THE entry of two new players, expansion plans of existing operators and the expected growth in the civil aviation business in India is driving airlines to embark on aggressive growth strategies.

Last week saw the country’s largest carrier, IndiGo, ink a memorandum of understanding with Airbus Industries for a record 250 A320neos, at a list price of $25.7bn. It is the single-largest order by aircraft for the European aircraft maker.

IndiGo, which has a 32.6pc market share in India’s crowded skies – it flew 1.86m of the total 5.7m passengers in August – is also one of the few carriers that is making profits in an industry awash in red ink.

The no-frills airline, which began operations just about eight years ago, had initially placed an order on Airbus for 100 aircraft in 2005. It followed it up with another order for 180 A320neos.

“This new order reaffirms IndiGo’s commitment to the long-term development of affordable air transportation in India and overseas,” said Aditya Ghosh, president of the airline. “The additional aircraft will enable us to continue to bring our low fares and courteous, hassle free service to more customers and will create more job opportunities and growth.”

The efficient and cost-effective airline has been consistently making profits over the past few years, at a time when the aviation sector has seen most major airlines sink deeper into red. But even IndiGo’s finances have come under pressure of late, as many low-cost carriers are offering discounts and rock-bottom prices.

The net profit of the carrier —which is an unlisted company, but plans to go public next year — is learnt to have plunged by 60pc for financial year 2013-14. Its revenues are believed to have gone up by nearly 18pc.

According to the Centre for Aviation (CAPA), India’s airlines posted a combined loss of $1.95bn on revenues of $9.5bn last fiscal. State-owned Air India and Kingfisher Airlines (which has not been flying for several months) accounted for $1.75bn of the loss.

The industry is also over-burdened with debt. CAPA estimates the combined debt of Indian carriers amounted to $14.5bn, with additional vendor-related liabilities of about $2bn. State-owned Air India accounts for $3bn in debt. About two years ago, the Indian government approved a hefty, Rs300bn rescue package (to be spread over 10 years) for Air India.

Political and bureaucratic interference over the years has reduced the carrier to today’s pitiful state. India’s flag carrier has a mere 16.2pc market share. On the international sector, it has been reduced to third rank, having been overtaken by Indian carrier Jet Airways and even Dubai’s Emirates. About 80pc of Air India’s losses are accounted for by its international operations.

IndiGo’s audacious strategy of acquiring new aircraft has been justified by its president Ghosh, who claims that the aviation market in India is highly under-penetrated. According to him, there are less than 400 aircraft in operation today in a country of 1.25bn people.

Airbus estimates that India would need nearly 1,300 aircraft valued at $190bn by 2032 to meet its growing demands. While an American makes 1.8 flights a year and a German about one flight annually, an Indian takes just 0.1 flight a year, indicating the enormous scope for growth.

Last year, airlines carried over 60m domestic and 13m international passengers in India. The country’s airports handled a total of 170m passengers. CAPA estimates that India will achieve some of the fastest growth of any aviation market in the world over the next 20 years.

COMPETITION in the aviation sector will intensify over the coming months with the launch of two new airlines. The Tata group has joined hands with Singapore Airlines to launch Vistara, a full-service airline, and with Malaysian carrier AirAsia, to launch a low-cost domestic service.

AirAsia India has already launched several services out of Bangalore and now plans to enter the country’s two most lucrative markets, Mumbai and Delhi. Vistara too has booked slots in Delhi, indicating it will start operations from the national capital. The airline will launch services to about five cities over the coming months, increasing it to 11 within a year of its operations.

The entry of AirAsia has triggered off a fare-war in the domestic skies with low-cost carriers coming out with flash discounts and massive concessions. Even legacy carriers such as Air India have had to extend discounts to face the new competition.

Both Air India and Jet Airways, which are full-service carriers, have been forced to cut fares to ensure their market share. However, by offering full service at low fares, they are adding to their losses.

After the Indian government open­ed up the civil aviation sector to foreign direct investment, Etihad Airways last year acquired a 24pc stake in Jet Airways. Some other domestic carriers were also hopeful of white knights rushing to their rescue, but other foreign (especially Gulf-based) carriers have been cautious and not taken up offers.

A major bottleneck that both domestic and international carriers face in India is the lack of adequate infrastructure. While Mumbai, Delhi, Bangalore and Hyderabad airports are now being managed by private players, many of the other state-owned airports are still facing problems of congestion.

Even Mumbai, which along with Delhi is among the busiest airports in the country, is facing constraints. International airlines are keen on launching Airbus A-380 flights to the city to cater to the growing passenger demand. However, the airport is finding it difficult to adjust the demands of the airlines.

While Emirates and Singapore Airlines are already operating A-380 aircraft to Mumbai, German carrier Lufthansa could not be provided with a slot for its giant aircraft during the early morning peak period.

Both the government and the private sector are investing billions of rupees in upgrading the airport infrastructure, but the frenzied growth being witnessed in passenger traffic is making it difficult for airports to keep pace with the demand.

Published in Dawn, Economic & Business, October 20th, 2014