Last year represented a turnaround in the fortunes of India’s aviation industry after several very difficult years. Lower fuel prices combined with modest capacity growth and strengthening economic fundamentals were largely responsible for surging traffic and an improvement in airline financials in FY2016. Domestic traffic was up 21.2% while international grew by a more modest 7.7%.
CAPA estimates that India’s airlines reported a combined profit of USD 122 million in FY 2016, the first time in a decade. This included record profits at IndiGo, Jet Airways, SpiceJet, GoAir and Air India Express.
India’s domestic market is on track to surpass 100 million passengers in FY2017
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.
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.
However, the ramifications of the Indian government’s demonetisation initiative announced in November 2016 (which resulted in the withdrawal and replacement of around 86% of the value of currency in circulation, to reduce the volume of undeclared cash in the economy) are still unclear, although there is no visible impact as yet.
India Domestic Airline Market Share Nov-2016
Domestic traffic could grow by nearly 25% in FY2018 and approach 130 million passengers
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 December 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However, the purchase of air travel using some withdrawn denominations was permitted until the first half of December 2016 which may result in a delayed impact in the first half of FY2018.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.
India Domestic Airline Passengers FY2004-2017F
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.
Indian airlines are scheduled to induct 60-65 narrow bodies and 10-12 regional aircraft in FY2018
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.
Traffic growth at Indian airports
FY2016 to FY2018F
Source: CAPA Research Forecast FY2017/FY2018
LCCs are likely to have a domestic market share of 75-80% within two years
With 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.
Air India continues to expand its International footprint, primarily using 787 equipment
Air India has been increasing its European and North American network, launching new non-stop services from Delhi to Vienna, San Francisco and Madrid over the last 12 months and a one-stop between Ahmedabad and Newark via London.
New destinations under consideration for next year include Washington, Toronto, Nairobi, Tel Aviv, Copenhagen and Stockholm. But CAPA believes that the viability of Air India’s ultra-long haul routes could increasingly be challenged beginning FY2018 due to cost creep and a possible softening of yields.
India GDP Growth and Projections to 2021
Jet Airways is likely to revive its long haul ambitions and may possibly join SkyTeam in 2017 or 2018
Jet Airways is focusing on international growth and the Amsterdam hub signals a revival of its long haul ambitions. The re-induction of 10 777 aircraft which Jet had sub-leased to other airlines, and some of the 777s could be used to launch several new routes.
The carrier has been up gauging capacity to Amsterdam and Paris and has entered into extensive codeshare agreements with Delta, Air France and KLM for connectivity to the US and Canada. Closer cooperation with these carriers
may be a prelude to SkyTeam membership in the next two years.
LCCs will grow more aggressively on international routes from Summer 2017, overseas routes will remain modest in terms of total operations
IndiGo and SpiceJet have pursued relatively modest expansion on international routes to date, preferring instead to focus on the domestic market. However, both carriers are expected to ramp up their international service from Summer 2017. This is also when GoAir plans to commence international services for the first time, primarily to unconnected destinations in Central Asia, the Gulf, China and Vietnam.
Re-engined narrowbodies have the potential to transform the economics of regional international routes by making more city pairs viable. However, despite the overseas opportunities, th
IndiGo is increasingly controlling domestic capacity growth and moving the market
IndiGo’s share of traffic has crossed 40% and could approach 55-60% within the next two years, a remarkable achievement in such a large and competitive market. As its share grows the carrier
is becoming more competitive with its pricing.
IndiGo will take delivery of more than two aircraft a month through to March 2018 which will see its fleet size reach 160 by then (of which around 140-145 aircraft will operate on domestic routes).
The improved economics of the A320neo will further strengthen IndiGo’s market position. The carrier remains highly profitable and the market leader on all counts.
Full service airline market share could fall to 20-25% within two years
Jet Airways and Air India could each see their share fall to around 10% or less unless they pursue faster expansion.
The full service airline model continues to decline in relative terms. Jet Airways and Air India, which together had a combined domestic market share of close to 90% in 2003 could each see their hold on the market fall to around 10% each or less within two years unless they accelerate their expansion. This pace of IndiGo’s growth is creating a strategic compulsion for other Indian carriers to scale up to remain relevant.
Actual and projected combined net profitability of India’s airlines FY2007 to FY2018F
Indian airlines could place orders for 250-300 aircraft (including options) in the next 3-6 months
SpiceJet first, followed by Vistara, will be the
primary drivers of new aircraft orders, both of whom are expected to stick with Boeing and Airbus respectively for their narrow body fleet requirements. For its long haul operations, Vistara is likely to opt for the 777X.
Vistara is likely to bring forward deliveries while AirAsia India is also expected to target aggressive expansion
The government’s decision to remove the five-year qualification requirement for domestic airlines to be permitted to operate international services and to retain only the 20-aircraft threshold, may push Vistara and AirAsia India to expand on domestic routes faster than planned. Vistara could bring forward deliveries to reach 20 aircraft by March 2018.
AirAsia India is also likely to pursue a more aggressive growth path to remain competitive in the market. Both carriers will need significantly higher levels of capital to pursue their accelerated expansion strategies.
Traffic is surging but last year’s profits may have been a high-water mark; the industry is expected to return to losses in FY2017 and FY2018
CAPA estimates that India’s airlines reported a combined profit of USD 122 million in FY2016, the first black ink in a decade. But this era of industry profitability is likely to be short-lived. Traffic growth is being stimulated above its underlying demand as a result of excess capacity and competitive fares. The downward pressure on yields, combined with cost creep, is expected to push the consolidated industry result back into the red for the 12 months ending March 31, 2017.
IndiGo, Jet Airways, SpiceJet, GoAir and Air India Express are all expected to remain profitable, but at levels lower than in FY2016. Jet Airways will be the only profitable full service carrier in FY2017. While losses are projected to increase at Air India, AirAsia India and Vistara. At a total industry level losses could reach USD 250-300 million.