Why duopoly might ruin India's aviation boom

Two players control more than 89 per cent of the market

54-Rajiv-Gandhi-International-Airport-Hyderabad Rajiv Gandhi International Airport, Hyderabad | Shutterstock

On a sultry monsoon evening in August, the who’s who of India’s aviation industry gathered at a plush hotel in Delhi for a coming out party. The banquet hall was full, and the menu and cocktails were impeccably curated on the theme ‘taking India to the world, and the world to India’. Television and YouTube channels streamed the event live.

According to the Airports Council International, India saw the highest increase―41 per cent―in airfares in the Asia-Pacific region in the first three months of this year over pre-Covid times.

It did not matter that the 'new kid on the block' was nearly a century old. The excitement over the ‘relaunch’ of Air India was palpable, as a new logo, the Vista, and a bold new livery were unveiled.

“There is more than a little bit of Air India in everyone,” said N. Chandrasekaran, chairman of Air India and its parent company, Tata Sons. “Our aim is to make this airline a truly world class and iconic airline that every Indian will be proud of.”

The average Indian was thrilled when Air India flew back into the hands of its original owners, the Tatas, in 2022, after floundering under government control for decades. But will Indians continue to feel the same?

The duopoly

The consolidation of the four airlines in the Tata fold and the domination of the market leader Indigo Airlines have led to a duopoly in the Indian skies. As a result, the affordable ticket rates that India was known for since the early 2000s have suddenly disappeared. According to the Airports Council International, India saw the highest increase―41 per cent―in airfares in the Asia-Pacific region in the first three months of this year over pre-Covid times. One reason is the impressive passenger growth. Domestic flyers increased by 43 per cent during January-March this year, compared with the same period a year ago. Nine crore people flew till June from the beginning of the year.

But there is another major reason―all other airline companies have become marginal or are facing existential challenges because of the market clout of Indigo and Air India. “Duopoly is not good for the Indian aviation market especially when India is on the cusp of an aviation boom,” said Sidharath Kapur, aviation consultant and former head of the airports divisions of GMR and Adani groups. “It needs at least one more player, if not two. Airline pricing depends on cost and competition.”

It was the intense competition that had led to the cheapest tickets in aviation. Things are very different now. Indigo carried 6.69 crore of about 9 crore domestic flyers in the first six months of the year―a market share of 63.4 per cent, which is unheard of in any open aviation market. Air India came second with a market share of 9.9 per cent. If you put all four Tata airlines together, they have a market share of 25.8 per cent.

In other words, two players control more than 89 per cent of the market.

And both have aggressive expansion plans. Between them, Air India and Indigo have ordered some 1,000 planes. This indicates the massive growth they expect in domestic flying, as well as their plans for global expansion. Air India is already on to the second phase of its transformation plan called Vihaan.AI, and Indigo has been starting new routes virtually every day, from Shivamogga in the Western Ghats to Nairobi in Kenya. Indigo's 531-seater Boeing 777 from Istanbul to Delhi is said to be the biggest non-A380 international commercial flight in the world.

The runaway leader

It took Indigo barely six years to become India’s biggest airline. Now, it is the largest in Asia, bigger than China Southern and Emirates. Right from its inception in 2006, the airline had set out some parameters that contributed strongly to it becoming the behemoth it is now. It boasted punctuality and good connectivity, and it till recently operated only one type of aircraft, the Airbus A320. This helped in keeping maintenance and pilot training costs under check.

Indigo uses the ‘buy, sell and lease back’ policy to reap huge benefits. It orders a large number of planes and, as delivery of planes starts a few years later, it sells them to leasing companies at higher market prices, and then leases them back. This business model ensures that while the leasing firm makes money from interest, the airline does not have to pay huge capital upfront.

But what is good for the goose may not be good for the gander. “When only two large airlines dominate, customers don’t have much of a choice. They end up paying high prices,” said Sangita Dutta Gupta, associate professor at School of Management, BML Munjal University, Gurugram. “Two dominant players can indulge in price wars and that can drive away smaller players.”

It does not help that the other domestic airline companies remain in a state of perpetual churn. SpiceJet has been to the brink of closure and back many times. It is also fighting many court cases.

Go First, the low-cost carrier promoted by the Wadias, went bankrupt in May, just as the peak summer rush was beginning. The airline was operating an average 200 flights a day and had a market share of about 7 per cent when it went belly up.

The impact was immediate. Airfares, which were already high, spiralled. Fares on the Delhi-Mumbai route, the busiest in the country, increased by 37 per cent. Leh, a destination where Go First was strong in, faced worse. Ticket prices to Delhi went up from less than Rs5,000 to about Rs27,000.

Go First may still make a comeback―it is going through bankruptcy procedures via the Company Law Board. But another bankrupt airline that tried the same route, Jet Airways, has not managed to get airborne yet. Its new owners, the Jalan-Kalrock Consortium, have been at loggerheads with creditors over arrears, and one wonders whether the airline has a second chance.

“Jet’s new promoters have to infuse Rs200 crore now. Running the airline is going to be significantly more challenging than just getting it off the ground,” said Kapur. “Probably, Jet is history. Even if they get it off the block, running it and sustaining it will need deep pockets.”

That leaves just the dark horse which came out of nowhere last year. Akasa Air took to the skies―sneakers, jazzy livery and a cheerful smile in place―and has notched up 20 aircraft and a market share of about 5 per cent in just one year. Many are placing their bets on this fledgling airline.

But Akasa’s launch was anything but auspicious. A few days after its inaugural flight, its billionaire promoter Rakesh Jhunjhunwala died of a heart attack, posing a question mark on whether the funding tap will remain open for the first few crucial years. “Whether the Jhunjhunwala family continue to be a committed player or not, we don’t know,” said Kapur. “They will have to continue to bear losses for the next two to three years at least, and will need to dip into the pockets of the shareholders for years, and that is uncertain.”

There are many other challenges, such as pilot shortage. By some estimates, airlines in India have ordered about 2,000 passenger aircraft, which will be coming in in a few years. A ballpark estimate is that the country will require 18,000 to 20,000 new pilots over the next decade; that is at least 2,000 a year. “Effectively, India can only produce 700 to 800 pilots a year,” said Kapur. “That is going to be a big constraint. Demand for pilots is going to be so massive that we will have to compete for pilots internationally. We need to ramp up our training facilities.”

This industryscape definitely calls for some careful strategising by the smaller players. “The smaller airlines will have to find an operating niche and probably choose select sectors and concentrate on service delivery,” said Jagannarayan Padmanabhan, senior director (consulting), the rating agency CRISIL. “It will be prudent to not get into a price war to gain market share.”

It is an uphill task. Not an impossible one, though. What they need are friends with deep pockets. “You need a strong financial backer if you have to grow,” said Kapur. “And you may not be able to grab the market share from the larger players, but you can grow with the growth in the market itself.”

But, for this, the smaller players will have to make sure that they are operationally efficient and provide a passenger experience that gets planes filled up. “A marginal player simply cannot afford to have their planes flying half empty,” said Kapur.

Ground realities

What a duopoly means for the Indian air passenger is that discount pricing may just be a thing of the past. In fact, Gupta of BML Munjal University says some sort of governmental or regulatory intervention is needed. “The government says it will not intervene because it is market economics,” he said. “Fine, but you cannot allow companies to take advantage of the market mechanism and make the consumer pay up more. Festive season price hike due to demand is okay; that has been the case over a period of time. But airfares cannot be high throughout the year.”

As airfares peaked during the summer vacation, the usually reticent civil aviation minister, Jyotiraditya Scindia, called on airlines to develop a system to ensure reasonable fares. By the government’s own estimates, rates came down by 61 per cent within a week.

The market mechanism is likely to ensure that airfares do not shoot through the roof. “I tracked passenger traffic at Srinagar, a destination Go First was strong in. When Go First withdrew, seat supply went down. Naturally, demand being high, prices went up. But interestingly, soon enough, there was a 13 per cent drop in passengers compared with the previous year,” said Kapur.

What it means, according to Kapur, is that if you try to increase airfares unreasonably, demand will go down. “Indians can postpone travel or look at other options,” he said. “With Vande Bharat and other fast trains, Indian Railways in some ways is an indirect competitor to this duopoly!”

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