May 9, 2023

The Battle for India’s Vast Consumer Aviation Market Appears Prearranged

Twenty-five years ago, when the number of Indians flying annually was equivalent to the current monthly figure, two state-owned airlines dominated half of the domestic aviation market. However, in March of this year, a single private airline accounted for 57% of the 13 million tickets sold.

While India’s embrace of capitalism has led to higher economic growth compared to its socialist past before the 1990s, sectors regulated by the state have largely failed to introduce robust competition that would provide consumers with more choices, improved services, and lower prices.

Economists Arvind Subramanian and Josh Felman have highlighted the growing influence of the “2As” — businessmen Mukesh Ambani and Gautam Adani — as evidence of an “extraordinary concentration of economic power.” Expanding on this analysis, Viral Acharya, a former deputy governor of the central bank, has also included the Mumbai-based conglomerate Tata Group, cement-and-aluminum magnate Kumar Mangalam Birla, and telecom tycoon Sunil Mittal. Over the past 30 years, the top five nonfinancial groups have increased their share of total assets by 8 percentage points, while the influence of the next five business groups has diminished by roughly the same amount.

“In a recent paper, Acharya stated that Big-5 not only expanded at the expense of smaller firms but also surpassed the next largest firms. The East Asian model promotes large conglomerates as national champions, aiming to secure larger shares of global value chains, aligning with this growth strategy.

Domestic Sector

In India, they are achieving or granting a form of hegemony in domestic sectors. With import tariffs trailing only Sudan, Egypt, and Venezuela, domestic groups entrenched in the country have gained significant bargaining power over 1.4 billion consumers.

The competitive landscapes of India’s aviation industry and its Chinese counterpart show a sharp contrast. The three major Chinese carriers—China Southern Airlines Co., China Eastern Airlines Corp., and Air China Ltd.—control less than half of the scheduled seat capacity collectively. Bloomberg Intelligence analysts Tim Bacchus and Eric Zhu highlighted last month that pricing competition among Chinese airlines on domestic routes is expected to remain strong due to seat growth. In contrast, the sudden bankruptcy filing of Go Airlines India Ltd. last week has filled consumers in the neighboring Indian economy with anxiety, raising concerns about potential plane repossession by lessors.

If Go First redistributes its 7% passenger share, Indigo, the brand operated by InterGlobe Aviation Ltd., could potentially expand its control to three-fifths of the market. In various sectors like aviation, telecom, ports, airports, and power, the prevailing trend in India appears to be a decline in state dominance, leading to the emergence and eventual decline of all but a few wealthy moguls who manage to outperform other affluent individuals. The Wadia Group, owned by billionaire Nusli Wadia, currently controls Go First. Vodafone Group Plc’s wireless joint venture in India with Birla, a prominent figure in the commodities industry, is struggling to survive.

Academic Research

The persistently high inflation in advanced economies has been partly attributed to the presence of high margins. This hypothesis is gaining support in academic research, and it may hold true for India as well. According to Acharya, a professor at New York University, “Consumers do not appear to fully benefit from decreases in input prices, which could be attributed to greater pricing power resulting from increasingly concentrated industrial organizational structures.”

Additionally, India experiences certain distortions that are unique to the country. Go First’s performance will serve as another examination of India’s bankruptcy law, which has thus far been ineffective in preventing sudden losses of aviation capacity. Other sectors, such as power distribution, suffer from long-standing structural deficiencies, including favoritism towards farmers at the expense of other buyers.

Industrial consumers pay more than twice the purchasing-power-adjusted cost of electricity in China, while American companies spend only a sixth of what Indian firms pay. The lack of competition results in increased prices, although the effects may not become apparent for several years. Currently, Indians enjoy the fifth-lowest data costs globally, thanks to Ambani’s strategic efforts to dominate the market by eliminating rivals. What was once a market with numerous operators now has only Ambani and Mittal’s Bharti Airtel Ltd. remaining.

Data charges are likely to remain low as the two dominant players continue to roll out their 5G networks, attracting customers away from Vodafone’s struggling joint venture. However, these charges may rise again leading up to the highly anticipated public listing of Jio Platforms Ltd., Ambani’s digital empire.

Adani management

To paraphrase Leo Tolstoy, every dissatisfied consumer has their own grievances. Adani is currently constructing an eighth airport in addition to the seven already under his management. As private concessionaires, they have the authority to impose fees on departing passengers in exchange for taking over the terminals from resource-limited governments. Although these additional costs may not affect the wealthy, they do burden the less privileged, such as blue-collar workers who rely on affordable flights for new job opportunities in the Middle East.

In the consumer staples sector, where competing products vie for attention, the Indian consumer is holding up reasonably well. Unilever Plc’s Indian division experienced a 17% increase in material costs during the fiscal year ending on March 31 but managed to limit its price hike to 11%. This resulted in a 6 percentage point decline in gross margin over a two-year period, a trend consistent with the performance of Unilever’s Indonesian unit. With Ambani’s significant foray into consumer goods, the company’s pricing power is likely to be further eroded.

However, consumer satisfaction can be compromised in various other ways. Recently, a friend who frequently flies complained about the absence of marmalade during breakfast on Vistara flights. Vistara, a full-service carrier jointly owned by the Mumbai-based Tata Group and Singapore Airlines Ltd., is in the process of merging with Air India, which Tata acquired from the government in 2021 through a privatization agreement. With the inclusion of AirAsia India, the third airline in the Tata conglomerate, the group now commands a market share of approximately 25%.

Furthermore, Tata has placed an order for 470 aircraft, the largest such order in aviation history. As a result, the world’s most populous nation may soon have only two viable choices for domestic air travel: Indigo and Tata.