Indian fleet Fare, capacity and talent wars are inevitable. A rebalancing that will reveal clear winners and losers is in the offing G_P_Sampath Kumar | Photo Credit: G_P_Sampath Kumar
The jury is out on whether all airlines will be able to survive the summer with cash and credit continuing to be constrained
With demand returning, the Indian airline industry looks poised for growth. Domestic demand is set to continue and base case forecasts call for 135 -140 million domestic passengers and 30 million international passengers taking to Indian skies in 2022. Most restrictions on flights have been lifted and schedule filings show capacity wars ahead. Collectively, the six largest airlines have planned a domestic capacity deployment increase of 29 per cent over the summer 2020 schedule. However, cash and credit continue to be constrained and as one looks at input costs, especially fuel, exchange rates and financing — a turbulent ride awaits. And into this competitive arena will enter two more airlines — a start-up and a post-bankruptcy airline. Fare, capacity and talent wars are inevitable. The jury is out on whether all airlines will be able to survive the summer. A rebalancing that will reveal clear winners and losers is in the offing.
A duopolistic market
The pandemic laid bare fault-lines within India’s airlines. Much like their global counterparts, Indian airlines parked planes, cut capacity and renegotiated contracts to conserve cash. But the period was especially challenging for weaker airlines — with fragile balance sheets, no parent company backing and no alternate revenue streams. The sale of Air India to the Tata group further altered the picture and currently the Indian market currently has two full-service carriers, Air India and Vistara and four low-cost carriers: IndiGo, SpiceJet, GoFirst and AirAsia India. Into this fray will enter a newly well-capitalised start-up (Akasa) and Jet 2.0 — which is still trying to find a foothold post-bankruptcy. The market leader IndiGo sits with a monopoly market share in excess of 50 per cent, while the combined Tata group airlines are set to command a domestic market share of 25-28 per cent. The market structure is tending toward a duopoly; with IndiGo and Tata-owned airlines on one side and the rest competing at the fringes.
Structural challenges continue
For India’s airlines, fundamental structural challenges continue. These are glossed over because of growth prospects. Leading the pack are voluminous aircraft orders and the financing of these orders. The sale-and-leaseback continues to be a core financing strategy, but is a double-edged sword. This is because contractual clauses entail minimum delivery commitments and the weaker airlines are taking on aircraft to unlock sale-and-leaseback cash flow only to find themselves deploying unprofitable capacity.
As far as credit goes, the market is diverging between strong and weak credit. Parent company backing has helped, but for players where this backing is weak or non-existent, the default risks are high. Stand-alone balance sheets are too weak to give lenders any comfort. In fact, asset-light balance sheets, once touted as management mantras, have now come to haunt with limited assets that can be collateralised or leveraged. Liens on this cash flow are not viable due to cash flow uncertainty. Policy uncertainty and upcoming capacity wars only exacerbate the situation. This is forcing lenders to limit risk by insisting on collateral.
India’s airlines also face the troika of fuel, FX and financing. Fuel, specifically jet fuel, because it is taxed as a luxury and regulated as a commodity; FX — because the rupee-dollar spread has gradually increased; and financing because cost of capital continues to be high.
A rebalancing is on the horizon
Indian aviation is a market of contrasts, where opportunities abound alongside challenges. A market with a growing traveller base but rapidly improving road and rail infrastructure, which will dent future demand; and a market where multiple airlines are flying in a sea of similarity — all claiming to be different. For now, the financially strongest player in the market commands highest capacity and market share, but price sensitivity is so high that in spite of a monopoly market share, it does not translate into pricing power. Among six airlines, 72.7 million passengers, 650 aircraft, overdependence on the sale-and-leaseback financing mechanism, weak balance sheets and $2.5 billion of losses for the recently concluded financial year, constrained credit and unconstrained capacity, will only add to the sector’s woes. Something has to give. And it is likely to happen this year. Indian aviation is poised for rebalancing.
(Satyendra Pandey is Managing Partner for the India-based aviation advisory firm AT-TV.)