The Indian airline industry is soaring – passenger volume growth has exceeded pre-covid levels and has grown around 13% in FY24. This comes as Indians have shown a growing appetite for air travel. The industry is seeing a duopoly with InterGlobe Aviation (Indigo) and Air India with nearly 70% market share. The pricing discipline and volume growth by top players are expected to cut losses in FY24. Indigo’s share price has surged 37.6% in the past six months, a clear sign of optimism, but recent issues with aircraft engines (Pratt & Whitney), flight cancellations and strikes by pilots and ground staff have limited the industry’s growth momentum. 

Government’s infrastructure push has helped passenger volume growth

The Indian government has developed 74 airports in the past 10 years and expects another 14 airports to be inaugurated in 2024. A higher number of airports have been developed in Tier-2 cities while ramping up the number of terminals in large airports. According to Indigo Airlines, nearly 87% of India’s population is within 100 km of an operational airport.  The construction time of an airport has also come down significantly, from 5 years to 20 months. Airport privatization has also helped increase investments by private players. For instance, Adani Airports is expected to invest around $7 billion in airport development across India. 

India’s passenger volume is expected to grow by around 12% CAGR over the next six years. Aircraft carriers like Indigo and Air India have ordered 500 and 470 aircraft from Airbus and Boeing to cater to the growing demand and replace the aging fleet. 

Indigo leads the pack in volume growth

The rise of low-cost carriers in the airline industry has led to volume growth. The rise in income levels of the middle class and increased connectivity to smaller cities has also given the industry a boost. According to ICRA, India’s airline industry is expected to grow around 8-13% in FY25. 

An increase in leisure travel and corporate activities has driven up passenger volumes. Big events like the G20 summit, World Cup, and IPL have also pushed up demand in otherwise dull seasons. Indian airline carriers are increasingly adding new domestic and foreign destinations to attract customers. 

According to Indigo’s CEO Pieter Elbers, “ Indian customers are eager for air travel but are price sensitive. Whenever we add a new destination, a huge demand uptick is seen for that route.” Most of the recent foreign destinations added by airlines are in the Middle East, Southeast Asia and parts of Africa. 

Indigo dominates India’s airline passenger volume growth

Indigo has gained volumes after Go First declared bankruptcy, as it ramped up its operations to take advantage. SpiceJet, faced with a liquidity crunch, was unable to use this opportunity – it was Air India that cashed in, instead. The weaker players are being weaned out, while stronger firms are gaining ground.

With higher ticket prices and a volume uptick, the airline industry’s net losses are expected to contract from Rs 17,000 crore in FY23 to Rs 3,000 crore in FY24. Higher passenger load should also boost profitability

The passenger load factor (PLF) of the industry has consistently remained above 85% for the past year. The peak holiday seasons (December and January) have seen PLF levels above 90%. While high PLF is good for the industry, this has led to higher ticket prices, constraining the price-sensitive industry’s volume growth.

Indigo’s passenger load factor has consistently underperformed the industry averages.

Lower numbers of operational aircraft due to persistent Pratt & Whitney engine issues have been a major reason for the elevated load factor, as planes get grounded due to engine issues. The pilot strikes at Vistara and Air India coupled with flight cancellations due to weather also increased the load factor in recent months.

Engine issues have troubled Indian airlines, made headlines

The engine issues with Pratt & Whitney have already claimed one victim, with the closure of Go Air. Other major airlines are grounding their aircraft periodically to check engine issues, and operational fleet size has been hit. Despite new destinations being added and new aircraft deliveries, India’s seat capacity (measured in available seat kilometers - ASK) has been range-bound around 14 million ASK on account of grounded aircraft.

According to travel portal Cleartrip CEO, Ayyappan Rajagopal, “Due to ongoing supply chain and engine issues, capacity addition has taken a hit. This will lead to higher fares for domestic travel”. 

Lack of new aircraft additions is limiting growth in available seat kilometers

Indigo currently has more than 70 aircraft grounded, while SpiceJet has grounded 25 planes due to engine issues. Overall, more than 200 aircraft are expected to be grounded this year due to engine issues. 

Capacity addition has been a core focus area for major airlines

Airlines are focusing on capacity additions to meet rising passenger traffic. Indigo (500 aircraft), Air India (470 aircraft), and Akasa Air (150 aircraft) together have put an order with Boeing and Airbus for 1,120 planes. The delivery is spread across the next five years, with nearly 150 aircraft scheduled to be delivered in 2024. Indigo and Air India are expected to see one delivery every week this year. 

Indian airline industry is expected to add around 150 planes to fleets in 2024

Commenting on the underserved Indian market, Air India’s CEO Campbell Wilson stated that “India had 43 wide-body aircraft at the time of Air India’s privatization, while Dubai had 250, Singapore had 150, and Qatar had 175. That highlights the subscale nature of Air India and the opportunity it has to grow”.

The new aircraft additions will help enhance the capacity of Indigo by around 17% (current fleet size 342 aircraft) and Air India by around 56% (current fleet size 124 aircraft). 

New-gen aircraft and lower fuel prices to aid margins

New aircraft additions are also expected to help save fuel expenses. For instance, the newly inducted Airbus A320 neo aircraft are 15-20% more fuel efficient than their previous versions. The newer aircraft also have lower maintenance and operational costs. 

Fuel costs, which account for around 35% of the airline expenses, are the major driver behind profitability. Aviation turbine fuel (ATF) is closely linked to crude prices, which the government and OMCs like the Indian Oil Corporation monitor. 

Aviation turbine fuel prices have moderated despite rising crude prices in the past five months

ATF prices have dropped by around 14% in the past five months, which is expected to help expand margins. This comes despite crude prices remaining range-bound around $80- $85 in the two quarters. 

The Indian airline industry has been buoyed by increased travel and rapid growth in airport infrastructure. Higher ticket prices and lower fuel prices should give airlines a margin boost. However, grounded flights, pilot strikes and slower delivery of new aircraft are speed-breakers in a growing industry, even as it has opened up new revenue sources via international destinations. But higher travel standards of foreign players and intense competition in the global market mean that domestic players don’t have an easy ride ahead.