Structural Separation vs. Vertical Integration: Cross-Ownership Reforms in Indian Aviation

When you see a good policy announcement, it resonates: it either addresses a known problem or clearly articulates why a change is necessary. But sometimes, you read a news report and end up scratching your head, trying to figure out why this is even required - the classic if-it-ain’t-broke-why-fix-it puzzle.

The Ministry of Civil Aviation’s current deliberations on allowing airport operators to own airlines and vice versa is a head-scratcher. The aviation sector is undeniably in trouble, with an airline duopoly that has stifled competition. But the proposed cure -vertical integration between infrastructure gatekeepers and the airlines that depend on them - may not only fail to fix the broken parts; it actually adds new breakage points.

The Proposal and Its Context

In July 2026, the Ministry initiated talks on a policy shift that would dismantle a long-standing firewall in the aviation sector. The change would remove restrictions on airline ownership in airport operators and vice versa, potentially enabling infrastructure giants like the Adani Group and GMR Airports to launch their own carriers, while also paving the way for airline groups like Air India or IndiGo to acquire stakes in airports. Current rules bar the operators of Delhi and Mumbai airports from owning more than a 10% stake in any airline, and any waiver would require legal clearance and also approval from the central Cabinet.

The stated rationale for the proposed change is to break the stranglehold of a near-duopoly where airline operators IndiGo and Air India together control nearly 90% of domestic capacity. Concerns over this concentration intensified during IndiGo’s operational crisis in December 2025, when the airline cancelled thousands of flights due to pilot shortages (prompting the already over-burdened Indian Railways to run special trains for stranded passengers).

The proposal has already drawn significant corporate response.

The Shrinking Market: From Fragmentation to Duopoly

Before examining the merits of vertical integration, it is important to understand the contours of the industry it is seeking to fix. The number of operational Indian airlines has narrowed sharply over the past decade: the collapse of Jet Airways and Go Airlines, along with the merger of Vistara and AirAsia India under the Tata Group, has left IndiGo and Air India in a dominant position in the world’s fourth-largest aviation market, with newer players like Akasa Air, struggling incumbents like SpiceJet Ltd., and smaller regional carriers operating on the margins.

This concentration threatens to constrain future growth at a time when India plans to double the number of airports to 350 by 2047, and the International Air Transport Association forecasts an additional 425 million passengers by 2044, almost tripling from 2024 levels.

Instead of addressing structural distortions ranging from high fuel taxation to the chronic shortage of pilots that make new entrants unviable, the government appears to be contemplating a policy that would hand over the keys to the kingdom to the entities that control the gates.

The Core Risk: Conflict of Interest and Abuse of “Natural Monopoly”

The core risk lies in the possible conflict of interest and abuse of “natural monopoly,” arising from the economics of airports. Airports are natural monopolies: the high fixed costs of runways, terminals, and infrastructure mean it is usually more efficient to have a single airport serving a city. Even where multiple airports compete for traffic, as Delhi and Mumbai do for connecting passengers, each airport retains monopoly control over its own essential infrastructure, creating the same incentives for foreclosure. The operation of an airport creates incentives to transfer the airport’s market power to the air transport market. If the airport market is regulated but the airport operator is allowed to control at least one airline, those incentives can give rise to anticompetitive practices aimed at displacing competing airlines.

Academic research confirms this dynamic. A study on vertical relations between airports and airlines found that the airport and its dominant airline have an incentive to pursue vertical integration. The merger implies a downstream market foreclosure through a price-squeeze strategy. However, the same study notes a trade-off: while integration may increase competitiveness concerns, it could also increase consumer surplus and welfare in certain contexts. This reinforces the complexity of the issue, as the theoretical efficiency gains have to be weighed against the very real risks of market foreclosure.

The mechanisms for abuse are straightforward:

Preferential Slot Allocation: Airport slots are specific times allocated to an airline for aircraft take-off or landing, with those at peak hours considered prized assets. An integrated operator could allocate the most coveted takeoff and landing slots, prime terminal space, and parking bays to its own airline, while relegating competitors to inferior facilities.

Cross-Subsidisation: The operator could use profits from its monopoly airport business—aeronautical and non-aeronautical services—to subsidise aggressive pricing by its airline, engaging in predatory practices that drive rivals out of business.

Information Asymmetry: A vertically integrated entity can effectively offer its own airline a hidden discount on airport charges while maintaining or increasing charges for competitors. This is next to impossible for a regulator to detect or prove, as the operator knows its costs far better than the regulator ever will—the classic asymmetry of information problem.

(i) Scenario 1: Airport Operators Entering the Airline Business

This is the scenario that has captured most attention. The primary fear is that an airport operator would use its control over airport infrastructure (slots, gates, terminal space) as a weapon to foreclose competitors and subsidise its own airline.

The Adani Group reportedly approached the government seeking dilution of the clause that caps airline ownership at 10% - and a reversal from its public position in late 2025, when it had stated that starting an airline did not align with its corporate strategy. The shift was widely seen as a strategic move to support its plans to establish an aircraft manufacturing facility with Embraer, a venture that requires a sizeable order book to become commercially viable.

Adani already has an outsized presence across India’s infrastructure landscape - it is the country’s largest private ports operator, second-largest cement producer, and a major player in energy spanning thermal generation, city-gas distribution, and solar development. While GMR holds a 74% stake in the Delhi and Hyderabad airports, Adani holds a 73-74% stake in the Mumbai and Navi Mumbai airports and, through subsidiaries, holds controlling equity in the six other airports it operates. Collectively, Adani’s eight operational airports handle 23% of India’s passenger traffic, 22% of air traffic movements, and 29% of cargo.

Adani’s position as one of the nation’s largest airport operators has fuelled concerns about its growing influence. The group’s plans are likely to face strong opposition from homegrown carriers and invite close scrutiny from competition regulators, as it could potentially distort the level-playing field besides giving an unfair advantage in airport access, primarily in slot allocation.

While the Adani Group has, in a July 2026 exchange filing, denied any intention to launch an airline, this does not eliminate the risk. The group’s ambitions in airport-linked real estate, ground handling, and the planned aircraft manufacturing facility with Embraer mean that its strategic interest in the aviation value chain remains profound.

(ii) Scenario 2: Airlines Entering the Airport Business

This reverse scenario is equally significant and is being driven by Air India’s interest in expanding into the airport business. Air India is jointly owned by Tata Sons (74.9%) and Singapore Airlines (25.1%). This is not the first time such a combination has been contemplated—in 2019, the Tata Group, through a consortium with Singapore’s sovereign wealth fund GIC, proposed acquiring a 55.2% stake in GMR Airports. The deal did not materialise due to a conflict of interest issue involving Tatas’ stake in Vistara and AirAsia India. Since then, both airlines have been merged into the Tata Group’s airline portfolio, removing one barrier, while the policy debate now seeks to address the broader regulatory one.

If a dominant airline like Air India or IndiGo acquires significant stakes in airports, the concern shifts. The airline would use its dominance in the downstream market to control the “gateway.” The specific risks include:

• Preferential Access and Foreclosure of Rivals: An airline that owns or controls an airport has an even more direct incentive than a pure airport operator to allocate premium slots to itself. This could create a “fortress hub” where the owning airline’s dominance is almost impossible to challenge.
• Underinvestment to Deter Competition: A dominant airline with a stake in an airport could strategically underinvest in airport capacity to limit the ability of competitors to expand, protecting its own position and potentially earning scarcity rents.
• Information Asymmetry and Sensitive Data: Access to commercially sensitive information about competitor airlines’ slot usage, route profitability, and fare strategies is a significant antitrust concern.

The proposal has drawn sharp criticism from the dominant carrier, with IndiGo’s head calling it a “massive conflict of interest” with “no global precedent.” This suggests that even if airport operators do not immediately enter the airline business, the mere possibility is seen as a threat by existing players.

The “Too Big to Fail” Spectre

Possibly the most dangerous implication of allowing vertical integration in either direction is the creation of a “too big to fail” entity so deeply embedded in India’s critical infrastructure that the government cannot allow it to collapse.

The Adani Group’s scale across multiple infrastructure sectors means that a vertically integrated Adani airline would be backed by a portfolio of assets that the state cannot easily replace or allow to fail. Similarly, an airline that controls key airports could use that control to foreclose competitors and entrench its dominance.

The December 2025 IndiGo crisis showed the systemic cost of a single carrier’s failure. A vertically integrated Adani or GMR airline would be a far more potent and intractable problem. The government’s own concerns about market concentration are evident: it has proposed capping the number of airport bundles a single bidder can win in the upcoming privatisation round to “two to three bundles” to prevent an “oligopoly,” even though it had itself ignored such concerns in recent concession awards.

International Precedents: What the World Has Learned

The proposed policy has already been studied, debated, and largely rejected in some other jurisdictions.

Australia and Chile have an explicit prohibition on vertical integration. In the US, strict public ownership of major airfields and Federal Aviation Administration revenue-diversion laws effectively prevent local governments from channeling airport income into airline ventures. In the European Union, joint ownership is technically allowed, but aggressive antitrust enforcement makes it functionally unviable.

Argentina represents a different story—it has no restrictions on vertical integration, leaving it to the antitrust agency to decide whether to approve or reject a vertical merger. In the early 2000s, an airport concessionaire attempted to acquire an airline. The antitrust commission rejected the merger over competition concerns, but its ruling was overturned by political authorities. The aftermath was damaging: a protracted, costly investigation, political interference overturning the agency’s ruling, and reputational harm to the antitrust institutions.

Brazil offers a particularly instructive counterpoint as a model of structural separation. Since 2011, it has pursued an aggressive airport privatisation programme, with multiple concession rounds organised into regional blocks and terms of 20-30 years. Yet its tender notices explicitly aim to prevent vertical integration between airport operators and airlines, following international practices from Australia and Mexico.

The safeguards are concrete: airlines may only participate in airport auctions as part of a consortium, with a reduced stake and no participation in corporate governance. Maximum stakes have ranged from 2% to 10% depending on the concession round, and any transaction increasing an airline’s stake requires approval from Brazil’s civil aviation regulator. The OECD has recommended that Brazil maintain this structural separation unless “justified by significant proven economic efficiencies.”

Crucially, Brazil’s model demonstrates that a thriving private airport concession market does not require, or benefit from, vertical integration. Brazil shows that private concessions and structural separation are not just compatible; they are complementary.

The World Bank has concluded that developing countries designing airport concessions should include an explicit prohibition on vertical integration, noting that this approach keeps monitoring and information-gathering costs low, eliminates incentives to transfer market power, reduces conflicts between regulatory and antitrust agencies, and provides certainty to airlines.

While there is clear global evidence and unambiguous guidance, India appears ready to ignore both. The issue is not whether vertical integration can, in theory, yield efficiencies, but whether India’s regulatory apparatus—already stretched thin and already reactive—is equipped to police the conflicts, the hidden subsidies, and the information asymmetries that such integration inevitably invites.

The December 2025 IndiGo crisis offered a preview of what happens when a single carrier’s failure paralyses the system. Imagine that scenario with a carrier backed by a portfolio of airports that the state cannot allow to fail. That is the direction of travel this proposal would set the country on.

This is the first of a two-part series. Part 2 will examine the legal architecture currently preventing cross-ownership, assess the arguments in favour of the policy, and consider what it would actually take to break the duopoly without introducing a more systemic threat.