The Indian Airport Lounge Opportunity

You walk into an airport lounge, pay ₹2, and enjoy the comfort of the lounge along with unlimited free food! But how is this massive operation run of just ₹2, and is there any company that stands to benefit from the move!

The lounge scene in India is absolutely exploding, with the young aspiring traveler enjoying the comfort and free food that lounges offer, with a very small outflow from his own pocket - often as low as ₹2!

The industry is subsidized primarily by a mix of credit card network providers and issuers, with a small contribution from other corporates.

Let's look into the top level economics for a while - How much do the cc companies pay, and how much of it goes to the lounges!

Passengers who checked into lounges via Dreamfolks (FY20, FY21, FY22, 9M23) Strong recovery after COVID impact

48.8, 13.8, 25.3, 58.0

ARPU (FY20, FY21, FY22, 9M23) - Increasing primarily by international lounge mix. ARPU is ~₹820 for domestic lounges &~₹1300 for international lounges

₹752, ₹765, ₹800, ₹923

Gross Margin per passenger(FY20, FY21, FY22, 9M23)

₹138 (18.3%), ₹131 (17.1%), ₹128 (16.0%), ₹147 (15.9%)

So a lounge will make anywhere between ₹600-₹750 every time you check-in, and the facilitator between the lounges the cards and the customers keeps a neat ~₹130-₹145 take rate! This money is paid primarily by Card Networks (Visa, Master, Diners, Rupay) and Card Issuers (HDFC, SBI, ICICI, Kotak), with card networks driving 61% and issuers driving 38% of lounge revenue.

Given the nascent stage of credit and debit card penetration in India, and the attractiveness of lounge access to the Indian customer - complimentary lounge access on cards ends up being an attractive customer acquisition tool for the card companies.

There are currently 5.7cr debit and credit cards that have lounge access of which only 8% are utilized for lounge access, providing good headroom for growth even with the current card penetration.

In the next decade -

India's air pax will grow ~5x

Credit cards in force will growth ~5x

Lounge penetration will grow ~2x

You might already have begun seeing posts about crowded lounges and long queues on social! These issues around crowding will be solved for with more & larger lounges and contactless access.

But the sheer demand this space will see in the coming years is undeniable.

Because the lounge aggregator space is extremely capital light (Dreamfolks still works with 64 employees) - the business ends up being both extremely resilient (made 24% ROCE even in COVID impacted FY22) and benefits immensely from scale as the cost base remains largely fixed!

This makes it a solid way to play the Indian aviation growth story which has otherwise shaky and unprofitable sector. Businesses of this nature, which offer steady stable growth in a growing but unattractive core sector tend to become darlings of D-Street!

But is it all sunshine and roses, or are there issues that can come up in this sector as well! The most pressing issue is the financier of the entire party - the cc networks and issuers.

The first is a clamp down on the earnings potential of these players. Any reduction in MDR is likely to be passed down by the industry, either by reducing allowable lounge entries or reducing pay per lounge entry.

The second is one of the large credit card networks pressing back on the gross margins these businesses earn, especially as the absolute number expands as the business scales. This creates an overhang in Q4 when a bulk of these negotiations happen.

And the last is the loss of one of the large clients, which while certainly possible, isn't highly probable given the impact it will have on the attractiveness of the card network.

That being said, this is a booming market, and there is enough value on the table for

+cc companies (acquiring premium customers)

+lounges (getting steady growing demand) &

+aggregators (growing absolute margins)

So these risks while very real, they will not be near term concerns given the focus of the ecosystem on capturing the growth that lies ahead!

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