Airline consolidation in the offing in India: CAPA Outlook 2007 report

19 April 2007

"Despite the bullish traffic growth projections for India, overseas experience suggests that it is extremely difficult for a market to absorb so many new entrants, particularly in such a short space of time", said the Centre's CEO, Indian subcontinent and Middle East, Kapil Kaul. "This is especially the case for India, which is facing a number of external issues, such as airport infrastructure and manpower shortages, that serve to increase costs and reduce efficiency and flexibility. These are compounded by the fact that airline management in some cases is relatively inexperienced and untested", he said.

According to the Outlook report, consolidation will occur through a process of closure or mergers/acquisitions, leaving around two to three full service carriers, three to four large national LCCs (operating fleets of 70+ aircraft), and three to four niche, regional operators (with aircraft less than 80 seats).

The report also says that the process will begin this year, but may stretch out over a period of time, given the eagerness of foreign investment to enter the market.

"The merger of the two state-owned carriers, Air India and Indian will set the ball rolling for further consolidation and mergers and acquisitions. Both Jet Airways and Kingfisher Airlines are likely to be keen to grow via acquisition to expand their market share, subject to an appropriate strategic fit. Meanwhile, SpiceJet, which now has the support of investors of the calibre of Tata Group and Istithmar, may also be considering this option", said Kaul.

Sector investment
Talking about the long-awaited civil aviation policy, expected to be announced shortly, the report says that India is currently in the unusual situation of having billions of dollars of investment waiting to enter the sector. The inhibiting factor is the lack of a clear policy framework.

"One of the key policy issues is the level of investment by foreign airlines in Indian carriers, currently prohibited. Opening this up could bring in much-needed strategic investment and expertise. Similarly, increasing the overall foreign investment cap from 49 per cent to 74 per cent could ease the availability of capital generally. The ministry of civil aviation will also need to continue to work with state and central government departments to reduce the excessive taxation on aviation turbine fuel, which is currently a significant impost on carriers - most state governments still see aviation as a cash cow", said Kaul.