It was not a flying start to the year 2021 for the Indian airline industry. As it was about to recover from the first wave of Covid-19, it was hit by the second wave. However, the impact was short-lived. Within a few months, the air traffic grew multi-fold on the back of vaccination drives and as the number of infected cases reduced in the country.
2022 could be on similar lines as the number of Covid cases in the country starts to rise because of the Omicron variant. However, even if we assume that the new variant does not impact much, the situation is still not hunky-dory for the industry.
Earlier the issue was because of lower demand which will now shift to higher supply in 2022. This is because a new airline – Akasa – will take to the skies while Jet Airways after being out of action for some time, will also return. Along with this as the country’s flagship carrier – Air India – comes under the control of Indian conglomerate Tata Sons, the competitive intensity could further rise in the sector.
The sector is also grappling with the issues of high fuel prices and unfavourable foreign exchange rates (INS-USD). For an airline, 70% of its costs (including fuel prices) are dollar-denominated. As most of the airlines predominantly operate in the domestic market, a depreciating rupee increases the cost significantly.
These things would not have been a problem, had it not been for subdued ticket prices. According to the data compiled by us, ticket prices for the 20 major routes in India continue to remain below pre-covid levels.
Thus, even if we assume that there won’t be a third wave of Covid-19, the airline sector’s profitability could continue to remain under pressure owing to an increase in competitive intensity, lower ticket prices, high fuel cost, and an unfavourable foreign exchange rate. In event of the third wave, profitability will be delayed further.
