Premium economy, a flight worth flying

India's aviation sector may be moving out of its price-sensitive comfort zone where the key metric is on-time performance. Airline margins here are squeezed between high fuel costs and price-conscious flyers that favour the survival of budget carriers. Globally, however, the premium economy class has emerged as a sweet spot for airlines. This hybrid approach allows for densification of the economy class without having to rely inordinately on business class revenue. In India, the potential of business travel and value-conscious leisure travel is influencing the fleet augmentation plans of market leaders, IndiGo and Air India, to provide full-service and low-cost offerings. The market may be able to sustain dual-configuration aircraft if airlines get the price of their premium offering right. For starters, a premium economy segment offers the best opportunity to improve airline toplines in domestic travel.

Premiumisation will be helped by Indians flying abroad. Post-pandemic, the international travel industry has become more dependent on Indian flyers to sustain future growth. The number of countries easing visa restrictions for Indians is climbing fast. This provides Indian airlines an opportunity to build premium capacity and move into the higher revenue-lower cost segment of the business. They will also try to counter the location and jet fuel cost advantages of Gulf carriers with originating traffic. The initial battles of what looks like a long war will be fought over competitive services and prices. If Indian carriers can reduce the dominance of their counterparts in the Gulf, they could look at the bigger prize of building international transit hubs to cater to traffic originating elsewhere in the Asia-Pacific.

There is growing evidence of a change in Indian consumer preference that airlines cannot ignore. The Indian aviation industry has received timely capital infusion with the privatisation of Air India that could permanently alter the market dynamics. A well-capitalised airline industry with visibility of strong traffic growth has begun seeking efficiencies by front-loading its fleet acquisition and by experimenting with cross-subsidisation.