Over the past five years, India’s aviation industry has grown fast: in 2018, the International Air Transport Association (IATA) predicted that India would be the world’s third largest aviation market by 2024, and grow from 158 million passengers in 2017 to 572 million by 2037. However, after four years of double-digit demand growth, in 2019, air traffic in India rose 5.1%, down from 18.9% growth in 2018, according to IATA. While part of the decline can be attributed to the broader economic slowdown in India, industry-specific challenges are not helping.
From a supply standpoint, India’s aviation industry is going through a fair amount of turmoil, with airline shutdowns including Jet Airways last year and Kingfisher Airlines in 2012, and the disinvestment of Air India by the Indian government. In addition, Indian carriers face inherent structural issues, such as thin margins, regulatory pressures, high taxes and unsteady fuel prices.
While India has proven to be a difficult environment for airlines to operate in (ironically, often more difficult for Indian airlines than for international carriers), the sheer market size and potential makes it highly lucrative. So, what can revive the industry and help it bounce back from the anemic growth of last year?
- Easing government regulation: While the current Indian government has taken important steps to deregulate the industry, there is significantly more opportunity. The government’s “5/20 rule” required companies to be in service for at least five years and have a minimum of 20 airplanes to fly international routes. In 2016, the government modified it to the “0/20 rule,” removing the five-year limit — a step in the right direction. The government’s imminent plans to divest Air India and allow overseas control of local airlines, which could increase foreign investor interest and facilitate the sale, is another positive step. But the government must do more. Per the current government’s UDAN project, the price of half the seats on flights less than 500 kilometers or one hour is capped at about $30. While the impact of this price cap is partly offset by concessions such as no landing or parking fees, the low cap makes it hard for airlines to profitably fly those routes. The current regulatory and tax framework that impacts fuel costs puts Indian airlines at a significant disadvantage versus other international carriers. According to IATA, fuel accounts for 24% of an average airline’s cost structure vs. 34% for Indian carriers. Such constraints are extremely difficult for Indian carriers to offset.
- Better airport infrastructure:Airport infrastructure as well as connectivity to and from airports are critical success drivers for the industry. While large cities like Mumbai and Delhi have done a good job upgrading their airports, it’s only the start. Firstly, these cities can’t just be connection points or feeders for domestic routes, but instead must grow into true hubs that provide connectivity to various international destinations. For instance, Mumbai’s international airport’s current runway capacity constraint is standing in the way of achieving this. Secondly, there is significant need for secondary airports as larger airports reach capacity. Most major global cities have more than one (often up to four) airports that serve various purposes: international hubs, low-cost carrier airports (generally with lower airport taxes) and city airports that provide easy connectivity to and from the city centers. While Hindon airport in Delhi and the recent development of Navi Mumbai International Airport on the outskirts of Mumbai are once again examples of steps in the right direction, the country must do more, and faster. Lastly, India must invest in more efficient communication lines between airports and metro and suburban areas to tap into large pockets of demand.
- More partnerships with international carriers: Code shares, revenue sharing agreements and alliance membership can help boost demand for Indian carriers as well. Indian carrier Vistara and United Airlines announced a code-sharing partnership in 2019 that enables both airlines’ loyalty members to earn and redeem points when flying on either carrier’s metal. IndiGo and Qatar Airways also forged a code-sharing partnership late last year, signaling the chance for one or a few Indian airlines to join the ME3 (Qatar Airways, Emirates Airlines and Etihad Airways) for connections to the Middle East or South Asia. After much deliberation, Air India was granted membership to the Star Alliance in 2014, expanding the airline’s international connectivity. Seamless traveler experiences and benefits, such as easy booking, affordable combinable fares, through-checked bags and loyalty program point acquisition and redemption will be critical for success.
- Improved management and operations: Even if the macro conditions are favorable, Indian carriers will not be successful unless they run tight ships. A strong operation — a robust fuel hedging strategy, optimized flight and airport operations and well-managed corporate functions — is of course critical. But well-run commercial functions and a high degree of focus on revenue generation is equally important. Airlines should continue to invest in network planning, revenue management, loyalty programs, marketing, sales and go-to-market (including distribution) strategy and e-commerce to deliver strong and sustainable revenue performance.
If Indian airlines can address the regulatory and infrastructure challenges, keep forging beneficial international partnerships and focus on operational fundamentals, they can avoid some of the industry’s past mistakes. Although some woes will continue, for India’s airline industry, the future is looking up.