Aviation – A Paradoxical Industry

Aviation – A Paradoxical Industry

  • Reading time:6 mins read

By Mudit Jain

Over the last four years, India’s aviation market has grown at a yearly average rate of 20%, which is the fastest in the world. : In the year 2000, 200 million kms. were flown by scheduled airlines, there were 39 non-scheduled operating airlines, and there were approximately 225 airplanes using a total of 50 operational airports. Fast forward to 2019, where 1,550 million kms were flown by scheduled airlines, 72 non-scheduled airlines were in operation, and a whopping 680 airplanes were soaring across India’s skyline using a grand total of 125 operational airports.

What do these numbers signify ?

The number of kms. flown has grown by 7.8 times, the number of airplanes in use has increased by 202% and there are 2.5 times the number of operational airports in India than there were less than 20 years ago. These numbers place India as the seventh largest civic aviation industry globally and place the nation to become the third largest by the year 2024. Complimentary to the enormity of these numbers, India has plans to open an additional 100 airports by 2024.
More and more Indians are shifting to flying ; paradoxically though, nearly all the big players are in dire straits financially.


Indian aviation braving turbulent times

Keeping aside managerial and operational efficient functioning, one of the key determinant factor of an airline’s success or failure is the price of crude oil. Fuel costs account for roughly 40% of a carrier’s operating cost. Excessive taxes on aviation turbine fuel (ATF) in India – one of the highest in the world – make Indian carriers less competitive against global players.

The launch of the Low-Cost Carriers (LCCs) disrupted the entire business model of the full-service players, divulging into their market share, and creating distress in the industry. The paper-thin margins, and cut-throat competition and high government taxation, results in airlines turning commercially unsustainable from time to time, and they require constant infusion of funds to survive. Massive and recurrent losses have led to a debt trap, resulting in inadequate means for recapitalisation for most of the airline companies.

In the 2000’s, India witnessed the grounding of two of its major premiere airlines – Jet Airways and Kingfisher Airlines. Both used to provide five-star services to their customers, and coincidentally both melted down after their debt became unserviceable. It all began in April 2007, when Jet decided to buy Air Sahara from Subroto Roy for an enormous sum of Rs 1,450 crore — all raised through debt. In a counter-bid to Jet’s growing market share, liquor baron Vijay Mallya went ahead and acquired Air Deccan for a sum of Rs 550 crore. The twin acquisitions which occurred within two months in 2007, were expected to change India’s aviation landscape forever. It did, albeit, negatively.

Future of aviation industry in India

India is destined to become the largest country in the world in the upcoming years. The youthful population has significant implications for aviation in India. First among these is a youthful travel appetite that, unlike their parents, don’t have all day to get around. Over half of the country has enough disposable income to travel for leisure and take flights occasionally. Lastly, leisure travel in India, as it grows, will not only centre around only in metropolitan cities, meaning that airlines will need to increasingly offer top-notch service and infrastructure in and among all size cities.

Despite this growth and underlying strong economic base for air travel, India is far behind its global compatriots in its airline offerings. China, which has a similar population size to ours, has almost 4,000 operational aircrafts among its fleet while India has only about 700. As the Indian population grows in both economic wealth and size, India will need more airports, more aircrafts, more gates and more runways to meet this growing demand. While the fundamental principles of India’s aviation industry will not change, this conversation solicits the question: what is going to be the main driver for aviation development in India? Incidentally, there are three. More demand across the country, amplified private sector investment, and last but not least, increased public sector immersion. These all collectively can take India to new heights.

It’s an old aphorism that it’s best to invest at the time of extreme pessimism. So, if you look at it that way, there’s never been a better moment to bank on Indian aviation which has been hammered severely by the pandemic. At the forefront on this investment train, stands possibly the greatest opportunist, benefactor and visionary of the New Age Capitalist India – The Adani Group, headed by India’s second richest man- Gautam Adani. The Adani group is looking to raise $500 million via private placement of equity shares in Adani Airports Holdings before their IPO, that has already been delayed due to Covid-19. The Adani group already has aquired 50-year operational leases for the airports in Ahmedabad, Mangalore, Guwahati, Lucknow , Thiruvananthapuram and Jaipur. These airports along with the Mumbai airport (the second largest in India), collectively handled close to 80 million passengers in 2019-20, which is a quarter of India’s total air traffic of 340 million.

Many other major changes are also looming. It looks like the much awaited and much delayed disinvestment of Air India will almost certainly go to the Tatas, along with their stakes in Air Vistara and Air Asia.

The Indian aviation industry is also set to welcome two new players — the second incarnation of Jet Airways (backed by a consortium of U.K.-based Kalrock Capital and Murari Lal Jalan) and the entry of Akasa Air, backed by Dalal Street ace veteran Rakesh Jhunjhunwala. While both are still finalising detailed plans, their entry underscores the appetite for opportunity in the Indian airlines segment at a time when existing players are struggling to make ends meet. It is a cliche saying that “every dark cloud has a silver lining” , but only time will tell how the Indian Aviation as an industry shapes up in the future with these industry juggernauts at the forefront.

In India, the prevailing grim environment along with reduced demand due to the coronavirus puts pressure on the airline companies to adapt faster. The covid-19 pandemic has forced airlines globally to reassess their business models and become more efficient. A fast-growing youthful population and above average economic growth, create a dynamic environment for airlines. This will create winners and losers, and the only constant in the future is change. The growth in this industry will be further catalysed by private sector participation, and then sustained by a conducive economic ecosystem and infrastructure created via government initiatives and plans. In short, the aviation industry in India is “ready for take-off”, so it is advised to fasten your seatbelts!