Is the airline industry in India going to follow a similar path as telecoms?
The India dream: Indian aviation has enormous long-term growth potential and is expected to produce tremendous upside for first movers. As India continues to modernize and grow over a 10- to 15- year time horizon, large number of Indians will be able to fly for the first time in their lives and an increasing number of people will be able to afford flying. India is the only country which has this potential growth for airlines. They need to capture good Indian demand for their overseas services.
The India Reality: India is a challenging market. India’s private airlines, once seen as a bright symbol India's modernization, soon found their hopes of boundless growth grounded in red ink losses. Intense competition for the loyalties of highly price-sensitive travelers, and high operating costs, led to years of losses and mounting debts. Since 2007, Indian carriers, including state-owned Air India and now-grounded Kingfisher Airlines, have lost a combined total of about US$8.5bn after years of below-cost ticket pricing and overambitious expansion. Indian carriers together have cumulative debts of >US$14bn to their lenders, plus debts of about $1.5bn to their various suppliers. Government policy is often an obstacle instead of a solution. Flying is taxed as a decadent luxury rather than an essential element of a modern economy. Indian Carriers pay up to 70% more for jet fuel than regional peers. All of this limits potential demand.
Telecom operators in India entered the market with similar rising tide lifts all boats mentality, only to find out the losses just kept coming as regulations and stiff competition created a market which had some of the cheapest call rates in the world.
In September 2012, the India government allowed foreign carriers to own up to 49% of domestic airlines. No doubt to encourage others to invest in shoring up the finances of the India airlines so the government did not have to.
India's airline market growth story may have a different ending than the telecom market has had so far as foreign airlines, especially from the Gulf, are looking at tie-ups with existing Indian carriers, to help them capture more Indian passengers for their own international networks. Analysts say tie-ups with Indian airlines will help Gulf carriers synchronise schedules and seamlessly connect travelers from smaller cities with their international routes.
But investors and operators would do well to look closely at the market realities and adjust their expectations and execution accordingly.
Source: "Foreign airlines see beyond clouds in India", Financial Times, February 21, 2013.http://www.ft.com/cms/s/0/38d491ee-7be5-11e2-99f0-00144feabdc0.html#ixzz2Lb7YAOQE
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