India's Aviation Sector | 08 May 2024

Source: IE

Why in News?

After ruling the Indian skies, IndiGo is now attempting to make a mark globally with non-stop, long-haul, and low-cost flights from Indian airports.

• However, the long-haul, low-cost airline model has been a challenge for many airlines, with numerous failures and few relatively stable and profitable operations.

What is the Long-haul, Low-cost Air Travel Model?

• About:
  • The long-haul, low-cost air travel model is an attempt by low-cost carriers (LCCs) to expand their operations beyond short-haul domestic and regional routes and offer non-stop, long-duration flights at lower fares.
    • This model aims to replicate the success of LCCs in the short-haul segment by applying similar cost-cutting strategies and business practices to long-haul operations.
• Challenges:
  • Higher fuel costs for operating larger, wide-body aircraft on long-haul routes.
    • Increased operating costs for wider aircraft, such as more crew, maintenance, and airport fees.
  • Difficulty in maintaining the rapid turnaround times and high aircraft utilisation levels that are critical to the LCC business model.
  • Balancing the need for passenger comfort and amenities on long flights with the low-cost carrier's focus on minimising costs.
  • Establishing a viable network and flight schedule that can sustain demand and profitability on long-haul, low-density routes.
  • Competition from established full-service carriers with stronger brand recognition and loyalty on long-haul international routes.
• Successful Examples:
  • A few long-haul LCCs like Scoot, Jetstar, and French Bee have managed to establish relatively stable and profitable operations.
  • Key strategies include offering a hybrid product with some premium/business class amenities, targeting underserved routes, and leveraging strong domestic/regional networks.

What is the Progress of India’s Aviation Sector?

• India's Aviation Boom:
  • India has emerged as the third-largest domestic aviation market in the world, after the USA and China.
    • The industry has undergone a remarkable transformation, shedding its previous limitations and evolving into a vibrant and competitive sector.
  • Proactive policies and strategic initiatives by the government have catalysed the growth of the aviation sector, fostering a conducive environment for expansion and innovation.
• Infrastructure Development:
  • India's airport network has witnessed a remarkable transformation, doubling its operational airports from 74 in 2014 to 148 in April 2023, facilitating increased air travel accessibility.
    • Regional Connectivity Scheme-UDAN:
      • The Regional Connectivity Scheme–Ude Desh ka Aam Nagrik (RCS-UDAN) was launched in 2016 to provide connectivity to unserved and underserved airports in the country.
      • The scheme aims to revive existing airstrips and airports, bringing essential air travel access to isolated communities and boosting regional economic development.
      • With 517 RCS routes operational, connecting 76 airports, UDAN has facilitated air travel for over 1.30 crore people, promoting accessibility and economic growth
• Passenger Growth:
  • The aviation industry is experiencing a remarkable resurgence post-Covid, with a surge in passenger demand.
    • From January to September 2023, domestic airlines carried 112.86 million passengers, a 29.10% increase compared to the same period in 2022.
    • International airlines carried 45.99 million passengers between January and September 2023, a 39.61% increase compared to the same period in 2022.
• Carbon Neutrality:
  • The Ministry of Civil Aviation (MoCA) has taken initiatives to work towards carbon neutrality and achieving net zero carbon emissions at airports in the country.
    • Airport operators have been advised to map carbon emissions and work towards carbon neutrality and net zero emissions in a phased manner.
  • Greenfield airports are being encouraged to prioritise carbon neutrality and net zero emissions in their development plans.
    • Airports like Delhi, Mumbai, Hyderabad, and Bengaluru have achieved Level 4+ ACI Accreditation and become carbon neutral.
    • 66 Indian Airports are operating on 100% Green Energy.

What are the Challenges Facing India's Aviation Industry?

• High Fuel Costs:
  • Aircraft Turbine Fuel (ATF) expenses can represent 50-70% of an airline's operational costs and import taxes add to the financial burden.
• Dollar Dependency:
  • Fluctuations in the dollar rate impact profits as major expenses like aircraft acquisition and maintenance are dollar-denominated.
• Cutthroat Pricing:
  • Airlines often engage in aggressive price competition to attract passengers, leading to thin profit margins amidst high operational costs.
• Limited Competition:
  • Currently, IndiGo and a resurgent Air India hold the majority share, possibly nearing 70% combined. This concentration of power can lead to:
    • Limited Competition: With fewer major players, there's a risk of reduced competition on routes, potentially leading to higher fares for consumers.
    • Pricing Power: The dominant airlines may have more leverage to influence ticket prices, especially if they coordinate strategies.
• Grounded Fleet:
  • A large portion (over a quarter) of Indian aeroplanes are grounded due to safety concerns and financial issues, hindering capacity.
• Environmental Concerns:
  • Pressure to reduce carbon emissions and adopt sustainable practices can add complexity to growth strategies.

Way Forward

• Diversification of Fuel Sources: Emulate initiatives to incorporate biofuels into the fuel mix, reducing dependence on traditional ATF and mitigating the impact of import taxes.
  • Implement fuel hedging strategies to manage the volatility of fuel prices, a practice used by many international airlines.
• Ancillary Revenue Streams: Develop ancillary revenue streams such as cargo services, in-flight sales, and premium services to bolster profits.
• Competitive Pricing Strategies: Utilise advanced yield management systems to optimise pricing and maintain profitability without engaging in detrimental price wars.
  • Strengthen customer loyalty programs to encourage repeat business and reduce the need for aggressive pricing tactics.
• Regulatory Reforms: Advocate for regulatory reforms that encourage new entrants and prevent monopolistic practices in the industry.
• Route Rationalisation: Encourage airlines to explore under-served routes, thereby increasing competition and offering more choices to consumers.
  • Consider aircraft leasing options to maintain operational flexibility and reduce financial burdens associated with owning a fleet.
• Carbon Offset Programs: Implement carbon offset programs like the ICAO Carbon Emissions Calculator (ICEC) to measure and mitigate the environmental impact.