Can small airlines survive in India's new aviation landscape?

Even as the gloom and doom that engulfed India’s airlines post pandemic begins to lift, the last few weeks have been quite chaotic for fliers on the country’s smaller airlines. Airlines schedules have been erratic with many cancellations that have been playing havoc, especially on non metro routes. 

The niggling fleet and network problems faced by smaller airlines - SpiceJet, Go First, AirAsia India, and Air India Express and even the market leader IndiGo have combined to ensure that passengers are forced to deal with last minute time and schedule changes and then cancellations. Frustrated passengers are forced to book and rebook thrice on account of last minute changes by the carriers. What has irked many fliers is that these last minute changes force them to rebook at far higher fares on airlines like Vistara and IndiGo - which remains more reliable since it offers far more frequency on all routes than rivals.

A senior government source says that this was happening as many of the smaller players are “over-extending beyond their fleet capacity” in a bid to regain some of the lost market share over the last two years. In the case of AirAsia India and Air India Express, the network alignment of the two airlines as they merge have led to frequent changes and cancellations in the last few weeks.

But as India’s aviation sector embarks on a never before consolidation phase, the bigger question many are beginning to ask is whether we need so many unreliable, smaller players with weak balance sheets, questionable commitment and a lackluster track record that are in fact causing more grief than bringing any great benefits to fliers and passengers as a whole.

To understand why the present structure of the industry is untenable, readers need to absorb some of the salient features of this sector. India’s aviation sector continues to defy logic. In FY20, the country had six scheduled airlines with combined losses of around $1.7 billion. In the last financial year, the country had seven scheduled airlines with combined losses to the tune of $7-8 billion in FY21 and FY22. So despite losses growing, none of the incumbent players have bowed out. In fact, one new player, Akasa Air, has joined the race and is by all accounts racing ahead of rivals.

Two other events have changed the entire market scenario. One was the pandemic which invariably led to weakening of already vulnerable players. Pre pandemic, airlines like SpiceJet and Go First had more aircraft in the air, bigger market shares, lower losses and stronger balance sheets. 

But the pandemic and the two years post have taken their toll, leading to both of these airlines whittling down their operations. In the case of the former, as per DGCA data, the aircraft in operation are now down to between 47-50 including 12 Max out of a fleet of 78-80 aircraft. 20 aircraft have been returned to lessors for non-payment of dues and for the airline to phase out its older B737-800s. Go First is operating around 33-36 out of its fleet of 58 aircraft, according to DGCA sources.

In the last few months however both have been trying to stabilise their ships. A 7% stake taken by the Carlyle group in SpiceJet will help the airline reduce some of its dues and a further infusion of funds - amounting to around ₹550 crore - is expected through the government’s ECLGS funding. “In the case of SpiceJet, there has been a presence of Rahu and Ketu so to speak for the last few years' ', says a source who does not wish to be named. The troubles Boeing faced and the subsequent delayed deliveries of its Max aircraft led to a situation where the airline could not cushion itself against various vagaries of the market through a steady SLB income as it might have. Many argue that despite all odds, the ship was kept afloat thanks to the risk taking appetite of its chairman Ajay Singh.

Through most of last year, Go First too stabilised its operations and by the end of 2022 had crossed most rivals in market share. Like IndiGo, it has also been facing fleet problems due to engine troubles and shortage of parts. Some of its lessors have also sought to seize their aircraft, according to recent news reports. However, the airline is also expected to receive funds to the tune of ₹600 crore through ECLGS. Promoters have also infused funds, as and when required, post pandemic. A detailed email sent to the company remained unanswered.

While these steps may bring temporary relief and, combined with an uptick in the market, will keep both airlines afloat for now, industry sources argue that the long term prospects of the carriers remain under a cloud with the changed structure of India’s aviation space.

A look at the 2022 end-December data compiled by India’s director general of civil aviation gives a clearer picture of how the market is changing. The privatisation of Air India has changed the entire game with four airlines under one umbrella constituting a market share of around 25%. With IndiGo at over 50%, almost 80% of the market is divided between two players. This leaves 20-25% for the remaining three players: SpiceJet, Go First and the most recent entrant Akasa.

A recent report by the Center for Asia Pacific Aviation (CAPA) articulates what DGCA data shows, positing a grim future for the smaller players and argues that the privatisation of Air India has changed the game forever. With four carriers under one umbrella, the Air India Group will boast a market share of around 25%. IndiGo and Air India Group combined account for around 80% of the domestic market as things stand, which could moderate over time to around 75%. These carriers will become the two core pillars of the industry going forward.

The report goes on to ask the questions the industry has been seeking answers to. What happens to the rest of the players? It argues that if the remaining players including the latest entrant Akasa were to battle it out for the remaining 25% of the market, they will each at best be able to secure 5-10% of traffic. “This is a no-man's land which leaves them neither competitively relevant in the general market, nor occupying a specific niche. It is a position that makes the success and survival of each individual carrier more challenging,” says the report.

In view of this, the CAPA report further goes on to suggest that Go First and SpiceJet are best placed to play this role by coming together either by forming an alliance with coordinated operations and marketing, but still maintaining two separate AOPs or consider a formal merger of the two carriers or even consider an investor-led integration of the airlines. In general, it would imply fewer and perhaps a stronger third pillar for the industry.

According to the CAPA report: “This would restore order in the market and likely deliver a level of competition that is positive for consumers and the economy, but with rational capacity and pricing decisions that are positive for shareholders, employees and the entire aviation value chain.”

On the contrary, if the situation remains as it is, the market will get more and more fragmented across three or four weak operators which will leave them at a sub-scale level of operations that is neither competitively relevant in the general market, nor occupying a specific niche. “It is a position that makes the success and survival of each individual carrier more challenging,” he adds.

Industry analysts point out that a concerted effort is also required to ensure that viability is the hallmark of the next phase of Indian aviation. A former aviation secretary argues that “profitless growth of the kind we have seen in the last 15-odd years serves no purpose”. 

However to reach this end, both the government and the private players need to do their bit. In the case of the smaller airlines, they need to change their mindset and strengthen their boards, management and governance. “There is a tendency to “make hay while the sun shines” to earn quick profits. This needs to be replaced with a more mature and balanced approach,” says the author of “The Old Bold Pilot”, former IndiGo chief of operations and aviation veteran Shakti Lumba.

At the government level, it is critical that the government brings aviation turbine fuel under the GST framework with full input tax credit, rationalises other input taxes and builds a better ecosystem for MRO work to be done fully within India. Till then, this vicious cycle of profitless growth and cyclical closure of weaker players is unlikely to end.