paradise and a paradox. It is a market of contrasts. Where opportunities meet challenges. A market with immense potential, but fundamental challenges; a market with a growing passenger base but rapidly improving road and rail infrastructure, which will slow demand in the future; and a market where multiple airlines fly in a sea of similarities – all pretending to be different. For now, the financially strongest player in the market has the highest capacity and market share, but the price sensitivity is so high that despite a monopolistic market share, this does not translate into power. price fixing.
Among six airlines, 72.7 million passengers, 650 aircraft, over-reliance on sale-leaseback financing, weak balance sheets and $2.5 billion in losses for the recently ended fiscal year, limited credit and unlimited capacity will only add to the sector’s woes. Something has to give. And it is likely to happen this year. Indian aviation is on the verge of rebalancing.
Satyendra Pandey is the managing partner of Indian aviation consultancy AT-TV.
April 17, 2022