Rising Airfares: Blame It On Duopoly In Indian Skies?

Since the 1990s, when the government opened up domestic aviation to private companies, air connectivity improved with more airlines that increased competition, led to lower fares and democratised air travel.

As some airlines struggled to sustain, newer airlines came up, keeping the aviation space competitive until recently when the sale of Air India to the Tata Group coupled with the crisis at Go First has resulted in a near duopoly. The development, coming as it does in the face of a sharp turnaround in post-pandemic passenger traffic, has led to a sharp rise in air fares and is beginning to pinch consumers.

Passenger Traffic Growing Fast

The number of domestic passengers in FY 2023-24 is expected to cross pre-pandemic level and reach 155 million in FY 2023-24, according to the Centre for Asia-Pacific Aviation (CAPA). Passenger traffic had plunged from 141 million in 2019-20 to 53 million in 2020-21, before recovering slowly to 84 million in 2021-22 and 136 million In 2022-23. According to CAPA, domestic air travellers in India could touch 500 million by 2030, growing at an annual pace of nearly 20 per cent.

India is already the third-biggest domestic aviation market by volume; it is projected to be the third-largest overall by 2026, according to the International Air Transport Association.

In such a fast-growing market, if fleet expansion fails to keep pace with passenger traffic growth, air fares are bound to rise. Worse, in the absence of competition, even with fleet expansion, the power of pricing air travel would remain with the two big players in the market – the Tata-owned Air India and Indigo.

Currently, Indigo has a formidable 62 per cent share in total passenger traffic, while Air India commands about 20 per cent, including the share of Air Vistara. Tata-operated Air Vistara is in the process of being merged with Air India after the latter’s take-over by the Tatas. Another 6.6 per cent share is held by Air Asia, which is also Tata-owned.

The remaining market share is split between two smaller players Spicejet and Akasa Air – 5 per cent and 4.2 percent respectively. Spicejet has been struggling to stay afloat, while the future prospects of recently-launched Akasa Air remains somewhat unclear after the death of its chief promoter, Rakesh Jhunjhunwala.

“​​India seems to be going to a stage where there would be just two lead operators in the aviation space in future. There would always remain the risk of a duopoly’’ said Harshvardhan, an aviation consultant who goes by one name.

In contrast, market share data for other major aviation markets such as the United States, Brazil, and China point to a more balanced and competitive space. In each of these countries, there are three to four major players. For instance, in the US, a little over two-thirds of the market is split almost equally among four nationally-operating carriers while the remaining is shared by dozens of smaller airlines.

Like many other major markets, India too saw a surge in new airlines when it opened up its skies, which until the early 1990s were controlled by state-owned Indian Airlines, to private competition. Several airlines such as Jet Airways, Sahara Airlines, East West, ModiLuft, and Damania Airways took wings in the 1990s, followed by Air Deccan, Kingfisher Airlines, Spicejet, Air Asia in the later decade.

However, barring Jet Airways, Spicejet, and Air Asia, none could survive. Even in the case of Jet Airways, which is currently grounded and has since seen a change of ownership, chances of a revival are uncertain. In other words, running an airline in India isn’t easy, it would seem.

India An Expensive Place For Airlines

Compared to many large aviation markets, flight operating cost in India is very high, mostly on account of high taxes on air turbine fuel that accounts for almost 40 percent of the total operating cost. Over and above the indirect taxes levied by the Centre, states charge value added taxes at varying rates. In Maharashtra and Karnataka, it’s 18 per cent, while in Delhi, it’s as high as 25 percent. Besides, there are airport taxes, navigation charges, parking and landing charges, which tend to be higher in India, thus putting a squeeze on airlines.

Experts view the Indian aviation market as one of the most challenging in the world to navigate. Margins are low, volumes are higher. Together that leaves airlines with very little room to make profit amidst cut-throat competition.

The Covid-19 pandemic made it worse. The lockdowns left the financials of domestic airlines under pressure. Smaller airlines were impacted more. Only those airlines, such as Air Vistara and Indigo, which have deep pockets could tide over the crisis. During this period, there was also the issue concerning technical snags in Pratt and Whitney engines in a large number of aircraft used by several Indian airlines, including Indigo. The planes had to be grounded for a considerable period of time, thus hurting their operators.

High Air Fares Are Here To Stay

As we write, the minimum one-way weekend airfares from Delhi to Bengaluru is averaging around Rs 10,000 for the next few weeks. For Delhi-Mumbai it’s around Rs 8,000. The rates go up further if one is headed to a smaller city like Bhubaneswar or Nagpur. The minimum weekend fare on the Delhi-Bhubaneswar route ranged between Rs 12,000 to Rs 15,000.

And this isn’t about air tickets getting expensive because of winter holidays. Air fares remain elevated for bookings through the next 3-4 months.

“So far the indications are not good, markets are largely held by two dominant players. We have seen a spike in fares on several routes on various occasions. This will be very bad for the consumers,’’ said Subhas Goyal, Chairman, Aviation and Tourism Committee, Indian Chambers of Commerce, said,

Some experts, however, have a different view.

“We have seen many airlines shut down in the past. Though this sector is very fragile in terms of pricing, what I have observed in the past is that the operators that increased fares had to lose the passengers,” said U K Bose, an aviation veteran and former CEO of Air Sahara, which no longer operates.

“Even in the case of two big operators I don’t think that they would be able to play with the fares or create a cartel as per their own choice,” Bose added.

Moreover, the Directorate General of Civil Aviation can always step in.

“If the duopoly is affecting the consumers' sentiments, the government will not let it remain like that, they have certain tools to intervene’’ said Mark Martin, CEO, Martin Consultancy, a company which is working in aviation space.

Martin sees “the current phase of duopoly as transient in nature”, suggesting the aviation space will soon become competitive with either new airlines or expansion of some of the existing airlines.

That said, any new airline will take time to make its presence felt, so will the expansion of smaller airlines currently in operation. For now, the Indian aviation market will likely resemble more of a duopoly. And whether the two leading operators exploit the situation or not, demand-supply mismatch coupled with high costs of operations would still keep the airfares high.