May 8, 2023

The Mystery of Airlines Folding in India’s Thriving Aviation Market

By architfly INDIAN AVIATION NEWS 0 Comments

In the ongoing battle for dominance in India’s aviation industry, Go Airlines India Ltd. has recently become the latest casualty. This unfortunate event follows a pattern seen before and is likely to be repeated in the future.

With the growing aspirations of the middle class to travel by air, Indian airlines invested billions of dollars in aircraft orders over the past few years, resulting in intense competition in the world’s most populous nation. Even prior to the devastating impact of the pandemic, the struggle for survival in this industry was fierce.

The allure of the aviation sector has been especially appealing, yet unforgiving, for affluent entrepreneurs who sought to venture into this burgeoning field, enticed by the prestige of owning an airline. Go Airlines, owned by Nusli Wadia’s group, known for its diverse business interests ranging from cookies to clothing, becomes the third prominent carrier, majority-owned by a billionaire, to suspend operations in the past 11 years.

India presents a unique combination of being both a rapidly growing market and a challenging one for operators and suppliers like Airbus SE and Boeing Co.

Why did Go stop?

The reason behind Go’s halt is multifaceted. Once considered the nation’s third-largest carrier, Go filed for insolvency protection, citing a failure by Pratt & Whitney to provide necessary parts and replacement engines for its Airbus A320neo jets, which form the core of its fleet. Despite a court order requiring Pratt & Whitney to fulfill its obligations, the engine manufacturer, a subsidiary of Raytheon Technologies Corp., has disputed this claim.

However, Go has faced difficulties in the past as well. It has experienced slower growth compared to its competitor IndiGo, which now dominates over 50% of the domestic market. Additionally, Go accumulated significant debt during the pandemic, using the funds to cover lease rentals, airport dues, and employee salaries while its aircraft remained grounded.

Last year, the airline had to postpone its planned 36-billion-rupee ($440 million) initial public offering due to a large portion of its fleet being idle. As a result, it now faces imminent defaults on its outstanding debts, amounting to 114.6 billion rupees ($1.4 billion).

In response to Go’s plea for relief from lessors demanding the return of their planes, an Indian court recently reserved judgment, thereby delaying a verdict.

Who else has folded?

Kingfisher Airlines, established by Vijay Mallya, a beer tycoon who is currently a fugitive, ceased operations in 2012 due to its inability to settle outstanding payments to banks, employees, lessors, and airports. Jet Airways India Ltd., founded by Naresh Goyal, a former travel agent who became a billionaire, has been grounded since entering bankruptcy proceedings in 2019. Over the past few years, several smaller regional carriers, including Air Costa, have also shut down. Air Costa made headlines in 2014 by placing an order for 50 Embraer SA jets valued at $2.9 billion, but unfortunately, it faced financial troubles and ultimately folded in 2017.

Why so many failures?

Indian airlines face a range of factors leading to their closure, primarily stemming from a combination of excessively low ticket prices, high fuel taxes, intense competition, and the recent disruption caused by the Covid pandemic. To illustrate, a one-way ticket for a 90-minute flight from New Delhi to Mumbai was available for just $79 on Booking.com, while a similar-length flight from New York to Atlanta was priced at $199.

Certain Indian states impose substantial provincial taxes, with rates as high as 30%, on jet fuel. This constitutes the largest expense for airlines, accounting for over half of the costs for some budget carriers. Established players like IndiGo lure passengers with extremely affordable fares on routes also serviced by competitors. They leverage their extensive network to recover costs on less competitive routes and take advantage of economies of scale to reduce operational overheads.

Furthermore, the depreciation of the Indian rupee by nearly 20% against the dollar since the start of 2019 has escalated the expenses associated with leasing planes from foreign countries.

Government helps?

Successive governments, often influenced by populist sentiments, have refrained from providing direct assistance to struggling airlines. In fact, there were instances where the government even encouraged carriers to further lower their fares. The previous administration permitted foreign airlines to invest in domestic carriers and encouraged states to reduce taxes.

Under the leadership of Narendra Modi, the current government took measures such as offering credit lines during the pandemic, but they stopped short of providing full-fledged bailouts. Modi has demonstrated his commitment to reducing government involvement in business by selling the perpetually unprofitable national carrier, Air India Ltd., to Tata Group last year. However, as Modi seeks a third term in the upcoming elections, the occurrence of more airline failures could tarnish his reputation as a supporter of the industry.

Do new airlines keep popping up?

The primary attraction is the vast market potential in India. With over half of its population under the age of 30, the country has the potential to become the world’s fastest-growing major economy in the near future. In 2016, India surpassed Japan to become the third-largest domestic aviation market, and more local airlines are expanding their operations to include international routes.

According to the Sydney-based CAPA Centre for Aviation, India is projected to handle more than 1.3 billion passengers annually in the next two decades, a significant increase from the current figure of fewer than 200 million passengers. Furthermore, CAPA estimates that within 40 years, the Indian aviation market will expand from the size of Las Vegas to the size of the entire United States.

Additionally, there is a certain prestige associated with Indian industrialists owning an airline. Figures like Vijay Mallya contributed to glamorizing the industry through his airline, Kingfisher, which shared its name with his popular beer brand. Mallya personally selected flight attendants and enlisted top models for marketing campaigns. Naresh Goyal’s Jet Airways included Bollywood celebrities on its board and held annual general meetings filled with poetry and adulation for Goyal and his family.

In the most recent development, the late billionaire Rakesh Jhunjhunwala assembled a group of seasoned aviation professionals to launch Akasa Air, the country’s newest airline, just last year.

Can failed carriers recover?

While it is uncommon for financially struggling airlines to make a comeback, there are instances where it has happened before. A notable example is SpiceJet Ltd., which faced significant financial difficulties leading to the grounding of its entire fleet when local oil companies declined to provide fuel on credit. However, under the fresh ownership of its original co-founder Ajay Singh, SpiceJet has successfully navigated through these challenges by engaging in contract renegotiations and discontinuing unprofitable routes, enabling the airline to remain operational.

Next?

The privatization of Air India has led to increased consolidation in the industry. Tata Group, which already held a majority stake in two other local ventures – Singapore Airlines Ltd. and Capital A Bhd.’s AirAsia – has initiated the merging of all these brands into a single entity. However, history has shown that this does not guarantee survival in the competitive Indian market. Jet Airways, after acquiring budget carrier Air Sahara, and Kingfisher Airlines, following its takeover of Air Deccan, both ended up going bankrupt.

Regarding Go, it is possible that the court will appoint an official to oversee the airline while renegotiating terms with lenders and lessors. Despite the airline’s insistence on recovery, all flights have been canceled until at least May 9. During this period, Go faces the risk of losing its trained employees and crew to competitors who are actively seeking to fill vacancies created by the pandemic.