To Save Air India, Look Further East Written By Tushar Chaturvedi
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ollowing a compounded annual growth rate of 20.3% in 2015, the highest ever recorded in the aviation industry, the Indian airline market is expected to stabilize at 10% until 2030. The explosion in airline demand is largely due to the country’s growing population and rising wages, with both trends set to accelerate in the coming decades. However, despite high market growth, Indian airlines collectively reported a two billion dollar loss in fiscal year 20202021, according to India’s Minister of State of Civil Aviation. Many aviation markets, including India’s, followed a similar path to the United States’ after deregulation of the aviation industry in 1978. Previously, airlines in the United States were restricted to specific geographical areas, limiting airline coverage. After deregulation, airlines began providing direct long-distance flights, leading to fewer passengers and ultimately higher seat prices. During the 1980s, the more cost-effective “hub-and-spoke” aviation model became more popular, in which connecting flights through large airports are used to reduce prices. Typically, “hub-and-spoke” airlines are Full-Service Carriers (FSC), meaning that they provide amenities such as meals and entertainment to passengers. However, due to the use of connecting flights, FSCs take longer than direct flights, leading to the development of Low Cost Carriers (LCC) such as Southwest Airlines. LCCs typically fly non-stop between origin and destination and often depend on lean service to maintain profitability.
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In India, the FSC industry has been dominated by the historically nationalized Air India, for which the Indian government instituted price caps of $35 for regional flights. Indian subsidy of full-service aviation resulted in an uncompetitive and unprofitable market, with nearly a billion dollars of losses in the Indian airline industry attributable to Air India alone.
flights. Indian subsidy of full-service aviation resulted in an uncompetitive and unprofitable market, with nearly a billion dollars of losses in the Indian airline industry attributable to Air India alone. Another key piece of legislation, called the 5/20 rule, stifled FSC growth and spurred investment in LCCs. Under the rule, Indian airlines were required to operate domestically for five years and own at least 20 aircraft before offering international flights. Because the hub-and-spoke strategy is most profitable for long-distance flights and due to the price caps, Indian FSCs own under 300 aircraft compared to the 3,000 owned by In India, the FSC industry has been dom- major US airliners. inated by the historically nationalized Air However, with Tata Group’s $2.4 billion India, for which the Indian government acquisition of Air India—resuming coninstituted price caps of $35 for regional Cornell Business Review