The dilemma of high airfares in India’s aviation industry

The aviation industry in India has emerged as one of the fastest-growing industries in the last few years. According to IATA, the Indian aviation market will be the world’s third-largest market by the year 2024. In order to further fuel growth in the aviation industry, addressing challenges such as infrastructure limitations, fuel costs, and regulatory frameworks will require continued collaboration between stakeholders.

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The global aviation industry is the top-ranked industry when it comes to global transport, post, and storage industry by market size. It is valued at US$ 985.6 billion in 2023, and expected to reach US$ 1,250.41 billion by 2027, exhibiting a CAGR of 6.1% between the forecasted period. This industry is expected to gain more momentum in the next few years, owing to rising disposable income, expansion of technological improvements, and increased travel demand.  

Similarly, Indian aviation is bound to benefit from this growth. Currently, India holds the 3rd position globally in terms of domestic market seat capacity and the 18th position for international seat capacity. IATA (International Air Transport Association) has predicted that India will be the world’s third-largest market for aviation, by the year 2024. 

CAPA India projects that India could be operating a commercial fleet of 4,000 aircraft and handle over 1.3 billion passengers, as compared to 200 million in FY 2023. Indigo’s mega order of 500 Airbus A320 Family aircraft, the largest single order ever by any airline with the aircraft manufacturer, is seen as only a sign of things to come. In CAPA’s view, the industry has gone past much of its financial losses over the pandemic years and is now moving towards profitability. There may, however, be further consolidation leading to 3-4 strong players in the medium term.

However, the sector’s growth is still constrained at present due to persistently high prices, which are bound to discourage discretionary .

Key Factors Contributing to the High Airfares

Despite being praised as the ‘fastest growing aviation sector’ in the world, Indian airlines are charging hefty airfares from passengers. There are certain factors that affect the pricing dynamics of airfares. These include:

 

• Losses due to Pandemic: In the years 2020–2021, they lost a lot of money (₹15,000 crore) because of the pandemic. In 2019–20, IndiGo was the only airline to make a profit, while all other players posted losses, led by then-state-run Air India at Rs 4,600 crore. The present price increases are seen as attempts by airlines to recoup losses. 
• Operating Costs: Airlines incur significant operating costs, including fuel expenses (40–50%), aircraft maintenance, labour, and regulatory compliance. Fluctuating fuel prices and high maintenance costs directly impact the pricing of aviation services. Also, the dollar-rupee volatility adds high costs to operations as the leases are in US dollars, and the Indian rupee’s depreciation raises costs further. 
• High Lease Cost: Airlines have to pay for using airport facilities like runways and terminals. Nearly 80% of India’s commercial fleet is leased, and airlines pay annual lease rents of about ₹10,000 crore, making up almost 15% of their revenues. 
• Infrastructure Limitations: The rapid growth of air travel in India has put pressure on existing airport infrastructure. Expanding and upgrading infrastructure requires substantial investments, which are often recovered through passenger fees and charges, contributing to higher prices. 
• Uneven Market Share: The consolidation of four carriers, including Air India and Vistara, by Tata consolidated Air India and Indigo, will capture 75–80% of the market, leaving just about 20% for players like SpiceJet and others. It is feared that this dominance of few players will lead to further rise in prices.

Source Ministry of Civil Aviation

In order to further fuel growth in the aviation industry, addressing challenges such as infrastructure limitations, fuel costs, and regulatory frameworks will require continued collaboration between industry stakeholders and policymakers. While immediate reductions in prices may not be feasible due to the aforementioned challenges, advancements in technology, fuel efficiency, and infrastructure development can lead to improved cost structures for airlines. As the industry evolves and matures, it is likely that increased competition, operational efficiencies, and government support will contribute to more affordable aviation services in the long run.