No more consolidation in sight for Indian aviation: pundits

The Indian aviation industry experienced some serious turbulence through 2022. The geopolitical strife, spiralling fuel costs, volatile foreign exchange markets with the depreciating rupee, have all built major pressure on airlines. On the flip side, the industry witnessed a sharp rebound in passenger traffic that rose to 97 per cent of the pre-Covid levels. Of course, the mismanagement of the crowds flocking to the airports raised questions about infrastructural inadequacies. The year also marked the historical privatisation of the national carrier - Air India - for which it was a homecoming, returning to the fold of the Tata group where it originated. This was followed by a game-changing act with the Tatas merging Air India, Vistara, Air Asia and Air India-Express - which inevitably translated into a major consolidation of the industry.

Today, according to the data of the aviation research and consultancy firm - CAPA India, 70 per cent - 80 per cent of the market share is commanded between the merged Air India entity and IndiGo. While there has been some chatter about more mergers in the offing, particularly between the smaller players to protect their interest, industry observers are convinced that it is not a possibility in the near future. Most point to the failed mergers in the past, such as Jet Airways-Etihad and Kingfisher-Air Deccan.

CAPA India’s team lead, Sathyanarayanan S, underscored, “The wave of M&As in the industry is over with Air India, Vistara and Air India Express, Air Asia mergers.” Seconding this view, Mark Martin, CEO of Martin Consulting, an aviation consultancy firm, said, “Consolidation will occur only in desperate instances, which seems an impossibility.” As it happens, the industry also saw the entry of a new airline - Akasa Air - in August this year.

Why not?

Analysts doubt a duopoly can emerge under the watch of the Competition Commission of India. “The competition laws in place do not allow for a market of restricted players,” said Mehak Khanna, an M&A and corporate litigation lawyer.

Such initiatives call for capital infusion. “Banks have already burnt their fingers several times. Debt serviceability and recovery of debt are two important factors of concern for banks for M&As. Aviation remains a moderate to high risk industry with too many variables and checks involved, so banks are not inclined towards this industry,” explained an official of a major bank, who did wish to be identified.

Poonam Sengupta, attorney with the major law firm - JSA India, further said, “M&As come with regulatory approvals, operational challenges and financial implications which are long and tedious.”

Outlook 2023

Geopolitical issues, rising prices of crude, and continuing supply chain challenges are likely to remain the headwinds in the forthcoming year, according to a statement issued by IndiGo, which holds the largest market share at 56.2 per cent of the passenger traffic.

Suprio Banerjee, vice president and sector head- Corporate Ratings at the credit rating firm, ICRA Ltd, echoed, “The elevated ATF (aviation turbine fuel) prices and a weak rupee against the dollar, have been playing a spoilsport for the industry earnings.”

Projections for 2023

However, Banerjee saw a favourable long-term in the sector that is still “under-penetrated”. Today, there are eight airlines at play in the domestic market, of them six have forayed into international routes as well. There are about 70 foreign airlines flying on routes to and from India. CAPA India estimated that the domestic passenger traffic is likely to grow by 260-280 million in 2023. The number of international passengers is expected to go up by 55-60 million.

On an optimistic note, IndiGo’s statement claimed, “We are seeing a strong recovery in both the international and domestic segments, buoyed by festive travel, tourism as well as the return of business travel.”

The roadmap ahead

The recent chaos at the country’s major airports has put the spotlight on infrastructure development.“To handle the surge in air traffic, our policies should focus on enhancing airside capacity,” said Devesh Agarwal, an aviation analyst and former president of Bangalore Chamber of Industry and Commerce, noting that just building terminals won’t help when there’s not enough space to land and park aircrafts.

Cargo traffic also needs more attention, experts urged. In 2018 Indian carriers transported 20.5 per cent of the international cargo. This had dropped to 15 per cent in 2021. However, analysts noted that present rebound in the volume handled suggests that a focus on cargo would help turn the situation around.

“The next year will witness cargo airlines picking up, with other businesses including the e-commerce entities, such as Amazon and Flipkart, entering the fray,” said Shravan Shetty, Managing Director, Primus Partners, a business and management consulting firm..

“Airlines will not make profits until they increase their international routes,” said Shakti Lumba, an aviation analyst. Expressing the need for parity between domestic and international carriers in India, Rishi Jain, an aviation analyst said that instead of consolidation, Indian airlines need to look at global operations by inducting more wide-body aircrafts, and prepare to compete with carriers from the Gulf countries.

In November 2022, Ministry of Civil Aviation had eased regulations to enable domestic carriers to wet lease wide-bodied aircrafts on yearly basis. Both IndiGo and Air India are in the process of placing orders for fleet expansion. Experts feel more steps such as reduction in fleet size limit to fly on routes overseas would enable domestic carriers to further leverage on profitable international routes.