NEW DELHI: India’s domestic aviation is growing strong and is on track to become third largest domestic market, crossing 100 million passengers mark in 2017, according to a global think-tank.
“After a strong FY2016, traffic growth has accelerated further in FY2017, with India likely to overtake Japan this year to become the world’s third largest domestic market behind the USA and China. In reaching this milestone, India will have achieved average domestic traffic growth of over 15% per annum since the liberalisation of the sector commenced in FY2004,” according to Centre for Aviation (CAPA).
The think-tank estimated that India’s airlines reported a combined profit of US$122 million in FY2016, the first time in a decade. This included record profits at IndiGo, Jet Airways, SpiceJet, GoAir and Air India Express. AirAsia India and Vistara, still in their initial years of operations, were however loss-making, as was the national carrier, Air India. Although Air India reported its first operating profit in a decade.
Strong economic fundamentals have contributed to the growth – although traffic has been over-stimulated by low fares. India is expected to achieve 7.5% GDP growth in FY2017, with the IMF projecting that economic performance should improve still further over the next five years.
Domestic traffic in FY2018
The next financial year is expected to be the third consecutive year of domestic growth above 20%. Growth could be as high as high as 25% but may be tempered by 3-5 percentage points because of the impact of demonetisation.
Traffic growth remained strong in Dec-2016 and there are as yet no signs of a slowdown.
However, the purchase of air travel using some withdrawn denominations was permitted until the first half of Dec-2016 which may result in a delayed impact in the first half of FY2018. As of now, it is difficult to fully factor in what the impact may be, if any.
The introduction of the GST next year may possibly also have a short-term negative impact on economic growth for a couple of years until more positive results emerge.
Based on aircraft deliveries, competitive dynamics and the positive outlook for the economy, domestic growth at 20% or higher could continue for up to a further two years.
The pace of aircraft inductions in FY2018 will be one of the key drivers of traffic growth. This is however subject to deliveries of A320neos proceeding as scheduled, and operators being able to deploy the equipment as planned, as some operational challenges have been experienced.
LCCs market share
With low-cost carriers (LCCs) taking delivery of the clear majority of narrow body aircraft coming into the market (an estimated 50 out of 65 inductions), their share of the domestic market is expected to rise from around 65% today to reach 75-80% within two years.
The last time that LCCs had a similar market position was in early 2011 when their share stood at over 70%. However, on that occasion it was as a result of a blurred demarcation between the full service and low cost operations of Jet Airways and Kingfisher. Airline business models in the market are better defined today and LCCs will have a clearly dominant position.
International traffic is expected to expand at 10-12% in FY2017 and FY2018, but bilateral restrictions preclude achieving true potential
Most of the ten largest international carriers are achieving year-round average load factors of 90% or higher, indicating constrained capacity. Without India’s unhelpful restrictions, international growth could be in the region of 15-17% per annum which would result in international traffic volumes doubling within five years. However, demonetisation could negatively impact demand for short haul tourist destinations such as Dubai, Singapore and Thailand.
Several Gulf and Asian carriers are seeking additional entitlements to the tune of up to 150,000 weekly seats. Bilaterals have become a key issue in India’s geo-political relations with markets such as the UAE, Qatar, Turkey, Hong Kong, Singapore and Malaysia. The Indian government may only agree to more modest incremental expansion in seats than is being sought by some countries.
Indian carriers are expected to seek to raise US$1 billion of capital next year, led by Jet Airways at US$300-400 million.
Jet Airways planned to raise US$300-400 million but its capital raising activities were delayed due to a change in strategy. And its improvement in performance on domestic routes in FY2016 appears to have peaked. Investment in product enhancement is a critical issue for the carrier to remain competitive.
AirAsia India and Vistara are likely to require significant recapitalisation in FY2018 to provide for much larger war chests in the face of strong competition. Following its recent funding exercise in Nov-2016, AirAsia India may need another tranche of capital by 3Q2018 and Vistara may need significant funding once it has taken a decision on acceleration of its fleet expansion.
But apart from the recent equity infusion in AirAsia India there has been limited progress on the capital raising front, with most plans delayed. The window for carriers seeking capital through IPOs or external funding may narrow as market dynamics are expected to deteriorate over the next 18 months with rapid capacity expansion placing downward pressure on yields, and cost creep visible.