As 2023 begins, India’s airline landscape has 7 large commercial airlines, 692 aircraft and combined revenues that are touching USD 11.5 billion. Forecast to fly more than 180 million passengers in 2023, and the market has witnessed several changes too.
Most significantly, the market structure here is now a duopoly with two large airlines battling it out. The rest are left to compete on the sidelines, and for those looking at diversity of opportunities, the market is second to none as it continues to shock and awe.
Beginning the year, the Indian aviation market has one well-capitalised startup in Akasa; an ongoing consolidation between Air India, Vistara and AirAsia India (now rebranded as AIX connect); continued expansion for Indigo and Air India; forced consolidation or contraction for SpiceJet and GoFirst; and a revival of Jet Airways in its new avatar Jet 2.0. Macro-headwinds notwithstanding a potential bankruptcy or shutdown cannot also be ruled out. 2023 promises to be another interesting year for Indian aviation.
Demand Forecast
Air travel demand forecast to continue growth tempered only by a 3rd wave. 2022 highlighted resilient air travel demand patterns. While India’s airlines faced many challenges through the year, there was not denying the fact that demand continued to be strong. Each month showed a higher number of travellers flying and by the end of the year nearly 170 million passengers would have taken to the skies on Indian registered aircraft. With an average growth of 7% on a monthly basis, interestingly, this pattern continued in spite of fairly high yields. Thus the potential for additional demand via discounting remains. Other proxies such as hotel occupancy, travel booking volumes, airport retail spends and luggage sales confirmed the strength of the demand. Indeed airports were bustling with activity including meltdowns that forced government intervention. Pari passu this demand profile promises to continue into 2023. But at the same time a 3rd wave as evidenced in China may act as a spoiler. Already, protocols have been revised for travellers and it remains to be seen how the virus and the sentiment spreads this time around.
Profitability Elusive
The path to profitability remains foggy in 2023. With all the excitement in the market, profitability remains elusive. Input costs, most significantly fuel and FX remain elevated and have all but eaten through margins. Rising interest rates are translating to higher financing costs. Suppliers are rushing towards airlines with stronger credit and the flight to quality means that airlines with strong credit backing by virtue of their parent company or balance sheet are able to negotiate better terms. Those with weaker credit are left to fend for themselves. As of this writing two airlines (SpiceJet and GoFirst) have applied for and have been granted Emergency Credit Loan Guarantee Funds under the revised ECLGS scheme. These guarantees only add additional debt to over-burdened and fragile balance sheets. And the debt has to be repaid thus will need to be provisioned for in the coming quarters.
By the numbers, India’s airlines are sitting on debt levels of USD 5.2 billion and losses that are in excess of USD 2.7 billion. Even airlines like Air India and Indigo continue to encounter turbulence are bracing for headwinds ahead. Cargo which was carrying some of the burden of profitability has seen a drastic decline in yields. Other income sources, most notably sale-and-leasebacks are also seeing margin pressures. There is no clear path to profitability and the market is counting on growth to help lift the airlines out of their current profitability predicament. On the ticket revenue front, competitive intensity in 2023 will only get stronger and if discounting wars begin the path to profitability will get even foggier. A sudden decline in fuel costs will almost certainly help airlines but this decline in the context of geo-political factors remains in question.
Additional Consolidation On The Anvil
The market in 2023 will be a battle between Indigo and Air India (including subsidiaries). Together these two behemoths will control 80 percent of the market. The other airlines are left competing at the fringes and it would seem that additional consolidation may be the way to go. However, debt levels, control provisions and expectations may not make for such a smooth ride. In which case, the weak will get weaker while the strong get stronger. Lease terms are already reflecting the same. The market structure will have two full-service airlines – Air India and Vistara – both under the same parent company and five low-cost airlines -- Indigo, SpiceJet, GoFirst, AirAsia India and Akasa. On the low-cost carrier front, with Indigo clearly leading the charge and defending its position other airlines are guaranteed to continue to make efforts to capture or re-capture a portion of the market. This could very well mean capacity wars, fare wars and deep discounting. Into this arena will also enter Jet 2.0 where the strategy remains to be seen and the sale of Alliance Air (the regional arm of erstwhile Air India). Both these will be closely watched and the existing market structure makes for interesting consolidation opportunities.
Finally there is the fact that global airlines need access to India’s large and resilient travel base. In this scenario, an equity investment into any of the existing airlines may very well be considered. But yet again, debt levels, control provisions and expectations may not make for such a smooth ride.
Overall 2023 promises to be yet another exciting year for Indian aviation. For financial investors the sector may be found wanting but for strategic investors with a view towards the long term 2023 may very well be the starting point.
—The author, Satyendra Pandey, is the Managing Partner for the aviation advisory firm AT-TV. The views expressed are personal.
Read his previous articles
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(Edited by : C H Unnikrishnan)
