The Indian aviation market split by business model currently has four low-cost carriers and two full-service carriers. This includes the national carrier, which when privatised or shut down, will free up more capacity for the taking.
Segmentation is occurring slowly but surely, capacity continues to pour in, airports constraints are easing and liquidity remains challenging. Balance sheets are fragile, the government recently has pushed for new legislation offering policy certainty for foreign investors and several talented folks at current airlines find themselves facing the proverbial glass ceiling and as such are itching to prove themselves. Thus, for a new entrant looking to enter the market, there are several avenues and opportunities. The question remains, is India ready for a new airline?
The competitive dynamics are mimetic
The Indian aviation market has long been cutthroat, but the competition over the past five years has seen especially intense. Airlines have been engaged in a desperate struggle for passengers, for pricing and for talent.
In such an environment, any new airline venture would find it difficult to succeed. But due to an unexpected sequence of events, there are chinks in the armour of all competition.
promoter discord at IndiGo to losses at Vistara, which are forcing a revision of strategy; from the pending privatisation of Air India to the B737Max grounding and balance sheet strength at SpiceJet; and from management attrition and operational woes at GoAir to fleet growth and the revision of a brand licensing agreement and control provisions and an Enforcement Directorate investigation into AirAsia India. Altogether, each airline has a different set of challenges, which detracts it from the core focus on competing.
By virtue of being a market limited to a handful of players, talent churn is also on the rise. And in an irony of sorts, this is leading a situation where more airlines are thinking in the same way and wanting more of the same. This is true to the philosopher Rene Girard’s mimetic theory, which states that human conflict can be traced to mimesis — that is fighting because parties want the same thing (as opposed to fighting to be different).
India’s airlines have failed to differentiate and consequently each wants more of the same. And this mimesis is leading to revenue dilution, pricing dilution and unsustainable supply demand spreads by incumbents.
Pricing wars continue unabated and because everyone is chasing the same demand. The market is one where price rules. The market growth has been in double digits but this has been driven by prices the best example being the glamourisation of “rail-air parity” when airfares are at or below railfares. A great outcome for the consumer. But current competitors now inadvertently find themselves competing for demand that is no longer captive.
Carefully considered, the above factors pose a potential opportunity for a new entrant.
Large aircraft orders have incumbents locked in to existing models
India’s commercial aviation fleet has grown from 383 aircraft in 2010 to 650 aircraft in the beginning of 2020. This number is set to grow with the ratio of aircraft on order to aircraft in service being as high as 1.7X.
The large fleet orders by incumbents are often cited as evidence of market strength. Yet, the orders also carry risk. These risks include a failure to absorb the order, decline liquidity on the asset type (as evidenced by the Boeing 737Max) and the force-fitting of the asset to the network.
If the operating characteristics of the aircraft are out of line with the network requirements and/or fall out of favour with demand characteristics, it presents a very compelling challenge. This has already happened sectors like telecom (often compared to aviation due to cost structure) where market leaders — both global and local — have been completely displaced in a short period of time.
New aircraft that may offer a lower cost of delivery (a key consideration for any airline) may hold the key. This lower cost of delivery can be achieved via several innovative methods which are not limited to technology. Unfortunately, aircraft that do not offer a competitive cost of delivery (CASK) that is at par or below existing aircraft will simply not work.
Finally, the dominant airline has placed massive aircraft orders and leveraged market dynamics to its favor. Thus it is a fool’s paradise when other airlines believe they can secure similar terms. Simply ordering more airplanes with similar
financing structures will not deliver the same results that it has for IndiGo. These large aircraft orders also tie incumbents to current technology and business models. And depending on minimum contracted guarantees, deferring or delaying capacity comes at a cost. A new entrant gets several benefits
Starting an airline is always a daunting challenge. And in an emerging market this is exacerbated. Yet, the Indian aviation landscape of 2020 is not the same that it was five years ago. There have been policy shifts most notably the National Civil Aviation Policy of 2016, foreign direct investment (FDI) into the sector has been opened up, competitor weaknesses have been exposed and there are drastic global technology and geopolitical shifts underway.
Further the most recent entrants Vistara and AirAsia India both are facing daunting challenges. These are a rich source of learning. A second mover advantage in this case is advantageous.
While it is the norm that competitors will create barriers including attempting to bleed any new entrant out of the market via aggressive pricing and other tactics, the dynamics now are one where the market leader IndiGo by virtue of its size will also be extra cautious. Other airlines that run to the government crying foul on pricing may also be put on the backfoot if they engage in similar behaviors against a new entrant. Again a unique circumstance.
That is not all. As aviation traffic grows, in parallel, rail and road quality is improving exponentially. While more travellers are taking to the skies, there are also those who are engaged in “reverse migration” choosing to travel by road or rail. Short sectors are most impacted.
Looking out to the future, with better roads and with exponential improvements at the railways, these impacts will only grow. Domestic tourism is gaining ground and destinations that just ten years ago were considered “exotic” are now mainstream.
From a broader vantage, the once powerful Middle East airlines find themselves facing challenges. To name a few, the hub concept is being challenged; narrow-body aircraft with increased range is leading to more point-to-point flying; and there is a slow but sure shift in demand.
The list is endless.
As the India market continues its ascent towards being the third largest aviation market by 2030, there are a plethora of factors that are changing. These coupled with easing of constraints via new airport capacity, relaxation of
cross-border equity restrictions, constrained liquidity, growing concern around environmental factors and green equity and the inflexibility of incumbents may very well provide the avenue for a entrant.
India seems to be ready for a new airline.
This article is the third installment of a three-part series. Read part 1 here and part 2 here. Satyendra Pandey is the former head of strategy at a fast-growing airline. Previously, he was with the Centre for Aviation (CAPA) where he led the advisory and research teams. Satyendra has been involved in restructuring, scaling and turnarounds. Read his columns