New Delhi: The return of the Narendra Modi-led government to power is expected to result in accelerated growth in the aviation sector, according to experts. This growth will be driven by the government’s focus on the sector and plans to establish India as a global aviation manufacturing hub, supported by major aircraft orders and increasing airport numbers.
However, with Go First expected to remain grounded, and SpiceJet struggling financially, the industry is likely to consolidate to just two-to-three player market, which may hamper consumer interest and competition in the industry, even as demand is anticipated to remain strong, according to analysts.
JM Financial said that the aviation industry will witness an upswing given the government’s focus.
“With a strong focus on transforming India into a global aviation manufacturing hub and introduction of the Amrit Kaal Civil Aviation Master Plan (BJP Manifesto), BJP’s return to power could accelerate the growth of the under-penetrated Indian aviation industry,” it said in a note this week.
The investment banking firm added that the number of airports doubled from 74 to 149 in the past decade — the first two terms of the Narendra Modi-led government — and is expected to reach 220 in the next five years. Further, the significant orders for new planes by Indian airlines, expected to be delivered in the next few years, would further boost the aviation sector, it said.
“The 1,124 aircraft order placed by Indian airlines in FY24 and a capex plan of Rs 1 lakh crore could accelerate the Indian aviation industry growth,” it noted.
Separately, Nuvama Institutional Equities added that the Indian aviation industry is set for growth with domestic air passenger traffic expected to rise 8-13 percent in the current financial year, reaching 150-155 million and surpassing pre-Covid levels.
This, it noted, was despite headwinds such as aircraft groundings, supply chain issues, scaling down of SpiceJet’s and Go First’s operations.
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Strong growth in air traffic
In April 2024, the number of passengers that travelled by air grew 8 percent year-on-year to 15 million passengers, led by strong international travel demand alongside steady domestic travel demand. The total number of scheduled flights increased by 8 percent in June to 90,000, primarily due to the pickup in international travel, although this growth was partially offset by aircraft groundings.
Given the increasing demand for travel in India, international airlines are also looking at expanding their presence in the country. For instance, in an interview with CNBC TV-18, Le Hong Ha, President and CEO of Vietnam Airlines, said that the airline is looking to expand its presence in the Indian market as the market has huge potential.
Likewise, Malaysia Airlines and Hungary-based Wizz Air were also reported to be eyeing expansion in the Indian market.
Emerging duopoly could hurt consumers
Amid the strong demand, however, Nuvama Institutional Equities expects a ‘duopoly-like industry structure’ that may impact consumer interest and competition in the near term.
“With a significant portion of its fleet grounded due to engine shortages, Go First’s resumption of operations remains unclear,” it said in a note. “Despite plans for an IPO and efforts to raise funds, challenges persist, including delays in engine deliveries and financial strains.”
Nuvama added that Go First’s market share continues to decline, and operational hurdles pose obstacles to its revival.
Additionally, despite the NCLT tribunal giving Go First a third extension of 60 days to complete its corporate insolvency resolution process in early April, the Delhi High Court later that month ordered the DGCA to de-register all of the airline’s 54 leased aircraft, which further dimmed its chance for revival.
While the total aircraft fleet in India at the end of FY24 is estimated at 790 aircraft — 100 more than in the previous year — primarily led by Air India and Indigo, the actual operational fleet is estimated to be significantly lower, increasing by just 12 aircraft to 588 due to an increase in grounded aircraft.
“Total grounded aircraft are expected to increase to 200 from 165 aircraft currently, primarily due to supply chain issues, P&W engine snag and operational weakness at SpiceJet (SJ) and suspension of Go First and SJ,” Nuvama said. “Indigo and SJ have resorted to inducting aircraft on wet lease to bridge the capacity shortfall. Up to 30 wet-leased aircraft are expected to operate by Mar-24E.”
Under a wet lease arrangement, the lessor supplies the aircraft along with crew and maintenance.
Go First & SpiceJet troubles to benefit market leaders
Nuvama added that since the entire fleet of Go First is expected to stay grounded (54 aircraft) and SpiceJet’s operational capacity is also likely to fall by 70 percent by March 2024, the industry will have just two large players with a combined domestic market share of over 75 percent.
“IndiGo is likely to benefit from market share gains across categories amid weakening of small players such as Go First and SJ (SpiceJet),” Nuvama said. “The industry could consolidate to two-three players, critically impacting consumer interest and competition in the near term.”
Meanwhile, JM Financial noted that the Air India-Vistara merger, which has been approved by the NCLT — creating India’s largest international carrier and second-largest domestic carrier — can likely lead to increased competitive intensity from Air India.
This week, Air India announced plans to introduce the three-class configuration to its entire full service narrowbody fleet (A320neo) over the next year. With this, the airline will offer business class, premium economy class and economy class cabins on domestic and short-haul international routes.
Nuvama said that a likely duopolistic industry structure dominated by Indigo and Air India “shall spur pricing discipline, thereby driving yields up over the long term”.
Aggressive capacity addition and robust demand shall drive passenger growth, it added.
That said, there is some relief expected for airlines in the near future. JM Financial expects an easing of aviation turbine fuel (ATF) prices, which could help the sector grow.
“ATF, which forms a major chunk of operating cost (i.e. 45-50 percent) experienced a price cut in the fourth quarter, following a surge in the second and third quarters and 3Q. During June 24, the price was further cut by Rs 7,000,” it said. “Due to this, airlines might experience lower costs and higher margins.”
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