A CAPA INDIA REPORT
After a long time, possibly for the first time since deregulation, India has a stable airline system led by two principal players – IndiGo and Air India Group. Both of which have aggressive expansion plans, which they will support by continuing to invest in management capital, digitalisation, corporate image, employee training, product upgrades and the development of gateways on key corridors. This is a new era for the market, which we will see unfolding from 2024. Competition between the two key airlines will be intense, across routes, regions and products, in a manner previously not seen in India. Importantly, both carriers have the balance sheets to support the anticipated growth and competitive intensity.
Complemented by the coming of age of Air India Express with its significant fleet inductions, the continued growth of Akasa Air, and the revival of SpiceJet, we will see new competitive dynamics in the domestic market. Similarly, both Air India and IndiGo will increasingly focus on international operations and will compete on short, medium and long haul routes, with key strategic developments expected in long haul markets from 2024. Akasa Air will also launch international services in 2024.
Both Air India and IndiGo are expected to take strategic positions for competitive reasons e.g. we expect Air India Express to concentrate on non-metro markets to compete with IndiGo, while full service Air India/Vistara will compete with IndiGo on metros.
IndiGo’s decision to introduce a business class on domestic routes, even though it will account for less than 1% of their total traffic carried, is to ensure that the Air India does not have exclusivity in the premium segment. The 232-seater A321neo allows them to introduce the two-class configuration without compromising aircraft economics and the business model in a significant manner.
Likewise, IndiGo’s speculated widebody order, if it materialises, may be to ensure both that IndiGo participates in the large international long haul market, and that Air India does not have exclusivity in the long haul market. This could be a trigger for the induction of widebodies by Air India Express for long haul operations in the near-term. This strategic repositioning may commence from 2024.
Key themes in the domestic market: Profitability will be more uncertain
• CRITICAL The revival of SpiceJet as a result of securing new funding (although more is required) will result in the emergence of a very aggressive airline that will seek to make up for 3-4 years of lost growth.
Although the market for procuring aircraft in 2024 is exceptionally tight, we expect that SpiceJet will bring stored aircraft back into operations, and will wet or dry lease as much capacity as possible, in order to be competitively relevant. This will have a material impact on the industry structure, and possibly on domestic profitability.
SpiceJet may be the most appropriate bidder for Go First if it can raise the funding. If successful, it would provide access to 50+ aircraft on the ground in India and an order book for 72 aircraft. In contracts, to expand organically through OEM orders would take 2-3 years. Although contemplating such a scenario may be premature at present, if they are successful it may lead to SpiceJet transitioning to an all-Airbus fleet in the near-term.
The resurgence of SpiceJet (with or without acquiring Go First), once new funding is in place, may be the most watched development in the industry in 2024, given that it has the potential to disrupt the market. Though we believe that the tranche structure of the funding may be a possible downside.
• Air India Express, which had plateaued at around 20-25 aircraft for some 15 years, is expected to have a fleet of more than 100 aircraft in 2024.
The carrier will expand significantly on domestic routes, where its network is currently not competitive. Rapid growth, combined with its brand overhaul, induction of new aircraft, modernisation of its inflight and ground services, and aggressive marketing, will see the carrier become increasingly relevant as a domestic LCC from 2024. Most of their fleet inductions will be for domestic operations given the need to have a competitive domestic network.
• Vistara’s transition to the Air India brand will need to be carefully managed.
The transition will need to be managed to minimise the impact on consumers, especially in the domestic market, given Vistara’s strong premium positioning. This transition will be a key theme to watch and could have a major impact in the full service segment
IndiGo will continue its dominance of the domestic market, despite capacity challenges
Supply chain and other issues will be mitigated by securing alternative capacity, to ensure that expansion plans, capacity guidance and strategic targets are met. The carrier’s ability to secure replacement capacity on a timely basis will be a key issue to track. The debut of the carrier’s business class will be another important strategic development in 2024, especially its product features.
Supply chain risks for the industry will extend into 2024
Most of the aircraft currently on the ground are expected to remain there, and will be joined by more. There will be a critical shortage of shop capacity during the year due to the increased number of engine inspections. After-market issues are likely for older as well as recently-inducted aircraft, as OEMs are focused on new engine deliveries. This relates not only to aircraft and engine deliveries, but also to seats, IFE etc. for both narrowbodies and widebodies. A key point to watch will be whether quality control and engine durability issues are appropriately managed, and ensuring that no new risks emerge.
Key themes in the international market
1) New competitive intensity will begin from 2024
2) Air India’s premium long and ultra-long haul product will become visible from 2024
• Air India
Air India’s first six A350s are expected to be deployed on international routes from Summer 2024, joining five 777s already leased from Delta, and other 777s leased and yet to come from Etihad and Singapore Airlines, which will result in a significantly upgraded long and ultra-long haul product and customer experience. Product standardisation across the fleet will take at least a couple of years, but service standardisation will start to become visible from 2024. Air India is expected to do whatever is required to secure market leadership in the long and ultra-long haul segment, which is key to its business case. A key aspect to watch is the extent to which Air India will be able to recapture premium traffic and strengthen yields as a result of offering an upgraded product with non-stop, multi-frequency service, as we believe that normalisation in the international market is expected from 2024.
IndiGo, which has established dominance in the domestic market by a mile, is now seeking to achieve a leadership market share in the international segment as well. In 2024 IndiGo will increasingly focus on international expansion using A320neos/A321neos and by extending the wet leases for its four 777s. The carrier may even wet lease additional widebody capacity, as an interim measure to maintain its international growth momentum. A key point to watch will be to see whether IndiGo places a widebody order, as speculated, as this will have a significant impact on the international market. If this was to happen, we believe that it will serve as a natural trigger for Air India Express to induct widebodies for long haul expansion. This would be inevitable from a strategic and competitive perspective.
• Bilateral Policy
Bilateral policy is likely to be relaxed with effect from H2 of 2024, as extending the freeze beyond that will possibly exacerbate aero-political and trade tensions. We estimate that foreign carriers are seeking an additional 150,000 seats per week in the near-term, but we expect that liberalisation will be gradual to begin with. The extent of opening up will be the key theme to watch.
• Foreign carriers responding to a resurgent Air India
Western European airlines are expected to both upgauge and launch new services to India. This will be to compete with Air India’s expansion and enhanced proposition, as well as to take advantage of North America traffic given that US and Canadian carriers continue to be impacted by Russian airspace closures. As a result, Gulf carriers are expected to allocate a greater share of their India capacity for North American and European traffic, despite their seat constraints at an overall level.
Airfares on international routes are expected to normalise to a significant extent towards pre-COVID levels from January 2024, in economy class and especially in premium classes. Historical season variations will remain. The extent of normalisation in premium cabins will be closely watched.