Air India’s quest for 30% clearly indicates a merger with Vistara

Thursday afternoon, Air India unveiled its transformation plan named “Vihaan. AI”. The reactions ranged from calling this a rebranding of Air India to wondering how the airline will climb from 8% ish market share to 30% in five years. More often than not, the context becomes clear after the dust settles and that is exactly what I did this morning. Re-reading the press release and re-calculating the numbers.

The airline wants to re-establish itself as best in class in customer service, technology, product, reliability and hospitality. I have serious doubts on the technology part – considering how Vistara’s website and overall systems have been since 2015. However, this article will focus more on the market share part. Over the next 5 years, Air India will strive to increase its market share to at least 30% in the domestic market while significantly growing the international routes from the present market share. 

In an environment where the load factors do not vary a lot from one airline to another, market share has always been a function of capacity deployment. Air India has already announced a plan to induct five widebody and 25 narrowbody aircraft. The airline is also moving fast to get grounded aircraft back in service, which will further help it with adding capacity. 

What was the market share pre-COVID and what is it now?

IndiGo has close to 60% market share now and certainly above 50% in all months post COVID restart. But a look at how the market was in February 2020 will give a good idea of where things stand. IndiGo continued to lead with 48% market share, while SpiceJet was second at 15.3% and Air India third at 12%. Go Air, AirAsia India and Vistara followed at 10%, 7.3% and 6.7% respectively. Air India was still in government hands back then but the combined market share of Air India, AirAsia India and Vistara was 26%. This included the 1% share of Alliance Air, which is now a separate entity owned by the government.

Cut to August 2022, these three airlines have 24% market share. While the market has shrunk, how has the market share moved? IndiGo has gained the most – about 10% and the airline has nibbled some share from every airline except Vistara. 

Eight to Thirty or Twenty Four to Thirty?

There are few things which are very clear. AirAsia India is merging with Air India Express. The merger of LCCs will ensure that Air India Express’s international operations are backed by domestic operations as mandated by National Civil Aviation Policy, 2016. 

IndiGo with over 250 planes has a market share of 57%. To have a market share of 30%, the airline will need around 145 aircraft. Both IndiGo and Air India also operate international flights and it is not a wise thing to look at this in pure aircraft numbers. In terms of ASK (Available seat Kilometres), a back of the envelope calculation shows that a mix of Air India + AirAsia India would require anywhere between 80 to 100 aircraft to reach the 30% market share on their own. While the airline has announced an immediate induction plan, the number is nowhere close to 100 and this is where the first indications of Vistara’s merger with Air India come in. Vistara with its 55-60 aircraft and a few more planned over the next 24 months, the total capacity number comes very close to the required number.

Vistara merger a real possibility?

Vistara on its own would hover around 10%. Air India (with AirAsia India under its fold) will also vie for increasing market share. It is important that they nibble into somebody else and not each other and this is where the merger becomes a real possibility. 

Past mergers in Indian skies have ended in disasters. But the TATA group is at a point where they have taken the leap of faith. Few mergers are inevitable, with the first being that of Air India Express and AirAsia India. With this being phase 1, the next phase could be the merger of Vistara with Air India. Time will tell on how the deal is structured and the future of three class configurations. Vistara’s three-class model gets adopted by Air India or it becomes two class? What would be the role of Singapore Airlines in the merger? 

Network Thoughts

The larger question to ask will be if the group will continue to operate two carriers – Air India and Air India Express or will it be just one Air India? The “House of Brands” strategy is often used by the hospitality industry but has not been very successful in aviation. Until now, Air India Express and Air India have had relatively exclusive networks, but they do not cross sell the flights leaving out a huge opportunity! The model could well be like that of Singapore Airlines and Scoot, where both operate a mix of narrow body and wide body aircraft and there is a codeshare in place to cross sell inventory.

With Air India aiming 30%, the 5% additional share that it plans will come in from whom? With more competition and flights, IndiGo could slowly start losing its market share even while carrying more passengers. That would put pressure on Go FIRST and SpiceJet, with Akasa Air being the other carrier trying to do the same. This puts a question mark on another carrier – Jet Airways! 

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