Recently we have written a lot about Air India and its struggles, as well as Etihad’s interest in acquiring the airline. To stretch it further, 2019 overall was a tough year for the Indian aviation market, as Jet Airways ended its operations and IndiGo struggled with the A320neo engines. It is quite unusual to witness so many airlines struggling so significantly in a single market. Let’s try to understand what is causing it and, more importantly, how it came to be.
Market overview and extremely low-cost dominance
India is the world’s 3rd largest aviation market for domestic traffic. Its rapid growth driven by strong demand results in load factors reaching 90%. The international market is also growing, which provides opportunities for airlines to thrive. The market is expected to further develop and, according to IATA’s report, it is set to reach 520 million passengers by 2037.
A key issue driving the lack of profitability in the market is the cutthroat competition which comes as a result of the extreme dominance of the low-cost carriers in India. In 2019 (excluding December) IndiGo had 47% of domestic market share, SpiceJet 14.8 %, Go Air 10.7%, Air Asia 6.2% and Vistara 5.1%.
The only remaining traditional airline now is Air India, whose domestic market share equaled 12.8% in that time period. Essentially, over 87% of domestic market share belongs to the low-cost carriers. For comparison, in the US the LCC share is around 38%, while in Europe it is at 36.3%. Such extreme downward pressure on fare prices has to lead to airlines offering extremely low fares as they compete for passengers, often selling tickets at a loss.
However, the low-cost dominance itself does not provide a full explanation and the question that arises is: What has fuelled the rapid expansion and dominance of the low costs in India? It remains intriguing to understand the causes of the overly competitive nature of the market.
Flying in India is expensive
The average hourly wage in the US is around $23.83, while an average airfare in 2018 was at $346. This means that an average American needs to work 14.5 hours in order to fund an average trip by plane.
In India, however, the average domestic airfare in 2018 was 3,292INR ($45.74), while the average wage is 42.62INR ($0.59) per hour. This means that an average worker needs to work for 77.5hrs to take an average trip by plane, which is over five times more than in the US.
It should come as no surprise that people are choosing low-cost over traditional carriers. That, in turn, allows them to further extend their market shares, fuelling the self-propelling machine of the expansion of low-cost carriers in India.
The underlying reason for the unprofitability of the Indian aviation industry is the low incomes of its citizens. That drives demand for low-cost travel, increases its market share and further increases the competition, keeping the fares low.
Furthermore, despite the extremely low fares, airlines in India face the same costs as airlines operating in any other market. They pay the same amounts for the aircraft they operate, for the fuel and for the maintenance.
In the end, the nature of the aviation market makes adjusting fixed and variable costs to the price levels of the fares impossible. That is the real issue leading to the competitiveness and unprofitability of the market in India (and to some extent, all of Asia).
What is the future going to look like?
Back in March 2019, I wrote a piece about Jet Airways where I took a deeper dive into the Indian aviation market as well as the reasons behind Jet Airways’ struggles. Spiking oil prices and a weaker Rupee was noted as short term amplifiers of the issues haunting the extremely competitive market.
Not much has changed since then. After a recent destabilization of the Middle East, oil prices have spiked, climbing above $70 per barrel, which can have severe impacts on a few airlines in India. Some are saying that lowering fuel taxes (that can reach over 30% in India) is necessary to restore profitability.
In reality, I would expect the low-cost carriers to increase their domestic market shares even further, while airlines continue to struggle financially. This scenario is unlikely to stop until the income levels in India rise substantially, airline bankruptcies take their toll or the government steps in.