Editor’s Note: This story was first published in Skift Airline Weekly on Sept. 3, 2018.
India today has just two intercontinental airlines. One is synonymous with cost bloat and government mismanagement. The other is nearly insolvent. Why isn’t anyone stepping up to challenge Air India and Jet Airways?
Well, they soon will have some challengers—if those would-be challengers are undeterred, anyway, by India’s current airline sector crisis, brought on by rising fuel prices, a falling rupee and bloody fare wars on short-haul routes. One long-haul aspirant, sure enough—the LCC SpiceJet—told Mint last month it would hold off on ordering wide-bodies until market conditions at home improve, even though intercontinental flying “will eventually happen.”
SpiceJet is not alone in eyeing India’s long-haul market, which some see as a potential sanctuary from raging competition in the short-haul market—think back to the early 2000s, when U.S. legacy carriers embarked on major intercontinental expansions to escape pressures closer to home.
In 2018, even IndiGo—India’s most profitable airline—is barely making money despite domestic demand that remains strong and an economy that’s still growing rapidly. Look at next quarter’s capacity plans, and you’ll quickly see why short-haul yields are tumbling: Domestic seat counts will be up 14 percent year-over-year, roughly double the pace of current GDP growth, according to Diio Mi schedule data. Of India’s seven major airlines, four are growing by double digits, including IndiGo itself—its domestic seat counts will rise 24 percent.
To be clear, IndiGo’s intercontinental visions formulated before the current industry meltdown. The airline certainly does see value in defensive diversification, away from over-reliance on short-haul. But it’s also playing offense, viewing intercontinental routes as a golden opportunity, given the liabilities of Air India and Jet Airways, and given the large pool of potential feeder traffic from its robust short-haul network. Thinking more boldly still, IndiGo would like to buy Air India, or its international franchise anyway, including its long-haul planes, routes and slots. That would provide an overnight intercontinental franchise, one that might otherwise take years to assemble. In addition, it would eliminate Air India as a competitor.
Alas, IndiGo ultimately backed away from buying Air India, as did all other potential buyers, when the government insisted on terms too onerous. Enticing though its long-haul assets might be, Air India’s other baggage—its huge debts, its bloated workforce and so on—is not something IndiGo wants to touch.
Yet organic overseas expansion remains a strategic imperative. In March, Bloomberg News reported IndiGo’s interest in ordering about 50 A330-NEOs, which it could obtain more quickly than A350s or B787s—these are largely sold out for the next few years. The airline never did place any orders at the Farnborough airshow, as some observers expected, suggesting IndiGo too—like SpiceJet—was putting its wide-body plans on ice. In July, Business Standard reported that’s indeed the case, with narrow-body A321-NEO LRs now under consideration instead. IndiGo has, however, already started applying for route rights to Europe, with London, Birmingham, Milan, Paris, Brussels, and Frankfurt all mentioned as possible routes. In the nearer term, it’s said to be eyeing shorter-haul international routes like Hong Kong, Istanbul and Kuala Lumpur, all within easy reach of its A320s. Just last month it announced some new flying to Singapore and the Gulf markets Abu Dhabi, Doha and Kuwait.
As the long-haul plans of SpiceJet and IndiGo progress cautiously, another Indian carrier is ramming full-speed ahead. Vistara, a full-service carrier backed by Singapore Airlines, ordered six B787-9s at this summer’s Farnborough Airshow, with purchase rights for another four. They’re due to arrive in 2020 and 2021, enabling Vistara to serve Europe initially, and later North America and northeast Asia.
As low-cost carriers, IndiGo and SpiceJet could decide to forego alliance membership. But Vistara seems a good fit for the Star Alliance given its links to Singapore Airlines. Then again, Air India—the only Indian carrier currently part of a global alliance—is already representing Star on the subcontinent. IAG, meanwhile, makes no secret of its eagerness to find an Indian carrier to represent Oneworld—it might yet persuade IndiGo if not Vistara.
Will the AirAsia group establish a long-haul AirAsia X venture in India? Might Go Air, itself just now entering short-haul international routes, ever go long-haul? Probably not anytime soon. But the plans of Vistara, IndiGo and SpiceJet are plenty to make Jet Airways—if not government-coddled Air India—increasingly nervous.
Its financial problems are severe, but give Jet credit for responding strategically to the long-haul threats. Although stopping short of SkyTeam membership, it’s working closely now with Air France-KLM, Delta and Virgin Atlantic. With Air France-KLM, it has a joint venture. And all four airlines together pack a powerful punch in the busy if lowish-yield North America-India market. Jet has since added new flights to Paris, Amsterdam, London and Manchester after dismantling a mini-hub in Brussels. On the other hand, it has deferred B787 deliveries, proceeding instead with narrow-body B737 renewal.
Why did India’s airlines take so long to start thinking long-haul?
Air India, after all, was always a plump target. Well, Jet Airways has in years past tried routes to North America, but with little success. To repeat, the North America-India market tends to be light on business traffic and heavy on lower-yielding family visit traffic. India, meanwhile, attracts few tourists relative to its size, meaning not much long-haul leisure traffic. Kingfisher had grand plans to fly A330s, A350s and even A380s intercontinentally before succumbing to its own financial recklessness. IndiGo was focused on building a domestic network. Same for SpiceJet, which in any case almost went bankrupt in 2014. Vistara first launched in 2015 and initially faced India’s since-relaxed “5/20” rule—before flying abroad an airline needed at least five years of flying experience and a fleet of at least 20 airplanes.
So in stepped Gulf carriers, which identified the vacuum and turned themselves into India’s de facto intercontinental carriers. Even today, many of the seats on Gulf carrier flights to pretty much anywhere in the world are filled with Indian travelers connecting through Dubai, Doha and Abu Dhabi. Indian tech workers in San Francisco and Dallas, Indian expats in London and New Jersey, Indian students in Germany and Australia… all are key Gulf carrier customers, if not always their most lucrative. Etihad, for its part, purchased a 24 percent ownership stake in Jet Airways five years ago, which it still holds today. Qatar Airways frequently expresses interest in launching its own Indian carrier, having at times in the past flirted with investing in IndiGo.
Tougher Long-Haul Market
But the Indian long-haul market is getting tougher for the Gulf carriers, even before Vistara, IndiGo and SpiceJet dip their toes in the water. To Europe, Jet’s new flights provide more nonstop capacity to the giant London market, most importantly. Air India, too, is adding European capacity using its new B787s. Carriers from Japan and China are sending more seats to India from northeast Asia. Sydney airport is working hard to convince carriers to challenge Air India in the Australia market.
Yet it’s the North America market that has the most potential demand growth—but also the most intense competition. By a quirk of geography, many North America-India passengers have the option to connect via hubs in both the eastern and western hemispheres. Take a passenger traveling from Los Angeles to Delhi. Should she connect in Frankfurt? Maybe Dubai? Hong Kong? In fact, all three journeys are roughly equidistant. Better yet, flying through Moscow is even shorter. No wonder why airlines as diverse as Lufthansa, Emirates, Cathay Pacific and Aeroflot all compete for North America-India traffic. When Air Canada started receiving its first B787s a few years ago, it quickly resumed India non-stops, adding still more competition. Soon Delta, no longer spooked by Gulf carrier efforts in the market, will likewise resume India non-stops.
Currently, United and Air India are the only carriers flying nonstop between the world’s second and third largest countries by population. But traffic between the U.S. and India is a high priority for the joint ventures U.S. carriers have with their European counterparts. In the meantime, more sixth-freedom players seek to grab a slice of the market, including Iceland’s Wow Air and Air Italy, the latter backed by Qatar Airways. Turkish Airlines, too, wants more Indian flight rights to serve the market. Norwegian mentions India as a possible market for its A321-NEO LRs. According to an Airline Weekly analysis of IATA PaxIS data, Dubai is today the busiest connecting point between North America and India, followed by London Heathrow, Doha, Frankfurt, Abu Dhabi, Amsterdam, Paris, Hong Kong and Istanbul—quite a diverse collection of hubs indeed.
So warning to Vistara, IndiGo, SpiceJet or any other Indian carrier hoping to compete for intercontinental traffic: It’s a fiercely competitive market, never mind that bumbling Air India is the top nonstop competitor. Another fact that shouldn’t boost anyone’s confidence: Most of the world’s most profitable airlines are short-haul, narrow-body-heavy airlines. India’s high taxes on jet fuel and other goods and services won’t make things any easier.
That said, India’s long-haul market is growing rapidly from a small base, with enormous long-term potential. Years of elevated economic growth are already starting to produce a sizeable contingent of overseas business traffic. A shortage of slots at key airports like Mumbai, meanwhile, is a check on what would otherwise be even fiercer competition. The mission is risky, for sure, but long on possibilities.