Did Indigo and Spice Jet disrupt the Entire Airline Industry?
In the past two years, the cessation of Jet Airways still remains one of the biggest events in the airline industry. Before shutting down in April 2019, Jet Airways had the second largest market share in the industry after Indigo Airlines. This event paved way for the growth of many small and big players in the industry who benefitted by rising fares as the excessive demand was built in the industry with the reduction of the fleet. However, Indigo and Spice Jet capitalized on this opportunity significantly as their market shares rose enormously. Today, these two airlines are the top two private airlines of the country with a combined market share of about 70-75%.
While the entire aviation industry performed well in the first quarter of 2019-20 capitalizing on the reduced supply, the boost in the industry was short-lived. To capture the excess demand, both SpiceJet and Indigo made deliberate efforts and announced their plans for increasing the capacity. During that time, it was predicted by some economists that the plan would be unsustainable and would lead to reductions in the profit margins ultimately leading to profit-less growth in the economy.
But both the airline companies were desperate to grab the excess demand and increase their customer base. And as was observed in the coming few months, vicious fare wars were observed between the two big rivals to fill up the additional fleets purchased by them. Not only this, the two companies aggressively bid for routes under the UDAN scheme, which concentrated a lot of market power in the hands of the big players by denying the airport slots to smaller companies in the industry. In simpler words, it meant that the market share of the two companies was such that whatever happens in the entire airline industry would be, in a way, determined by the actions taken by the two firms.
As the lockdown was announced in March 2020, the airline industry was one of the worst-hit. Domestic travel reduced while international travel completely dried up. As was expected, Spicejet and Indigo were the worst-hit airlines and their market shares plummeted drastically. While there was slight recovery observed in the industry during the festive season, the identification of a new virus strain and the subsequent travel restrictions being imposed is expected to reduce the demand yet again leading to the worsening of the sector. While poor demand and lockdown can be blamed easily for the loss the airline industry has been observing in the past few months, the problems faced by the top companies in the industry are only aggravating the situation.
For instance, Indigo has been trying hard to replace its A32 Neo Aircraft engines within the deadline of 31st May 2021 set by Industry regulator DGCA. This decision has been taken by the authority after multiple incidents of engine snags observed in the aircraft recently. At a time when air travel demand is not boosting up due to Covid apprehensions, this is further creating additional costs for the largest private airline thereby affecting the entire industry. Not only this, Spice Jet has been facing drastic capacity constraints after grounding of 737 MAX aircraft after two suspicious crashes leading to the killing of 300 people. Spicejet has been one of the largest clients of Boeing’s 737 Max and the delays in its delivery have limited the revenue expansion scope for the company.
The troubles faced by the top two private airlines coupled with the poor demand makes a revival in the industry seem difficult at the moment. Not only this, in order to capture the current demand, the companies have fallen into predatory pricing to outshine the competition. Whenever a big company like Indigo or Spicejet offers a discount on flight charges these days, the other small players are left with no other option than to follow. This ultimately ends up reducing the profit-margins in the entire industry. There needs to be a coordinated pricing strategy among the major players of the industry in order to ensure the industry’s losses are not magnified in the present situation.
Written By- Nischal Upadhyay