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By Satyendra Pandey Jan 27, 2023 11:56:19 AM IST (Published)
Credit and cash-flow woes for weaker airlines are all pervasive and options are far and few between. Thus the idea of consolidation which would at least give some semblance of pricing power, some semblance of volumes and one less competitor.
As 2023 begins, India’s airline landscape continues to be a story of contrasts. The country has 7 large commercial airlines, 692 aircraft and combined revenues that are touching $11.5 billion. On the other side are losses of $ 2.7 billion, debt levels in excess of $5.2 billion, credit lines running thin, a transient workforce and voluminous aircraft orders that are in search of financing. Add to it the PR nightmares that have surfaced across the industry. The market structure is now effectively a duopoly with two large airlines, Indigo and Air India, battling it out and controlling over 80 percent of the market. The rest are left to compete on the sidelines. It begs the question: is additional consolidation on the anvil?
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Credit & cash-flow woes find some consolation in potential consolidation
With the market structure as it stands, coupled with other factors, the Indian skies have seen a divergence. The strong airlines have become stronger, and the weak airlines have become weaker. Whether it be marketshare, the ability to finance aircraft or the ability to access credit. Or the ability to sell, or to maintain high yields or maintain stability of operations. Consequently, the access to credit and the ability to service borrowings stands constrained. And it is no surprise that at least two airlines have accessed the government’s emergency credit loan facilities made possible via the ECLGS scheme. Evenso, with soaring demand and fare levels that are a fair bit higher, some quarters are not quite sure of the nature of this emergency.
Credit and cash-flow woes for weaker airlines are all pervasive and options are far and few between. Thus the idea of consolidation which would at least give some semblance of pricing power, some semblance of volumes and one less competitor. But ideas are just that. Because when one digs deeper, the very elements that led to success including voluminous aircraft orders, asset light balance sheets and a captive talent market – are now leading to anything but success.
Debt levels and control provisions are a challenge
For the industry as a whole debt levels remain a challenge. But for stronger airlines, creditors are not quite worried because of parent company guarantees or because airlines have never defaulted on payment or demanded renegotiation. At the other end, you have payment deferrals, repeated renegotiation and even defaults.
For financiers too it is an interesting scenario because they have more options than before. Whether it be Air India or Indigo or a well-capitalised new entrant in Akasa. What this means is that the other airlines are left with even more stringent credit conditions – and with interest rates rising and the exchange rate trend – respite is just not seen on the horizon.
Thus again the idea of consolidation. A combination of one or more weaker airlines would not only help with capacity and pricing discipline but also help optimise costs. However, again - this is easier said than done. Debt levels, control provisions and expectations do not make for such a smooth ride. Equity has been found wanting and emergency credit has only added additional debt to over-burdened and fragile balance sheets. And the debt has to be repaid thus will need to be provisioned for in the coming quarters.
Control provisions are a point of contention – both because of past history of airlines, management structures and a legal system where the timelines are uncertain at best.
Consolidation is now a default option
To be sure the weaker airlines do have an option but the key word in each of these options is “equity.” This has been found wanting time and again. With products like mezzanine debt, structured credit and conversion options not quite proven or pervasive, and with the Jet 2.0 saga being watched closely, wearily and warily by investors, it would seem that consolidation is now the default option. A difficult default to say the least.
A consolidation no matter how difficult can provide a decent amount of market share, a strong order book, presumably better deployment of capacity by virtue of a larger entity. Talent may also be more enticed towards such an entity thus helping quell the attrition. But it is worth repeating a third time over that consolidation is challenging, consolidation creates chaos, and when not managed well consolidation has proven catastrophic.
Failing consolidation, it is a text-book case where the weak will get weaker while the strong get stronger. With 80 percent of the domestic market under two airlines, namely Indigo and Air India, the rest are left to fend for themselves. On the low-cost carrier front, with Indigo clearly leading the charge and defending its position other airlines are guaranteed to continue to make efforts to capture or re-capture a portion of the market. This could very well mean capacity wars, fare wars and deep discounting. Into this arena will also enter Jet 2.0 where the strategy remains to be seen; and the pending sale of Alliance Air (the regional arm of erstwhile Air India). Both these will be closely watched and the existing market structure makes for interesting consolidation opportunities.
For India’s airlines whether additional consolidation on the anvil is a question that remains. But at this time, one can take a calculated guess that if it were to materialise the words chaotic, confused and compulsory will figure squarely in the narrative.
—The author, Satyendra Pandey, is the Managing Partner of aviation services firm AT-TV. The views expressed are personal.
Read his previous articles here
(Edited by : C H Unnikrishnan)
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