Indian Aviation Headed For A Risk Rerating?

As airfares have steadily risen, debates on Indian aviation are once again making it to the forefront. The debate has even taken political undertones with current and former ministers commenting on the state of affairs.

Proponents cite all things positive, including the voluminous aircraft orders, airports bursting at the seams and penetration of flights per capita. Opponents cite all things negative, including the airline bankruptcies, rising airfares and constant consumer grievances. And both arguments may actually hold true. Because the Indian airline industry is clearly seeing the emergence of a bipolar industry. An industry where there are the very strong and very weak, with no middle in sight. Credit quality contrasts are growing, as are other risk elements including jurisdiction risk, credit risk, and counterparty risks. The question across several quarters: Is Indian aviation headed for a risk rerating?

Indian aviation has seen several peaks and troughs. Mapped against a timeline they are fairly regular making somewhat similar to a sine wave curve.

Starting with Jet Airways in the 1990s that gradually built itself into a formidable operation challenging the then incumbents. Mid-2000s saw the entry of a host of low-cost airlines, including the paradigm shifting Air-Deccan. The launch of Kingfisher Airlines in 2005, with no dearth of capital had industry watchers sit up and take notice. As did the announcement of a 100-aircraft order by a then unknown airline called Indigo. Also operating were GoAir and SpiceJet—both with strong backers, with a strong capital base. But capital and too much of it can also be a curse and the enthusiasm gave way to shock, with the failure of Kingfisher in 2012.

It wasn’t the failure itself, rather the way it was managed and handled with multiple liens, multiple claimants and multiple processes. This was followed by a severe cash flow crunch at SpiceJet that involved change of ownership in 2015. Both events forced a rethink of the risk.

2016 through 2018 was a relatively better time. The industry saw significant competition. While profits were elusive, creditors for the most part were cautious but optimistic and with seven airlines chasing demand, airfares were competitive and growth on an upwards trajectory.

But steady cruise is often met with unforeseen turbulence and towards the end of 2018, challenges started to reveal themselves, most notably at Jet Airways. Whether it was the cash flow, or the management exits, changes were underway and there was much to be examined. Things came to a point where Jet Airways ran out of cash and declared bankruptcy in 2019. This time, the process was managed in a manner that was arguably smoother than that of Kingfisher but that, too, left significant questions unanswered and many ends untied. Yet again, this forced a risk rethink.

Then, of course, there was the pandemic of 2020 that saw volumes plummet. Several airlines deferred payments and some defaulted. But then, the recovery was also very robust and by 2022, just two years later, the industry saw a host of changes—including the purchase of the national airline by the country’s largest and most respected business group, namely the Tatas; the merger of the Tata-Singapore joint venture Vistara; the launch of a new well-capitalised airline—Akasa; the purchase of erstwhile AirAsia India; and, of course, the voluntary insolvency of GoFirst.

As it stands, the Indian market now has in the works an airline revival that didn’t quite work, an airline turnaround, a complex merger involving three airlines, a significant expansion and another airline that has found its way to bankruptcy. Stakeholders are once again looking at a risk rethink.

The risk rethink forces the question that why do the risk elements keep changing? And the answer lies in the complex interplay of many factors including policy, process, and personnel.

On the policy side, while much has been done, there is still much to be done. On process, the grey areas between laid down law and regulations, the continued dependence on large reams of paper as files, and the multiple regulatory agencies involved only add to the uncertainty of timelines and outcomes. Add to that new processes and changing personnel and the elements don’t quite align.

Into this mix is also the revenue composition, currency depreciation and contractual clauses and enforcement mechanisms that are ever changing. And these are only a few of the elements. Mitigation factors have not quite been examined and copy-paste business models continue to dominate. India’s airlines are so caught up in managing one crisis after another, long-term planning is often left to outside consultants with no accountability for outcomes or kept in abeyance. Yet again, this informs overall risk.

Finally, there is the matter of personnel. Majority of India’s airlines continue to be promoter-led, which lends itself to dynamics that are at variance with that observed in the West. Yet, it is also true that majority of India’s airlines have C-suite positions filled by folks brought in from the West. A tension of sorts is all but certain and often reveals itself in decision-making, which then translates to added risk for an outside observer. It is a situation that will continue in the mid-term.

That said, risk is relative. Given geopolitical dynamics coupled with potential, India is certainly placed better. Because risks in markets like Vietnam, Indonesia, Malaysia, and Sri Lanka have continued to change while their market potential is limited by the number of travelers coupled with bilateral agreements. Russia and Iran, both large markets, are not quite accessible in the same manner as India. And China continues to be a market where folks are quite cautious.

Contrast that with India and the sheer potential, where the country will by the end of the decade have 1,200 plus aircraft, 400 million plus passengers, 200 plus airports and $500 billion of capital commitment—together making for the third largest aviation market globally. It is a market that simply cannot be avoided. A market where complexity is the norm. And a market that demands an accurate reading of risk.

For now, significant capital commitments notwithstanding, the Indian airline industry is increasingly depending on the parent company or promoter lineage to assure airlines of credibility. And in the long term, this does not bode well for the industry as a whole. As it stands, Indian aviation is staring at a significant risk rerating. Some airlines will make it through, while others may not.

Satyendra Pandey is the Managing Partner of the aviation services firm AT-TV.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.