Why civil aviation in India needs further consolidation
The best bet for airline owners will be to try and get their businesses to a healthy state and viable size for a stake sale
A recent Morgan Stanley research report tells us that marriage as an institution might be going through one of its worst phases — but, for the smaller companies in Indian civil aviation, there is no other hope on the horizon.
To understand why, readers need to step back in time. The Indian skies changed forever with the first low-fare airline flight of Air Deccan in 2003, sparking off a revolution that made flying more affordable and accessible. Larger numbers were able to make flying their most preferred and common form of transport.
From 2003 to 2020, India saw a spate of low-fare and full-service airlines get launched and shut down, depending mostly on how well the founders structured and ran their businesses. With the sector as price-sensitive as it was, in most years, the industry registered significant losses. In general, airlines in India were considered an unprofitable business with very low margins. In 2019, Jet Airways, created for a different era and once India’s most-loved full-service private airline, closed as it failed to navigate the winds of change.
The Covid pandemic added to the industry’s troubles significantly. It led to the further weakening of already vulnerable firms, but Indian civil aviation defied logic. In FY 2020, the country had six scheduled airlines with combined losses of around $1.7 billion. In FY 2021, the country had seven with even higher combined losses. However, despite losses growing, none of the incumbents were bowing out. In fact, one new airline, Akasa Air, joined the race. Before the pandemic, airlines such as SpiceJet and Go First had more aircraft in the air, bigger market shares, lower losses, and stronger balance sheets. Post the pandemic, both became considerably weaker.
However, it was the sale of the erstwhile national carrier to the Tatas that changed the industry irrevocably. In one shot, four airlines — Air India Express, Air Asia India, Vistara, and Air India — came under a single owner. As a result, besides the two biggies (the other being IndiGo), the total number of airlines shrank to just four by 2024, including SpiceJet and Akasa; Go First, weakened beyond recovery, ceased flying in May 2023.
Industry observers and analysts argue that a lower number of airlines works better; that the old structure of many small ones with limited market share was untenable, with financial repercussions for the sector. Not only were the airlines proving to be increasingly unreliable, but they also had weak balance sheets and were overextending themselves, causing more grief to passengers.
How to mitigate the ill effects of massive consolidation became a big concern. Collusion between two airlines is likely to be even easier than a clutch of them, something the Competition Commission of India (CCI) has grappled with over the years. Time and again concerns over collusion on fares and charges have appeared in the Indian narrative, though such allegations have largely remained unproven.
The two smaller airlines — SpiceJet and Akasa — have had a shaky ride for a while now. Although Akasa set up a good pace of growth, offering a reliable and decent quality service, its losses have soared, as is to be expected with a startup. It has also paid a hefty price for its turbulent history with its own pilots and lost the support of its primary founder and financial backer, the late Rakesh Jhunjhunwala since it took to the skies.
If things have not been smooth for Akasa, SpiceJet has been on a roller-coaster for a while now. Since the pandemic and the subsequent troubles faced by Boeing, its aircraft supplier, many were convinced that it was a touch-and-go situation for SpiceJet, which has no big corporate backing like Air India or a strong cash position and balance sheet like IndiGo. As was largely predicted, the airline whittled down in size and stature since its heydays, when its total fleet crossed 100 aircraft, and its market share was almost 10% (2017-18). Its on-time performance took a beating as did its safety record. The airline lost market share, hitting lows of 3%, not far above Akasa, the youngest in the game.
It was only towards end-2023 that some semblance returned to its operations after it infused fresh funds. SpiceJet allotted shares and warrants worth ₹744 crore (just below $100 million) on a preferential basis in the first tranche, and a second and larger tranche of funds ( ₹3,000 crore) was raised through a qualified institutional placement in September 2024. This money has been used by the airline to settle employee dues, payments to vendors, tax and other statutory dues. It is also deploying the funds to pull grounded aircraft back into the fleet. Perhaps for the first time in many years, its employees are not complaining or fearing the worst (read closure).
But industry observers and experts are all united on one matter: The smaller airlines will find themselves in dire financial straits repeatedly at different points in time unless they go in for marriages (mergers or sale of stakes) to well-capitalised airlines in regions such as West Asia or other carriers that might have a strategic interest in the Indian market. The best bet for airline owners will be to try and get their businesses to a healthy state and viable size for a stake sale, finding a match that can complement what they have built.
Anjuli Bhargava writes about governance,infrastructure and the social sector.The views expressed are personal