2011 Indian airline industry review – From cautious optimism to an uncertain future

In contrast to the positive note I ended my US airline review for 2011 on, the Indian industry most certainly had a bad year in 2011. The shine is certainly off the fast growing Indian market, and the cautious optimism noted at the end of 2010 has turned back into fear. Airlines and airports have continued to invest in their passenger experiences, but inconsistently at best. Moreover, mismanagement on the business side has significantly eroded the value of Indian airline businesses. The broader trends that shaped these changes in 2010 were:

The value carrier continues to dominate but cracks appear in the facade

In a continuing trend from 2010, India’s various low cost carriers have grown and enhanced their positions in the market. Value carriers directly controlled 48.8% of India’s domestic air travel market in November 2011, not including Jet Konnect, Air India Express, and what was left of Kingfisher Red. These carriers maintained their policies of fast growth, with SpiceJet, IndiGo, and Go Air, each growing capacity by more than 10% year over year. However, they failed to deal effectively with the rise in the price of fuel, and their operations, coupled with the LCC ones of the full service carriers combined to lose hundreds of millions of dollars in 2011. IndiGo bucked that trend through a combination of smart sale-leaseback transactions, and judicious cost discipline. But as a whole, the Indian airline industry has slipped towards a dangerous trend of growing fast by making zero profit.

Profit… What profit?

The analogy that I always use to describe the Indian market is that of Groupon. At first glance, Groupon, the popular online coupon website, would seem to be a rising star in the tech industry; especially considering its IPO in fall of 2011 that valued it at more than US $10 billion. But there are systemic issues with Groupon that belie their rising star; the most important of which is the fact that Groupon, as of the third quarter of 2011 had never made a quarterly operating profit. Moreover, the merchants upon which it depends for the coupons have reported iffy interactions with Groupon-driven customers, and its own customer base is very fickle, and for the most part worthless; not many people are spending money to get onto Groupon. This is a very good parallel to the Indian Aviation market, where the carriers make no money (Independent estimates have placed the figures for Fiscal Year 2011-2012 at US $ 2 to $2.5 billion). Moreover, much of the growth in the sector is comprised of low value traveler’s whose fares are unsustainable for Indian carriers with their high cost structures.

These troubles are most endemic at India’s full service carriers; Jet Airways, Kingfisher Airlines, and Air India. These carriers have been squeezed at the lower end by more nimble low cost carriers; and have responded by foolishly chasing market share and serving passengers at unsustainably low fares. But on the international side, a decade of mismanagement by the Ministry of Civil Aviation has restricted private sector players Jet and Kingfisher, while Air India cannot cover the cost of fuel on many of its international flights among other accomplishments. Thus foreign players have captured a lion’s share of the Indian travel market; especially amongst premium travelers. Thus, Indian full service carriers are being squeezed at the top end by foreign carriers and at the bottom end by domestic low cost rivals. When something is continually compressed; it eventually builds up heat and pressure until it explodes (8th Standard Physics) (or turns into metamorphic rock but that’s another story). And in 2011… explode the legacy carriers did. Air India had an unprecedented, if unsurprising number of failures including getting booted from Star Alliance. Kingfisher meanwhile dealt with its own crisis in early November, cancelling dozens of flights and stranding hundreds around India. The carrier has since settled down and appears to be close to finding an investor. But longer term concerns about Kingfisher’s finances remain, despite their planned entry into the OneWorld alliance in February of 2012.

Capacity discipline sorely lacking

As was already mentioned above, Indian carriers failed to enact any serious capacity discipline for 2011; capacity growth outpaced demand growth by a solid 5 percent in each quarter of 2011. Even LCCs such as SpiceJet attributed the industry’s problems to these factors. A net increase in quantity supplied will push fares downwards, and airlines have only themselves to blame for attempting such a scheme in the face of rising fuel prices.

Tier 2 airports mixed; more low fare connectivity but legacies strike out

2011 was also marked by increased flying from Tier 2 cities. India’s LCCs such as IndiGo and GoAir actively sought to fly their growing fleets of Airbus A320 aircraft into Tier 2 cities as a way of shielding themselves from heavy competition on the inter-metro sectors. Their additions helped push prices down in many such markets, which had been previously controlled by full service carriers (primarily through turboprops) in their attempt to escape low fare competition. While IndiGo and GoAir chose to grow their operations with mainline aircraft, SpiceJet instead elected to utilize Bombardier’s Q400 turboprops; with great success. Their flights, primarily in the South, have generated consistent seat load factors of over 80% this winter at economical fares, and SpiceJet is actively considering an additional order for Q400s to help balance the losses accrued by its other business segments.

On the other hand, Tier 2 markets have been mostly hit and miss for Indian full service carriers. Kingfisher failed to make any of their international routes from Tier 2 markets to Colombo stick, and appears to be drawing down a large chunk of its ATR flying. Jet too has slashed flights, and it is clear that these two are feeling the effects of heavy competition from LCCs.

Ministry of Civil Aviation with a typical showing

India’s Ministry of Civil Aviation (MoCA) recently released its “official highlights” for 2011, but as per the usual; India’s government was a majorly negative influence on the sector. There was the standard mismanagement of Air India, but that was no worse than usual. No, in 2011 the government failures lay in what they did not do.

It quickly became apparent that India’s government had failed to help its airlines appropriately solve the systemic issues. They continued an ill fated “soak-the-rich” fuel tax scheme that drove the sharp rise in fuel prices, failed to adequately approve Foreign Direct Investment (FDI) in Indian airlines, and just generally gave a hard time to India’s private sector carriers. Overall, government mistakes played a huge role in the market’s failure this year: as expected.

Conclusion: What to expect in 2012.

A recent report from the DGCA started off 2012 with a bang; the regulator opined that financial troubles at India’s major carriers could cause severe safety problems. So the first major aviation event of the year is likely to be the battle over these provisions. Longer term, you can expect to see either a marginal improvement in the sector if economic growth continues; or a precipitous decline in case of a European debt default. Regionalization should continue and expand; SpiceJet’s Q400 operation will get up to a full 15 frames; and with Bombardier’s backlog on the type falling to 29 frames, SpiceJet can easily acquire more. Even IndiGo might be tempted to acquire a few of the turboprops if the heavy competition on inter-Metro sectors continues.

On an international scale, there may finally be a resolution to the whole Air India/Jet Star Alliance saga. While the most likely resolution appears to be the entrance of both into Star Alliance, do not count out Jet membership in SkyTeam, where they would get access to that alliance’s lucrative trans-Atlantic joint venture for their US services. Middle Eastern carriers, especially flyDubai and other LCCs, will drive new service to the sub-continent, while service from older, more-established carriers, such as struggling Austrian Airlines, may disappear. The net trend though, will be upward.

Capacity discipline may be difficult for India’s exuberant airlines, so fares for passengers should remain at or near current levels barring a collapse or sudden jump in the price of fuel. Whether 2012 will truly be a successful year in Indian aviation or not will ultimately, however, depend on whether the government can pull itself together to reduce airline tax burdens, approve FDI, and bring India’s infrastructure up to par.

About Vinay Bhaskara

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