The year 2024 was a time of change for Indian aviation. The many changes the marketplace witnessed included the consolidation of the premium airline Vistara and low-cost carrier AirAsia India into Air India; the strategic shift by Indigo; the resolution of contentious issues by the court in the GoFirst bankruptcy; a qualified institutional placement for SpiceJet; operational challenges and a fundraise by Akasa; and the liquidation order for Jet Airways.

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Yields remained strong throughout the year, and in a market where cost efficiency is paramount, low fares were—and still are—scarce. Over the past decade, the industry has effectively shrunk from seven scheduled commercial airlines to just four. When factoring in capitalisation, capacity, and combined domestic market share, investors now see a clear duopoly emerging. In this environment, smaller competitors face a significant uphill battle.

Navigating the duopoly

Between Air India and Indigo, the combined marketshare is in excess of 88%. More importantly, both airlines have adequate capitalisation and a long runway ahead. As such, smaller competitors either have to have a large cash-cushion or a clearly defined niche. 

Given the strength of the balance sheet at Indigo and the patient capital deployment by the Tata group into Air India, investors into other airlines — new and existing — are treading extremely cautiously.

Hurdle rates are extremely high and further complicated by equity market returns and high interest rates. For airline investments to match investor expectations, IPO’s or strategic sales are the only options. But both require and underlying asset that either generates stable cash-flows or aggressive growth or a combination of both. And indeed, the proof is in the fact that in spite of a very attractive market proposition, a large single-source investment into smaller airlines has just not materialised. 

While SpiceJet and Akasa both have had success in sourcing investment, whether this investment provides an adequate cash-cushion whereby they can challenge the duopoly and grow towards grabbing a greater portion of the market in a financially viable manner remains to be seen. Competitors like SpiceJet and Akasa are also facing challenges with inducting capacity for very different reasons. And inducting capacity is only the first step, one then has to deploy the capacity and manage the capacity towards generating adequate returns. That is easier said than done. And all this while, indications are that competitive intensity will only amplify in the months ahead. 

Principles vs principals

In this competitive arena exist principals who have founded or led airlines. As is the case with many markets, in Indian aviation, the persona of the airline tends to become synonymous with their principals. Evenso, it is principles that are key to success. Whether aiming to be a premium airline or a low-cost airline, the principles have to be adapted to the India market and then held on to strongly. One cannot be a low-cost airline announced by a principal only to find the business model gravitating towards escalating costs and soft negotiation.

The issue of principals also continues to have consequences on the success or failure of airlines. History has shown that in a razor thin margin business — where a 5% margin is above the market average — clear strategic direction is critical. The luxury of time is simply not there. This means that where there are conflicting directions, conflicting approaches or at worst conflicting control provisions, strategic direction will be confusing at best. 

Culturally, there is also a scenario playing out where principals are rarely questioned or told that their thinking or reading of the market is incorrect or that the marketplace reality has changed. This leads to a gap in the market reality versus expectations.

Unfortunately, in a market that has witnessed three very messy airline bankruptcies, including large losses by capital providers, the consequences continue to play out. And when returns are not to be found, investor interest starts to wean. Calling a spade a spade is necessary but the ability to do that stands constrained. As the legendary investor Peter Thiel states, “probably to get out of the desert that we’ve been in for the last forty years you have to start by saying that you are in a desert not in some sort of enchanted forest.” 

The market contradiction

As it stands, from the outside looking in, India’s airlines have the benefit of an US$18-20 billion-dollar domestic market alone. The foundations for growth remain strong and all forecasts still indicate that by 2030 India will firmly establish itself as the world’s 3rd largest aviation market. India’s macroeconomic elements are aligned, and the country is on track to register 6% – 7% GDP growth with airline traffic that will grow at a multiple.

 However, growth is not given or granted. And, a growing market does not necessarily translate into success. Costs continue to creep up, crewing is expensive and consolidation and the resultant duopoly mean any new airline is looking at a David vs Goliath scenario.

Airlines like Akasa are indeed finding it tough to navigate the market. This in spite of secured capacity via voluminous aircraft orders; a strong team; and aggressive growth plans. In Akasa’s case, isolating a single element of staffing sheds light on these challenges. To cater to their growth plans, the airline has been carrying excess crew. However, with delays in aircraft delivery, excess crew has led to a multitude of other issues including regulatory issues and significant negative press whether warranted or otherwise. The airline finds itself in a difficult position of playing offense and defence both inside and outside and individually and collectively. 

The market contradiction that currently exists is that one of the largest low-cost markets in the world — is without a true low-cost carrier. The erstwhile low-cost airline has shifted towards a more premium offering; the erstwhile premium airline is betting on gaining low-cost marketshare while the others play at the periphery. This effectively means that an entire segment of the population or an entire segment of demand remains unaddressed. Demand that will fly and demand that can be stimulated at certain price points. However, price-points that do not exist currently. 

When looked at as a whole, India now has 4 airlines with all attempting to do more of the same. The arena is wide open for a new entrant as India’s airlines are flying in a sea of sameness and competing the profits away. For 2025, Indian aviation summed up in one sentence is: 4 airlines, a duopoly and a market contradiction.

—The author, Satyendra Pandey, is the Managing Partner of the Aviation Services firm AT-TV. The views are personal.

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