Looming Crisis In Indian Aviation: What Vistara, Air India, IndiGo Need To Do Differently Currently, canceled flights, dissatisfied frequent flyers and reprimanding from the regulators have become a regular activity for Indian airlines such as Vistara, Air India, IndiGo. To navigate these challenges, what does the sector need to do?

Too fast, too soon, the Indian aviation sector post COVID-19 has sought a tremendous spike. Unfortunately, the airlines were not geared up for this – especially the grounding of aircraft for want of spares and engines – this is a worldwide phenomenon and is a result of disruption of the production, manufacturing processes during the pandemic.

In its mid-year outlook in 2023, aviation consultancy firm CAPA India predicted that by the end of March 2024 – the Indian aviation industry may see 200 grounded aircraft– a precursor to a larger crisis. This will result in high operating expenses towards the cost of grounding, increase in lease rentals due to additional aircraft being taken on lease to offset the grounded capacity, rising lease rates and lower fuel efficiency (due to replacement with older aircraft taken on spot lease), which will adversely impact an airline's cost structure. However, healthy yields, high passenger load factor (PLF) and partial compensation available from engine OEMs would help absorb the impact to an extent.

Currently, canceled flights, dissatisfied frequent flyers and reprimanding from the regulators have become a regular activity for Indian airlines. To navigate these challenges, what does the sector need to do differently? Do we tend to look at this industry through the prism of more mature aviation markets and need to take a step back?

Evaluating the Vistara Crisis

There is uncertainty in the air. The Tata Group stands on the cusp of a major aviation merger consolidating AirIndia, Vistara, AirAsiaIndia and AirIndiaExpress, this move can either make or break the Tata Groups aviation business. In the last few weeks, Vistara has been under the public ire and its image has been severely battered.

Vistara is in the current situation due to a host of reasons, from rationalization of pilots payment with Air India to poor roastering, the causes are plenty.

"Perhaps, only one of them is the rationalization of pilot payments with Air India. There has been some very poor rostering, there are allegations of weak internal communications that has upset pilots, there is a sense of uncertainty amongst some employees at Vistara as to their position in the merged carrier. The command seniority is a big issue which has been delayed for almost a year. The pilots whose pending command training is not completed, prior to merger, will lose out in the new merged entity," said Sanjay Lazar, an aviation expert and CEO Avialaz Consultants.

Unilateral decisions of management are also to be blamed, "The differences in work culture and compensation standards between Air India and Vistara, particularly for pilots. The management's decision to reduce minimum flying hours unilaterally, without taking pilots into confidence, also contributed to the crisis," said a source on condition of anonimity.

The incumbent challenges plaguing the airline is a standard issue when two culturally diverse organizations are amalgamated. This happened earlier as well when the Indian Airline was merged with Air India. "Vistara as a stand alone entity had its own HR and compensation policy but with the merger with Air India – which incidentally is much larger than Vistara – Vistara staff will have to compromise as Air India cannot be brought to Vistara's level. Secondly, the issue of trained pilots not being Command is because there are not enough aircraft for the pilots to assume Command. A pilot always aspires to become the pilot in Command. As per the latest statement of Vistara, things are being resolved and should be in place very soon," explained Arun Lohiya, chief operating officer - CAD Ventures Pvt. Ltd. - A Cadila group company.

Air India merger: A precursor to larger problems?

Air India has seen a number of mergers and spin-offs over the last 30 years, starting from Vayudoot, Alliance, Air India Charters (later AIX), AIESL, AIATSL, HCI, AI-SATS etc. The top management is no stranger to the mechanisms of merging and demerging. "The Tatas have been planning this for a while and appear to have taken care to bring in the best experts world-wide to lessen the trauma. This merger was essential for growth and to achieve economies of scale, to leverage networks and bring down their relative cost platforms operationally. I believe this current merger will be less of a cultural changeover than the AI-IA disaster was, given that almost 50 per cent of AI are new recruits. Pilots, systems, inflight service and management cultures are the four main areas that will need focus, I think Air India has zeroed in on those already. That said, every airline merger so far across the world has deep pains and fissures. Tata is attempting to do what no airline group has done in aviation history, merge four carriers together at one go," Lazar added.

Two diverse cultures meeting will always be a problem. For instance, Hindustan Motors and Premier Automobiles, the makers of the famous Ambassador & Premier Padmini cars, could not change the work practice despite obtaining newer technology and foreign partners.

"Air India had a legacy staff supported by Govt. of India's expense which is different from a professional culture. Vistara with significant inputs from Singapore Airlines is the well tested model of SA. This change will be long drawn till the last of the Air India employees retires or is laid off. Corrective measures to change the behavior at this age would be very challenging," said Arun Lohiya.

Sharing a similar opinion, another source added, "The current situation at Vistara could be a precursor to larger problems in the integration of Air India and Vistara. Unless the management of both airlines learns from this experience, similar issues may arise at various levels of the hierarchy."

No Blues With IndiGo?

Though not exactly the world's favorite airline, IndiGo has been a market leader for close to 15 years. They have turned low cost operations into an art-form. There have been some undercurrents from time to time, with pilots roasters and operational issues, but those are just a blip. Overall, IndiGo has adopted some great HR policies for its staff and they have used technology to innovate and be ahead of the game.

However, the airline too has its shortcomings. Engines seem to be a major issue, as per the recent information, 69 aircraft are grounded putting pressure on the running fleet. "The engine situation (Pratt & Whitney) needs to be addressed as it has already caused the collapse of Go Air. As compared to other indian carriers IndiGo is better managed and all the aspects have been taken care of with the constant expansion of its fleet. But it being in a near monopoly situation, the airline has started to feel arrogance and deterioration of service standards," Lohiya said.

IndiGo needs to address issues to avoid potential challenges, "The airline's dominance over several routes and airports gives it an undue advantage, some customers have even reported unprofessional behaviour from its staff. While IndiGo is likely to remain the market leader, it should address lingering issues."

Going forward, IndiGo will have to make two-three major changes to innovate, "The airline needs to bring in a wide body as part of its fleet, to maximize RASK and optimize the CASK and target the North American markets – bring in a small premium section, on long haul wide body flights, to increase top line revenues, and broad base their offering – introduce some kind of loyalty card. History has shown that LCC's have not succeeded for transcontinental and long haul wide body operations, however, IndiGo's lean operating platform, and ability to innovate will ensure that they have the best chance of succeeding," the CEO of Avialaz Consultants said.

As per stats from Arena Jet, there are 514 routes with complete monopoly in 2024, and weekly flights with a complete monopoly presence are 4,537 per week. There are at least 14 airports in India which are exclusively served by IndiGo, "This is despite the government being the owner of the PSU National Carrier until 2022, yet a private LCC carrier became dominant. IndiGo has become the third largest airline by market cap due to its strong numbers. IndiGo has been a market leader on all fronts for a very long time, and is recognised as a market disruptor, and a market innovator. Air India on the other hand as a full service carrier operating 2/3 classes, exists in a totally different geography from IndiGo which is an LCC. Their airline platform is quite distinct and more premium, relying on higher classes to eke out higher yields. Both carriers will co-exist in the Indian market and will be strong players for many years to come," Lazar said.

IndiGo's strong position in the market is evident at the micro level, "The Air India and Vistara merger is still in its early stages, and it is unlikely to have a significant impact on IndiGo's market leadership in the near future," added the source.

How can India navigate the current challenges?

In the aviation paradigm, we are where the USA was 20 years ago. USA, the most advanced aviation market in the world, too is faced with manufacturer issues, security issues, safety shortcut allegations, mid-air door blowouts, engine blowouts, aircraft groundings, regulator daily monitoring and so much more. Still It continues to thrive because it has built a very strong aviation ecosystem in the country. The aircraft groundings are also as a result of engine issues at P & W which has affected many hundreds of aircraft around the world. The USA has over 2,000 airports, whereas India has barely scratched the surface at 170. The USA has 3,000 aircraft amongst just the top three airlines operating there, India has 800 odd amongst five carriers. The USA in 2021 had more than 7,117 aircraft, with 5,000 of them being 100 seater or larger aircraft. US carriers carried 862 million passengers in 2023, (down from 929 mill in 2019) in the USA, whereas in India that figure is only 190 million in 2023. This shows two aspects: The chasm that lies between largest and third largest aviation markets and it also shows you the incredible runway of growth that India has to exploit, both domestically and Internationally, Lazar stated giving a background about the global scenario.

"If nothing else, it has a minimum US $5 billion runway ahead of us with aircraft orders, airports and infrastructure development. What India is witnessing is the second wave of consolidations and growth, and we are already the third largest aviation market. What India needs for the future, is a strong independent autonomous regulator DGCA, an accident investigator like the US NTSB, and a passenger / operational body to help monitor passenger issues covering airlines, airports etc adoption of International laws and conventions on aviation, and providing an expeditious alternate dispute resolution mechanism. The sector will navigate these few challenges that it currently is going through, and will emerge brighter. I do believe we will see a lot of new rules and legislations post the 2024 Lok Sabha elections, and we will see a few more airlines setup in FY 2024/2025," Lazar explained, adding that India has the capacity to absorb at least one or two more carriers, both in the full service and LCC segments, with deep pockets.

There is also need of regional carriers, connecting the smaller cities, like that of Star Air and Fly91.

The Indian aviation industry is likely to face more challenges in the near future. The lack of effective regulation and the tendency of regulators to issue directions without proper consideration are major concerns. "The DGCA's relaxation of new pilot rest norms and BCAS's issuance of show-cause notices without significant changes in the environment indicate a need for a more proactive approach to ensure stability in the aviation sector," the source added.

ICRA expects the Indian aviation industry to report a significantly lower net loss of ~INR. 30-40 billion in FY2024 and FY2025 over INR. 170-175 billion in FY2023. Supply-chain challenges and engine failure issues remain near term headwinds. The airlines' ability to raise yields proportionate to their input cost increases will be key to expanding their profitability margins.

While some airlines have adequate liquidity or financial support from a strong parent, supporting their credit profiles; the credit metrics and liquidity profile of others will remain under stress over the near term, despite some improvement relative to the last few years.