The cautionary cloud in IndiGo and Air India mega orders

In 2023 until May, IndiGo and the Tata Group, which operates three airlines, accounted for 85% of domestic passenger traffic. While IndiGo has been a perennial market leader, the identity and share of the second airline has changed. In 2019, just before the pandemic, the combined passenger share of the top two airlines (the second being SpiceJet) was 62%. In 2014, this figure was 54%, the second being Jet Airways.

The sector has seen many upheavals in the last five years. Jet is gone, Go First is grounded and SpiceJet has ceded ground. Meanwhile, the Tata Group bought government-owned Air India, to go with AirAsia and Vistara, and form the second axis to IndiGo. Aviation is deregulated in India, which means anyone can launch an airline. As is the case in the US, the largest aviation market where four airlines have a 15-18% share each, and six account for a combined 25% or so, followed by a string of smaller, niche airlines. In an industry that is essential in nature and price-sensitive, 85% share in the hands of two groupings can pose challenges.

Securing growth

Globally, aviation is fairly fragmented. The US and China are two large markets. The rest account for small bits. This includes India, which though has the benefit of being a high-growth market. That promise is one reason why it is making a splash in orders. Airlines don’t want to pause on growth for want of planes, and are thus securing their pipeline. Their bigger peers elsewhere operate in lower-growth markets, and prefer stretching the life of their fleets.

Another emerging reason is the duopoly forming in India. Take the Airbus order book from 2006. With 830 aircraft, IndiGo led all airlines in that order book. To that it has now added 500 more. But there is no depth from India. Other than IndiGo, there are only seven other airlines from India that have ordered from Airbus. By comparison, there are a lot more airlines from the US, China, and UK, with decent-sized orders, including pending ones.

Age on its side

In terms of fleet size, India has the seventh-largest fleet. Its strides in fleet size is likely to mirror its ascent up the GDP ranking. Thus, in the coming years, it could overhaul four countries above it, namely Canada, Russia, the UK and Germany. But the gap with China and the US is a big one. At present, India’s fleet is roughly one-fifth that of China and about one-twelfth of the US. At the same time, India has one of the youngest fleets, which means that if growth slows, Indian airlines will have greater latitude to stretch the life of their existing planes.

But a slowing of growth will put pressure on them vis-à-vis their ambitious order books. While most such commercial deals have some amount of flexibility on deliveries, aircraft make and payment terms built in, the two Indian airlines placing mega orders will need to be careful they don’t over-stretch their markets or finances.

Duopoly days

India’s domestic market is the fourth-largest globally. It’s about one-third of China and about one-tenth of the US. Further, India’s domestic market accounts for about 2% share in the overall air-passenger market (domestic plus international). That’s something IndiGo and the Tata Group hope to change by unlocking growth both at home and abroad. If their duopoly persists, and if it stifles competitive pricing or a wholesome expansion, it could invite scrutiny.

The world over, aviation is a unique business. It is tough to succeed in, but also essential in nature. Thus, it also tends to be regulated, explicitly or implicitly. There are instances of state-owned airlines (Turkish, Qatar Airways). There are instances of a defining state decree—for example, Australia was a two-airline country till 1990. In the mid-1990s, India deregulated aviation. A duopoly is the latest outcome of that move, and will be watched from a consumer prism.

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Updated: 26 Jun 2023, 09:13 PM IST