Robust Growth Ahead for Indian Aviation

Market Overview

The Indian economy is characterized by rapid urbanization, a burgeoning middle-class, and a young demography. The share of middle-class households is expected to rise from 31% in FY21 to 47% in FY31. More than one-third of the 1.4 billion population lives in urban centers, and around two-thirds is between 15 and 64 years old. All these factors add up to an optimal environment for growth of consumer aspirations that cultivates a high propensity to travel. Air is the only mode of transport that commands an aspirational value and is therefore set to be the biggest beneficiary of the India growth story.

Air travel penetration in India, at 0.1 trips per capita (vs. 0.5 trips per capita in China) still has phenomenal room for growth2. This indicates a long runway for expansion of the air travel market. The growth in air travel strongly correlates with a nation’s per capita GDP. Between 1990 and 2022, India’s per capita GDP rose 6x, while the air passengers carried surged 15x. India’s per capita GDP will double from $2,500 in FY23 to more than $5,000 in FY31, setting the stage for a discretionary spending boom3 along with an exponential rise in air traffic.

In recent years, the state policy towards aviation has substantiated the market’s growth trajectory. The Ude Desh ka Aam Naagrik (UDAN) Regional Connectivity Scheme has successfully delivered on its objective of ensuring affordable and sustainable air connectivity to smaller cities and towns. Privatization of the government-run Air India in 2022 was a milestone in Indian aviation history. The government’s ambitious plan to privatize 25 airports by 2025 is an indication of its commitment towards deregulation of the aviation industry.

Airports Authority of India (AAI) and other airport developers have targeted a capital outlay of approximately Rs. 980 billion ($12B) in airport infrastructure in the next five years4. This will mean expansion and modernization of terminals and strengthening of runways. The number of operational airports in the country has grown to 148 in 2023, double of that in 2013. Around 80 new airports are expected in the next five years. Twenty-one greenfield airports have been accorded in-principle approval (including Navi Mumbai, and Jewar NCR), 10 of which have been operationalized.

As of March 2023, 17 scheduled local airlines were operating in India with a total fleet size of 718 aircraft. On international routes, 74 foreign carriers operate flights to/from India. Indian airlines are on a buying spree with an order book of about 1,500 aircraft, expected to be delivered over the next 10 years. Tata Group—which owns Air India, Vistara, Air India Express, and AirAsia India—has ordered 470 aircraft, with an option to purchase an additional 370. IndiGo placed the single largest order in aviation history, of 500 aircraft to be delivered from 2030-35, in addition to 480 aircraft, by 2030. The newest entrant Akasa is also expected to place a triple digit order by end of the year in addition to the 72 aircrafts already ordered8.

There has been a consistent effort by policymakers, working in tandem with both the local airlines and the airports, to transform India into an aviation hub. As the center of gravity for global economy shifts to Asia, India’s unique location can enable it to become the hub connecting EMEA and the Americas with the larger Asia-Pacific. Traditionally, foreign carriers have dominated the international traffic to/from India. These airlines are seeking additional seats primarily to exploit the sixth freedom traffic i.e., flying passengers beyond their country.

The Indian government, in a policy shift, has been encouraging local carriers to better utilize the Indian part of bilateral seat entitlements and ramp up global ambitions. The 2016 scrapping of the five-year requirement for airlines to commence international operations was a move in this direction. The uptick in wide-body planes in the Indian fleet also reflects the robust expansion plans of local carriers on international routes.

All these factors mean that the Indian air market growth will be spurred by massive domestic demand, flanked by a rapidly rising international segment.

Total Flown Passengers

India was the fourth largest market globally in 2022 in terms of air passengers carried by local carriers, climbing from the 18th position in 2002. Within two decades, the total fleet operated by Indian carriers has grown 6x, while passengers flown (domestic and international) has multiplied 12x. This encapsulates the growth trajectory of the Indian air market which is also reflected in a steady rise in passenger load factors (LF) ranging from 60s in the 2000s to 70s in 2010s. LF higher than 80% has been the new normal for local carriers in recent times, peaking at 92% in May 2023, indicating robust growth in air travel demand.

Domestic vs. International

India’s total flown passengers reached 192 million in FY23, marginally below the pre-pandemic levels of 202 million. The domestic passenger traffic stood at 137 million in FY23 (vs. 141 million in FY20) whereas international passenger traffic was trailing at 54 million compared to 60 million in FY20. India is projected to see 350 million domestic and 160 million international flyers by FY30.

The pandemic induced a 70% YoY decline in the total passenger traffic in FY21, while international air passengers dipped by 85%. In FY23, local carriers surpassed pre-pandemic levels of international flown passengers by 5% (24m in FY23 vs. 23m in FY20), while their foreign counterparts fell short by 20%. This trend is reflective of the rising clout of local airlines on international routes vis-à-vis foreign airlines. The share of local airlines in international flown passengers rose from 38% in FY20 to a peak of 62% during pandemic, and has stabilized at 44% in FY23.

Share of Indian airlines in international flown passengers in the coming years has an upside potential due to a host of factors: deployment of twin-aisle airplanes by local carriers on international routes, government incentives to airlines expanding international operations and better utilization of bilateral flying rights. Local carriers are competing aggressively in the short-haul international routes. Their expansion into long-haul international routes is going to be vital for the growth of India’s international air traffic.

Short-haul international routes connecting India with Middle East, South Asia and Southeast Asia, account for roughly 80% of international flown passengers in FY23. The Middle East sees the highest international traffic to and from India; its share has risen marginally from 52% in FY20 to 58% in FY23. This is a consequence of the combined thrust by both local and foreign carriers on direct as well as medium- and long-haul connectivity through Middle Eastern hubs. Southeast Asia, despite its geographic vicinity to India, is still trailing behind pre-pandemic levels of 20%. Four-fifth of Indian international traffic being short-haul i.e., a flight duration of six hours or less, explains the clout of low-cost carriers (LCCs). As the flight duration increases, the role of full-service carriers (FSCs) becomes crucial.

Low-Cost Carriers (LCCs) vs. Full-Service Carriers (FSCs)

On an aggregate level, the share of LCCs in total flown passengers (DOM and INT) in India grew from 69% in FY20 to 79% in FY23. The Indian domestic air market is dominated by low-cost carriers—LCCs flew 113 million (82%) of all domestic traffic in FY23. LCCs have increased their share in international traffic from 35% in FY20 to 41% in FY23, driven by the short-haul international segment.

IndiGo dominates the Indian skies–it flew 77 million passengers on domestic routes in FY23 (up from 68 million in FY20), and 8.5 million international passengers in FY23, (against seven million in FY20). Tata Group—comprising of Air India, Vistara (FSCs), Air India Express, AirAsia India (LCCs)—has the second largest combined share in Indian commercial aviation market. Between them, IndiGo and Tata Group, command 80% of the domestic market share. Tata Group flew 12 million international passengers in FY23, with a market share of 50% in international passengers carried by local carriers.

Go First, previously known as Go Air, had a market share of 8% in FY23 and the temporary halting of its operations in May ’23 has led to constrained domestic capacity. SpiceJet, the other troubled local LCC, flew 11 million passengers on domestic routes and 1.9 million passengers on international routes in FY23. The supply crunch for crucial aircraft parts has been challenging and is the primary reason behind the financial woes of many airlines, including SpiceJet and Go First. The 12-month-old domestic operator, Akasa Air has delivered a stellar performance flying 20 aircraft and gaining a market share of 5% by June 2023.

India Total Air Market

Air is the largest among the four-travel categories (hotel, rail and intercity-bus), accounting for roughly half of the total Indian travel market in FY23.

The total Indian air gross booking value (GBV) was estimated at Rs. 1,743 billion ($21.8B) in FY23, surpassing the Rs. 1,502 billion ($21.2B) in FY20. The weakening of the rupee against the US dollar in the last three years by about 15% undermines GBV in dollar terms.

The domestic air GBV stood at Rs. 781 billion ($9.8B) in FY23, up 30% from Rs. 601 billion ($8.5B) in FY20. This growth is at the back of demand-driven high airfares, even though passenger count is trailing for the same period. The domestic segment will grow at a CAGR of 14% during FY23-FY26, reaching Rs. 1,156 billion ($14.5B).

International air GBV was estimated at Rs. 963 billion ($12B) in FY23, nominally rising from Rs. 901 billion ($12.7B) in FY20, notwithstanding the lack of full recovery in international passenger traffic due to network and capacity issues. While international traffic accounted for 28% of the total flown passengers, it contributed 55% to the total air GBV in FY23, owed to higher average ticket price (ATP).

Fare hikes in air category have been the highest among all four travel categories, recording a double-digit growth in FY23 over FY20. Factors fueling the prevailing growth in ATPs include:

1. Resilient demand-side: The pent-up demand from leisure travelers, along with a staggered recovery in business travel have ensured flight booking volumes remain solid despite higher fares.
2. Supply constraints: The supply side is constrained by sluggish delivery of aircrafts and related spare parts. This, combined with market consolidation in the domestic airline industry, has resulted in higher airfares.
3. Rise in fuel cost: Crude oil prices climbed by 81% between January 2020 and April 202212 as a consequence of post-pandemic recovery in industrial demand and the war in Ukraine. This pushed up the cost of aviation turbine fuel (ATF) for airlines across the globe.

The sustained and incessant hike in ATPs calls for rationalization of fares, which is also sounded off by the Ministry of Civil Aviation. The price sensitivity of Indian flyers could lead to tapering of demand if fares remain elevated. The local carriers have enhanced operational efficiency to drive better yields through a variety of measures such as smart network planning and optimized dynamic pricing.

The recovery and growth in international segment are going to spearhead the total air market CAGR for the next three fiscals. The total air GBV is projected to rise to Rs. 2,824 billion ($35.3B) by FY26, growing at a CAGR of 17.4% during FY23-FY26, making it the fastest growing travel category. In the same period, international air GBV will reach Rs. 1,667 billion ($20.8B) by FY26, growing at 20.1% CAGR.

India Online Air Market

The online air market was estimated at Rs. 762 billion ($9.5B) in FY23. It is projected to reach Rs. 1,263 billion ($15.8B) by FY26, or 45% of the total air GBV. The online penetration peaked at 49% in FY21, because of a near-standstill in international demand.

The domestic online market is highly penetrated at 67%, in stark contrast with the international segment at 25% in FY23. The online penetration in domestic air market has shown a steady growth from 62% in FY20 and is projected to reach 71% by FY26. In the international segment this will rise to 26% in FY26. Here, the higher ticket-size and the complexity necessitates the expertise of traditional travel advisors.

India OTA Air Market

The Indian online travel agency (OTA) air GBV stood at Rs. 583 billion ($7.3B) in FY23, beating the FY20 levels by more than 30%. It is projected to grow at a robust CAGR of 19% during FY23-FY26, reaching ₹984 billion ($12.3B).

OTAs remain the dominant online distribution channel for air. On the domestic segment, OTAs grossed Rs. 427 billion ($5.3B), with a market share of 81% of online domestic air GBV while OTA air GBV in international segment amounted to ₹156 billion ($2.0B), denoting 66% of online international air GBV in FY23. However, OTAs accounted for just one-third of the total air GBV in FY23, showcasing a massive runway for growth.

Barring Booking.com, the air category has been the mothership for most first generation OTAs world over, as it was the travel category that initiated consumers to move online. At the onset of the millennium, the air market in India got democratized with the advent of domestic LCCs such as Air Deccan, Kingfisher and IndiGo. This created a plethora of choices for consumers, necessitating the need for all airline information, such as routes, schedules, and price comparisons, to be available on a single window. Consequently, trailblazers in the Indian OTA space–Cleartrip, MakeMyTrip and Yatra–replicated the global OTA model, beginning with the air segment.

Flights continue to be the largest contributor to the GBV of most OTAs. Widespread access to the Internet and a well adopted digital payment mechanism, coupled with increasing connectivity to non-metro cities and rising purchasing power has brought in a vast number of first-time flyers into the market. Those traditionally traveling via ground transport are steadily upgrading to flights, representing a huge opportunity for OTAs.

Almost all Indian OTAs have varying degrees of B2B business, besides the consumer-direct B2C business in their GBV mix. The B2B business includes the travel agency business, the corporate travel business (both TMC and self-service/SBT model) as well as the content/API play. The share of B2B varies for different OTAs, depending on their strategic mandate. B2B drives volumes but is capital intensive and pre-requisites consistent liquidity.

There is a long tail of Indian OTAs, the biggest of which are traditional B2B travel aggregators and distributors with an online consumer-direct play. These B2B players generally have an enormous travel agent network that they enable through technology and content aggregation. They are especially significant in the international segment because of the complexity and need for personalization. Travel Boutique Online (TBO) is the largest B2B consolidator in India without any B2C interface, while others such as Akbar Travels, Riya Travel, Via and Tripjack, offer B2C bookings.

While the last decade was all about pursuing topline growth at any cost, today it’s also about building sustainable business with an eye on profitability. Ergo, the higher margin hotel category is a natural progression for OTAs once they have firmed up air offerings and get to a sizeable user base. The ground transportation category, namely rail and intercity bus promises a large user base for a high frequency, lower priced travel product. Beyond the verticalized travel play, Indian OTAs are also banking on ancillary revenue streams such as advertising and fintech. The advertising model essentially capitalizes on the existing user base at no additional cost.

The MakeMyTrip Group holds the commanding share (56.9%) of the OTA air GBV in FY23. Flipkart-backed Cleartrip follows with a 13.7% market share, and EaseMyTrip at 13.4% share. Yatra and ixigo Group have 9.4% and 3.2% share respectively. The global OTAs, Indian OTA long tail and the consumer business of the major B2B distributors make up the remainder.

Conclusion

In light of the big-bang aircraft orders, high load factors and a healthy growth in both flown passengers and GBV, the Indian airline industry is set for stellar growth. The last three decades belonged to China. India is set to mirror a similar growth trajectory as air connectivity widens from tier-1 to tier-3 cities. The ever-increasing global Indian diaspora, broader economic boom, and growth of the Indian travel and tourism industry will pave the way for a resurging Indian air market.

The demographics dictate the growth outlook in most emerging markets. India is endowed with a young and aspirational population with rapidly increasing income levels. As existing traveler cohorts mature, resulting in a higher frequency and spend, the explosive growth will be propelled by millions of first-time air travelers. The journey of the Indian air travel market from 200 million to 500 million passengers and a fleet size of 700 to 1,500 planes will set the broad contours for growth in the next decade.

OTAs tend to do remarkably well in emerging markets because consumers are price-sensitive and value-conscious. High fragmentation in air, coupled with the near trebling of domestic and international air traffic, creates fertile ground for OTAs. The OTAs are notably credited for bringing the Indian air category online. With their technology and product prowess, they command the lion’s share of the online air market and will continue to scale new highs as air penetration expands to the Indian hinterlands.

ABOUT THE AUTHORS

VIDEC is a boutique consulting and advisory company with a singular domain focus in travel and hospitality. It offers commercial due diligence, industry and consumer research, thought leadership, and buy and sell side advisory services.

Virendra Jain is the co-founder and CEO at VIDEC. He is a serial entrepreneurial with over a decade long experience in Asia and Middle Eastern travel  technology and innovation marketplace.

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