Is Indian aviation planning for a tense summer?

Indian airlines are optimistic about the coming summer. With demand returning and strong returns, the industry is poised to emerge from the turbulent turmoil of the past two years. Strong domestic demand is expected to continue and the baseline forecast predicts an additional 135-140 million domestic passengers and 30 million international passengers in Indian skies in 2022. Most restrictions on flights have been lifted and schedules filed show a aggressive increase in capacity for the summer. month. Collectively, the six largest airlines have forecast a 29% increase in domestic capacity deployment compared to the summer 2020 schedule.

Even so, this is only part of the picture. A summer of strength also turns out to be a summer of tension. This as cash and credit continue to be tight, fuel input costs, exchange rates and financing continue to rise, and talent wars may increase the overall cost base. And as if that were not enough, two other airlines, a start-up and a post-bankruptcy, will enter the market. For consumers, this is a great time with price wars, capacity wars and talent wars likely to ensue. For airlines, not so much.

Indian airlines are witnessing the slow emergence of a duopoly

The pandemic has laid bare the rifts with Indian airlines. Just like their global counterparts, all Indian airlines have parked planes, reduced capacity and renegotiated contracts. All for the sole purpose of saving money. But the period has been particularly difficult for the weakest airlines, defined as those with fragile balance sheets, without support from the parent company and without alternative sources of income. These airlines had to rely on all the cuts to mitigate cash burn. This included payroll costs in the form of unpaid leave and pay cuts. All airlines made cuts to some degree, but the speed at which these were resolved (if at all) was radically different. As such, a duopoly had already begun to emerge, at least in the minds of industry insiders. The sale of the flag carrier, Air India, to the Tata Group further cemented the picture and as it stands the Indian market currently has two full service carriers Air India and Vistara and four low cost carriers: Indigo, SpiceJet, GoFirst and AirAsia. India. Entering this fray will be a newly well-capitalized startup (Akasa) and a seventh player – Jet 2.0 still trying to find footing after bankruptcy. But when you compare market share, it’s Indigo and Tata-owned airlines that control over 80% of the market. The others are left to compete on the sidelines.

Fundamental structural challenges persist

For Indian airlines, fundamental structural challenges persist. These are glossed over because of growth prospects, as is still the case. Leading the way are large aircraft orders and the financing of those orders. Sale-leaseback continues to be a core financing strategy for many airlines, but it’s a double-edged sword. Indeed, contract terms imply minimum delivery commitments and some of the weakest airlines fly in to unlock sale and leaseback cash flow only to find themselves deploying unprofitable capacity. It’s a situation that won’t end any time soon.

As far as credit is concerned, the market oscillates between strong credit and weak credit. There is no middle ground. Parent company support has helped, but for players where this support is weak or non-existent (usually evidenced by lack of equity injections or inability to commit), default risks are high . Stand-alone balance sheets are far too weak to reassure lenders. In fact, asset-light balance sheets, once touted as management mantras, are now haunted by limited assets that can be collateralized or leveraged. Liens on this cash flow are not viable due to cash flow uncertainty. Political uncertainty and upcoming capacity wars only exacerbate the situation. This in turn forces all lenders to limit risk by requiring collateral. Guarantee deemed insufficient.

Indian airlines also face the troika of fuel, currency and financing. Fuel, especially jet fuel, as it is taxed as a luxury and regulated as a commodity; FX because the rupiah-dollar spread has gradually increased with no sign of stabilizing; and financing because the cost of capital remains high. In this mix, talent costs have now become a new lever. Both to attract and retain talent. This is a situation that is set to escalate.

The paradox of the Indian market remains

Overall, Indian aviation continues to be a paradox. Where opportunities abound and so do challenges. A market with immense potential but with fundamental challenges; a market with a growing passenger base but also rapidly improving road and rail infrastructure, which will reduce demand in the future; and a market where multiple airlines fly in a sea of ​​similarities, all pretending to be different. At the moment, the most powerful player in the market also has the highest capacity and market share, but the price sensitivity is so high that, despite having a monopoly market share, this does not translate into a pricing power.

Even so, for people looking for diversity, Indian aviation is as good as it gets. It may be the only market that will experience capacity wars between a well-capitalized startup, a post-bankruptcy revival, a privatized national airline, and perhaps some sort of consolidation/pivot. All are fighting in an environment where fuel, funding, talent wars and currency continue to wreak havoc and where political actions create market distortions. And all are fighting as the incumbent tries to defend its monopoly market share in domestic markets and where foreign competitors eager to gain market access are likely to assess the strategic stakes of current airlines.

The recently concluded financial year saw 6 airlines with 650 odd planes competing for 72.7 million passengers. All this while international skies were closed, pricing floors were in place, capacity was tight and credit was limited. This year should see a higher number of passengers, but also two additional airlines, a number of fleets that will reach 700 and an environment where fundamental structural challenges continue.

With rising costs, squeezed margins are a reality. But hopes rest on the strength of demand and the holding of yields. There is a lot of signal and a lot of noise and for now the jury is out and the debate is whether this will be a summer of strength or a summer of tension. All things considered, the latter seems more likely.

—Satyendra Pandey is the managing partner of Indian aviation consultancy AT-TV. The opinions expressed are personal.

(Edited by : Ajay Vaishnav)

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