The Indian airline industry seems quite optimistic about the summer ahead.
With demand returning and yields holding strong, the preliminary picture looks well-poised for growth. Strong domestic demand is set to continue and base case forecasts call for 135-140 million domestic passengers and another 30 million international passengers taking to the Indian skies in 2022.
Most restrictions on flights have been lifted and schedule filings show aggressive capacity wars ahead. Collectively, the six largest airlines have planned a domestic capacity deployment increase of 29 per cent over the summer 2020 schedule. Even so, that is only part of the picture. 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 intensely competitive arena will enter two more airlines — a start-up and a post-bankruptcy airline. Fare wars, capacity wars and talent wars are inevitable. The jury is out on whether all the airlines will be able to survive the summer. A rebalancing that will start to reveal clear winners and losers is in the offing.
A market structure tending towards a duopoly:
The pandemic laid bare fault-lines within India’s airlines. Much like their global counterparts, all Indian airlines parked planes, cut capacity and renegotiated contracts — with a singular goal of conserving cash. But the period was especially challenging for weaker airlines — defined as those with fragile balance sheets, no parent company backing and no alternate revenue streams. The sale of the national airline, Air India, to the Tata group further altered the picture and as it stands, 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 a seventh player – 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.
Fundamental structural challenges continue
For India’s airlines, fundamental structural challenges continue. These are glossed over because of growth prospects, as is the case once again. Leading the pack are voluminous aircraft orders and financing of these orders. The sale-and-leaseback continues to be a core financing strategy for several airlines, but is a double-edged sword. This is because contractual clauses entail minimum delivery commitments and some of the weaker airlines are taking on aircraft to unlock the sale-and-leaseback cash flow only to find themselves deploying unprofitable capacity. It is a situation that will not let up anytime soon.
As far as credit goes, the market is diverging between strong credit and weak credit. There is no middle. Parent company backing has helped, but for players where this backing is weak or non-existent (usually evidenced by lack of equity infusions or the failure to engage), the default risks are high. Stand-alone balance sheets are far 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 because of cash flow uncertainty. Policy uncertainty and upcoming capacity wars only exacerbate the situation. This is forcing lenders to limit risk by insisting on collateral. The collateral that is found wanting.
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 with no signs of settling; and financing because 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 abound alongside challenges. A market with immense potential, but fundamental challenges; a market with a growing traveller base but rapidly improving road and rail infrastructure, which will dent demand in times to come; 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 the Managing Partner for the India based aviation advisory firm AT-TV.