Jet strikes jackpot but what will happen to Air India?

New Delhi: Is Air India going to perish because Civil Aviation Minister Ajit Singh has gone ahead and opened up the Indian market to Etihad, an airline with deep pockets and much muscle?

Opinion is divided but it is obvious that the largest impact of Singh’s largess to Etihad Airways will be felt by Air India.

In an interview to Mint newspaper just a short while ago, the minister defended his decision, saying “I cannot think for a particular airline. But where is the problem for Air India? Air India is flying directly from Delhi rather than taking passengers via any hubs. Yes, it has to get feeds from other cities. And Air India has to be on its toes.”

[caption id=“attachment_727713” align=“alignleft” width=“380”] Also, the governments of India and Abu Dhabi agreed to increase seat entitlements between the two countries. Debarka Banik/Flickr[/caption]

Yesterday, Jet Airways announced a strategic partnership with Etihad Airways where it will offload 24 percent stake to Etihad.

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Also, the governments of India and Abu Dhabi agreed to increase seat entitlements between the two countries from 13,300 at present to nearly 50,000 by 2015.

Put simply, the alliance between Jet and Etihad and Singh’s push for massive increase in seat entitlements mean the traffic from smaller towns and cities which till now was available to Air India for international destinations would have to be shared with the Jet-Etihad combine. This, at a time when the traffic growth has stagnated, obviously means a substantial loss of market share for AI on key international routes.

Sources in Air India pointed out earlier that Jet is proposing to take traffic from smaller cities in India to Abu Dhabi whereas Air India already brings this traffic to Delhi, its hub airport, before offering onward connections to western destinations like the Americas.

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So is there not enough traffic for two airlines to carry then? The sources in AI rubbished claims by Jet that the 28 million passenger market currently available to Indian carriers for countries west of India was growing at 10 percent. Jet’s argument is that there are enough passengers out there for both airlines to survive.

“It is a fallacy to assume that traffic is growing at 10 percent. In 2011, overall traffic grew by just 4%, there was degrowth in 2012 and if you look at travel industry forecasts for 2013, the situation does not look so good. So where is this 10 percent per year growth going to come from?” AI sources argue.

Whichever argument is correct, one thing is clear: Competition is expected to increase manifold in the Indian market and this may not necessarily be a bad thing.

But for Air India, it may spell doom for several reasons:

1. The airline has already suffered daily losses because of grounding of the Dreamliners. It has already had to do massive rescheduling of international operations, delay launch of flights to new destinations such as Australia and this is hurting its bottomline. Gulf routes were the most lucrative and now, because of the Etihad-Jet muscle power, here too AI will face insurmountable competition.

2. Its hub and spoke model will suffer, specially in the case of non-stop flights to the US which it offers from Delhi. Jet-Etihad plan to offer flights from several Indian cities to Abu Dhabi and then onward connections to the US. Why would a passenger want to pay more to reach the Americas if a cheaper option via Abu Dhabi is available? Jet can buy much cheaper fuel at Abu Dhabi, making its cost of operations lower than AI.

3. Air India is already struggling with lack of funds. The government still owes it over Rs 8,000 crore in budgetary support which was promised in FY13 but has not come in. Increasing competition on international routes - international operations account for 60 percent of AI’s revenues - is only going to make matters worse.

Here’s how the AI sources quoted earlier described the situation:

The Jet-Etihad combine can now offer almost 5,000 new seats a day between Indian cities and Abu Dhabi. If one were to assume load factors (number of seats which are filled on a plane) at 80 percent, that means about 4,000 passengers a day. “At least 20 percent of these passengers will be the traffic which would have gone with Air India.”

A fifth of AI’s international traffic diverted to the Jet-Etihad combine would certainly mean trouble for an airline which has only recently begun to make operational profits.

So does the solution lie in closing the Indian market to competition? A senior official in the Ministry of Civil Aviation had said earlier that instead of Air India being affected, the new market dynamics will force two of UAE’s carriers, Emirates and Etihad Airways, to compete among each other and that the massive seat entitlements to Abu Dhabi would not affect Air India.

Today, Ajit Singh said Air India needs to keep on its toes. If only the government also helped by removing heavy taxation on Aviation Turbine Fuel and freezing any more bilateral talks with other Gulf countries. Perhaps then Air India may learn to survive even in the new, competitive and cut throat market.