India’s aviation crisis is all about too big to tame

By Andy Mukherjee

India’s latest aviation fiasco — about 3,000 flights cancelled since last week — has exposed the ill effects of leaving two-thirds of a fast-growing market in the hands of a single player and allowing it to become not just too big to fail, but also too big to tame.

InterGlobe Aviation Ltd., which operates IndiGo, has told the regulator that the mass cancellations were a result of multiple factors, including implementation of stricter regulations on night flying and weekly rest for pilots. Combined with technical glitches and the switch to a winter schedule, the mandate resulted in an acute shortage of crew. With more than half a million reservations abruptly dishonored, and stranded passengers pouring their anger at helpless counter staff, the authorities had to roll back the rules around pilot fatigue.

The Airline Pilots Association of India has rightly termed the policy U-turn as a “dangerous precedent” — after all, management had known the new requirements since early last year. However, authorities had no choice. After they woke up to the distressed scenes at overcrowded airports, the immediate priority was to restore order by returning the planes back to the skies.

In the process, India’s own image, already sullied by a deadly Air India crash, has taken a hit among tourists and business travelers worldwide. The sheen around IndiGo, which fleetingly became the world’s most valuable airline in April, has come off. The uproar clearly underscored that the service efficiency that had served the two-decade-old airline well was just a relentless pursuit of profit with risks to be borne by the society at large — as they indeed were last week.

The contest for India’s 1.4 billion consumers was turning into a fixed match, I had argued in May 2023. That was after Go Airlines India Ltd. suddenly filed for bankruptcy, putting its 7 per cent market share up for grabs by IndiGo, which was already in control of 57 per cent. In the US, 49 passenger and cargo airline bankruptcies between 2001 and 2013 barely led to cessation of operations. However, the insolvency regime in India lacks the ability to rescue the business of a carrier from an over-leveraged corporate structure.

Rather than encourage more players, the government appears keener to maximise its take from the economy’s growing hunger for air travel. Rapacious federal and state taxes on jet fuel keep existing players unstable and discourage new entrants. Meanwhile, airports have gone from being a state monopoly to largely a private business dominated by the Adani Group, a sprawling infrastructure conglomerate. Fliers have to shoulder part of the cost of airport upgrades in the form of a user development fee. That’s in addition to consumption taxes on tickets.

The government is reportedly planning to extend the tax holiday on profits earned by aircraft leasing firms in Gujarat International Finance Tec-City, or GIFT City, a finance hub being promoted with much fanfare. No amount of financial engineering, though, can fix the underlying infirmities of India’s aviation economics.

The unseemly collapse of IndiGo’s services has shown that quite clearly. Nobody — the consumers, the employees, and even the country’s reputation — is safe in a market where competition is stunted and choice limited. Ultimately, shareholders, too, suffer, but not enough. Even after the $4.5 billion loss of market capitalisation, IndiGo shares are still up this year. While authorities have put in temporary price caps to prevent gouging and the aviation minister has pledged to use the fiasco to “set an example” for the industry, meaningful reform will have to start with the government itself.

India’s private carriers know that the country’s aging, creaking, government-run railway network poses no threat. That creates all sorts of perverse incentives, which can only be eliminated by a massive, Chinese-style investment in high-speed trains. Rather than cut airlines down to size, or try to compete with them with a failed and discarded model of state-run carriers, the government needs to broaden the definition of competition in its transport sector.

The current crisis comes at a time when IndiGo’s nearest rival Air India is mired in its own troubles after four years of privatisation. The June crash of a London-bound Boeing Co. 787 Dreamliner, which killed 241 passengers and crew, is still under investigation.

Eventually, public memory of the latest mess will fade. But unless the government fixes its tax and bankruptcy laws, sets stringent pricing limits on airports — a natural monopoly — and improves the day-to-day monitoring of IndiGo and Air India, the two systemically important carriers, consumers can’t afford to breathe easy.

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH)