Air Traffic Soars, But Airlines Struggle to Raise Fares Amid Competition and High Costs

Air traffic in India has surged dramatically in the past decade, with passenger numbers increasing by over 62% since 2015. However, despite the sharp recovery in travel following the Covid-19 pandemic, airlines are facing significant challenges in raising airfares to cover the rising operational costs, particularly fuel.

According to Willie Walsh, Director General of the International Air Transport Association (IATA), while airfares have seen some upward movement in 2023, they have failed to keep pace with inflation and escalating fuel costs. Walsh pointed out in a recent interview that while some correction in airfares has occurred, prices have not risen enough to cover the high inflationary pressures faced by airlines, particularly due to soaring fuel prices. He emphasized that if fares haven’t kept up with general inflation, airlines are not even covering their operating costs. In fact, domestic airfares in India have remained near or below their 2015 levels despite the substantial rise in the number of passengers.

Experts suggest that the inability of airlines to raise fares is largely driven by the intense competition within the Indian aviation market. As soon as an airline raises its prices, competitors quickly swoop in with lower fares, keeping the pricing environment highly competitive. Even though the Indian aviation industry has seen significant consolidation with several airlines shutting down and merging over the years, experts argue that it hasn’t brought the expected benefits to the industry.  For example, when Jet Airways shut down, the capacity lost was recouped in just nine months, and after Go First’s bankruptcy in 2023, airlines like IndiGo, Air India, and Akasa rushed to add more planes to the market.

The situation has created a duopoly between IndiGo and Air India, which together carry 9 out of 10 domestic flyers. However, even with the addition of new aircraft, airlines are finding it hard to raise ticket prices, especially on new routes. As an executive from IndiGo explained, price stimulation is crucial on newer routes to convert rail passengers into airline customers. Air India CEO Campbell Wilson echoed this sentiment, noting that due to competitive dynamics, airlines must keep ticket prices attractive to fill planes. While Walsh believes that consolidation globally has typically led to lower fares for consumers due to the ability to spread fixed costs over a larger operation, the intense competition in the Indian aviation market continues to keep airfares relatively low, putting pressure on airlines to balance profitability with consumer demand.