TATA-SIA, the new airline expected to be launched next year, will surely be a game changer and will have a strategic impact on the aviation industry. However, the shockwaves resulting from the two Tata joint ventures (with Singapore Airlines and AirAsia Bhd), will be felt only from 2015-16.
The cost environment in Indian aviation continues to be very hostile and fares are still way below costs. For existing airlines, business conditions are tough and this will impact traffic till the two key elements—fuel and currency costs—stabilise. In the near term, costs might actually increase. Experts say aviation fuel is likely to remain firm. Currency impact will continue to be a challenge in the near term. The third key cost, airport fees will also remain high in India. I see continuing cost and revenue challenges for airlines at least, till the end of next financial year.
AirAsia India’s entry will directly increase competition and will lead to more pressure on fares on some routes. But the extent of fare-wars will depend entirely on AirAsia India’s network and scale of operations in India. At this time, there is still some uncertainty because of delays. We need more transparency in granting licences as this impacts investor sentiment.
Coming to the question of who is most likely to go belly up—I can say the challenges are very serious for most domestic players. All Indian carries except IndiGo have huge debt and interest burden. Jet might need another round of equity infusion by Etihad by next year. I will not rule out downsizing of operations, especially by SpiceJet, as it restructures its network. Clearly, there will be survival challenges for one or two carriers. The key is securing near-term funding.
I see more airlines rationalising capacity as promoters are unable to manage losses. And this could be a step in the right direction. IndiGo, already the largest domestic airline by market share, will continue to add capacity as per their business plan. Jet may also marginally increase capacity. But frankly, the airline industry needs to find capital to manage existing operations before any more expansion.
There is, however, a small positive thread to this tale: International traffic to India is seeing a double digit growth. Start-up airlines are hoping that the government does away with the rule that requires airlines to have at least five years of operating experience and a fleet of 20 planes before they are allowed to operate on these routes. This will surely give airlines breathing space, and drive growth in the short-haul international traffic.
The Tata Effect
The impact of the Tata-SIA venture on the domestic market will initially be limited. Like any project, the airline will take time to scale up and a full-service airline model will look to address a different market segment. International plans will truly be the key to making this work. The permission for international flights will depend on the government’s stand on the 5-year/20-aircraft rule. Pressure on the existing players will come only when the Tatas are able to scale up size and operations. At CAPA, we are concerned with the lack of transparency on regulatory clearances in India and remain uncertain about clearances for this project. The other big change that will drive airline growth is airport modernisation. But the big decisions will not happen until the new government is formed.
The most immediate visible change in the Indian skies, in the short term, will be the impact of the Jet-Etihad deal. The play will be visible to passengers from the summer 2014 schedule. Etihad has already announced doubling of capacity in 14 Indian cities. The Abu Dhabi carrier is also beefing up its connections to the rest of the world. It has been among the most aggressive aircraft buyers this year.
Illustration: Sameer Pawar
To my mind, one of the biggest challenges for the next government in the airline sector will be dealing with policy issues around granting more rights to foreign airlines to fly into (and out of) India. Since we have embarked on the path to opening up the skies, it will be tough to deny more rights to airlines like Emirates and Qatar Airways. The decision to allow foreign airlines to invest in India is indeed a significant one. The impact will be more visible and meaningful as our economy recovers and political stability returns. Right now, investor interest is very thin, except for some middle-eastern carriers. Much of it depends on how soon the Jet-Etihad deal goes through. We surely expect similar investments in Indian carriers to be structured in the coming years, where investments are linked to bilaterals and deeper market access.
Check out our Festive offers upto Rs.1000/- off website prices on subscriptions + Gift card worth Rs 500/- from Eatbetterco.com. Click here to know more.
(This story appears in the 10 January, 2014 issue of Forbes India. To visit our Archives, click here.)
This is an excellent snapshot of the current state of affairs at the Indian civil air-transport system. Hope the leadership of the industry takes corrective action and brings direction in the system. The fundamental question to ask is... what are the needs and wants of the industry?on Jan 9, 2014
For industrial growth connectivity and pax affordability will generate morerevenues for AAI, GOVTon Jan 7, 2014