Churning in aviation sector

Sushma Ramachandran

Senior Financial Journalist

THE Air India ‘Maharajah’ seems to need company, judging by the Tatas’ plans to merge the aviation behemoth with its other carrier, Vistara. The merger, expected to be completed by March 2024, is being viewed as a precursor to a long-awaited consolidation in the domestic aviation industry. It looks as if the market will slowly but surely ease into a situation in which the current multiple players will coalesce into just a few large entities. This upheaval in the aviation sector comes just as the industry is emerging from the pain of the two pandemic years and passenger traffic is returning to pre-Covid levels.

Air India and Vistara may have differences in operational culture, but the former will benefit by adopting the more contemporary approach of its newer sibling.

The giant killer as far as airlines is concerned remains Indigo, with an enormous 57 per cent market share. This is followed by the Tata Group with its four carriers — Air India, Vistara, Air Asia and Air India Express — accounting for about 23 per cent.

The announcement regarding the Air India merger with Vistara has prompted many aviation experts to comment adversely on the latter’s losses, terming it a good way to bury its failure. Quite the contrary, the merger makes good corporate sense on several counts. First, both are full-service carriers and have a complementarity that should be brought together in one entity that can focus on international and premium routes. Second, it sets the stage for the merger of the low-budget airlines, Air Asia and Air India Express, which can cater to the fare-conscious domestic market. Third, the two airlines may have differences in operational culture, but Air India will benefit by adopting the more contemporary approach of its newer sibling.

The merger is taking place in the backdrop of other significant developments in the aviation industry. These include rough waters being faced by the consortium seeking to revive the Jet Airways. Though it was given the green signal last year by the National Company Law Tribunal, it is now running into trouble from lenders who feel the consortium is not serious in its attitude. To add to its woes, erstwhile Jet Airways staffers have lost faith in the revival process and sought liquidation of the airline to gain some financial compensation.

Another is the slow entry of Akasa Air, which was originally backed by the late Rakesh Jhunjhunwala, a well-known stock market supremo. His demise just after the new carrier was launched came as a big blow, but the Bengaluru-based carrier has taken off, albeit on a low key. Its positioning as an ultra-low-cost carrier should help it in the price-sensitive Indian market in the long run. But right now, it is facing hiccups in the form of supply chain disruptions that have upset its aircraft configurations.

The entire industry also seems to be at an inflection point now that the pandemic is virtually over and air travel for both business and pleasure is becoming the norm again. While the pleasure segment is growing rapidly as domestic tourism is having a spirited revival, business travel has assumed new dimensions after the advent of Zoom and other videoconference apps. The concept of conferences and meetings has altered radically over the past two years. No longer will a businessperson travel out of town just for a one-on-one meeting. Videoconferences have replaced small group meetings. At the same time, the market for big conferences and exhibitions is reported to be booming.

To add to the shift in passenger-traffic patterns is the increasing presence of travellers from smaller cities. This is partly due to the fact that air travel became more acceptable as a safer mode of transport during the pandemic and partly due to the ramifications of the regional connectivity scheme, ‘Udan’. The latter was launched in 2017 and has had a patchy performance because the airlines found it unprofitable to operate from tier 2 and tier 3 cities. The subsidy being offered on such routes was simply not enough. The scheme may be limping along, but it has still made air travel a reality in several small metros and northeastern states that were earlier dependent on time-consuming road and rail connections. Places as diverse as Bareilly in UP and Itanagar in Arunachal Pradesh are now just a flight away, opening up vistas for more tourism, especially to remote northeast locations.

Yet, the bottomline is that the domestic aviation industry remains in a dismal financial health. Rating agency ICRA Limited has estimated that Indian airlines have suffered a net loss of Rs 12,700 crore in 2022 fiscal, with the industry-wide debt level having risen to Rs 50,000 crore. Despite a healthy recovery in the domestic air passenger traffic, the agency cites elevated jet fuel prices and rupee depreciation posing a threat to future earnings.

In this backdrop, it is clear that the aviation sector is going through a churning process that may resolve only in the medium or long-term time frame. The overhang of losses during the pandemic, for instance, may take a while to be resolved. Critical issues such as high jet fuel prices will continue to plague all airlines. This is a global problem since the world oil prices shot up immediately after the Ukraine war. The problem has been aggravated by a depreciating rupee. Passenger volumes may be virtually back to the pre-pandemic level, giving the impression of business as usual. But with new airlines entering the fray, it will be difficult for the existing players to raise revenues by hiking fares.

In these tumultuous times for the domestic carriers, clearly only the hardiest will survive the storm. The minnows are likely to be weeded out in this process. A duopoly is expected to emerge at the end of the consolidation process. This will include the market leader, Indigo, which is incurring losses due to headwinds caused by high fuel prices and a depreciating rupee. The other big player is likely to be the Tata Group with the two entities of Air India-Vistara and a merged Air India Express and Air Asia. There are uncertainties over the fate of the new entrants to the skies as well as the smaller players owing to the challenging climate for this sector. One thing is for sure: the aviation industry is soon set to change in an irrevocable manner. 

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