To fully harness the growth prospect of Indian aviation, problems have to be addressed with deliberate and decisive measures. With these, for Indian aviation, sky is the limit.
From 44.6 million domestic passengers in financial year 2007-08 to 121 million domestic passengers in 2017-18, Indian aviation has seen phenomenal growth. This growth is forecast to continue with India becoming the third largest aviation market by 2030. A growing middle class that is 300 million strong as of now, a trend towards urbanisation leading to increased travel demand, rising propensity to spend and significant capacity entering the market – all key factors for growth are aligned. Indian airlines have capitalised on this growth potential evidenced by the large fleet orders. The current commercial fleet of 645 aircraft is likely to double within the next seven to ten years and for each aircraft flying, there are 1.6 aircraft on order. However, this growth is not without challenges as elaborated below:
TAX ON ATF
The tax policy related to Aviation Turbine Fuel (ATF) continues to hamper growth prospects. For Indian carriers, ATF constitutes 35 to 40 per cent of the operating cost of an airline. It is one of the largest expense items and unfortunately the pricing of ATF in India is based on import parity rather than on the basis of actual cost including refining and marketing. These lead to inflated pricing on top of which states levy their own surcharge. ATF continues to be out of the purview of GST leading to incredibly thin margins for the airline industry.
Airport capacity poses a huge challenge for Indian airlines. While the country has a total of 449 airports, metro airports continue to be key to aviation traffic with 61 per cent of the domestic traffic and 73 per cent of international traffic still originating from the six metro airports at Delhi, Mumbai, Bengaluru, Hyderabad, Kolkata and Chennai. For airline network planners, this poses a dilemma as networks have to cover these cities yet they are constrained by the ability to add flights due to non-availability of slots and parking. Peak slots across the metro cities are taken and parking has reached saturation. A new runway in Bengaluru expected to be operational by the end of this year, will ease the problem to some extent, but the system capacity will continue to be a challenge. For airlines this means a forced dispersal of capacity towards non-metro and Tier-II cities which will inevitably lead to decline in yield.
The current fleet and aircraft on order highlights the significant capacity that will enter the market. The capacity growth can well lead to downward pressure on fares as airlines compete and rush to fill new capacity with market stimulation via lower fares. Indeed, this is the reason the market has seen high load factors, but declining yields. When coupled with airport saturation, the challenge is threefold namely – where to park the airplanes, where to fly the airplanes and how to do it profitably.
The market currently has three full-service carriers and four low-cost carriers, all competing for the same traffic. A search on the website of any travel agent such as MakeMytrip or ClearTrip, will show similar pricing levels across carriers. Thus it is the cost-base that matters and airlines with the lowest cost of delivery measured by cost per available seat kilometre, are the ones that tend to do well. For the last three years, it is the low-cost carriers that have consistently delivered profits while the full-service carriers have been bleeding. With the forecast capacity addition, fare wars will continue to be intense and a focus on costs will be critical to growth. Indeed, as one looks at airlines that are finding it hard to compete, these being Air India and Jet Airways, their cost base is fairly high and in this market environment extremely challenging.
The large fleet orders require financing and the financing environment is forecast to become a bit more challenging. With IndiGo using the sale and lease-back model wherein the aircraft is sold to a lessor at a profit and leased back to the airline for a period of six to eight years, others have followed suit. As of now, this remains an attractive financing measure. Yet interest rates are rising globally and this will lead to an increase in lease rate along with stricter requirements for margins and maintenance reserves. For financing options in India including working capital and term loans, banks are wary to lend to this sector given the unstable EBITDAs and aggressive competition. The current challenges at Jet Airways coupled with weak airline balance sheet, is cause for concern and further exacerbates the situation. The alternate is dollar-denominated debt, but that carries with it currency risk. The forecast strength of the dollar is also a factor that has to be carefully considered. Interestingly, several airlines are using sale and leaseback proceeds as sources of working capital which in the medium and long term, is not a sustainable proposition.
WITH THE FORECAST CAPACITY ADDITION, FARE WARS WILL CONTINUE TO BE INTENSE AND A FOCUS ON COSTS WILL BE CRITICAL TO GROWTH
The yield environment is perhaps best highlighted by the statement that, “it is a great time to be a consumer.” As airlines compete, fare wars are common and pricing trends very unstable. The market has seen discounting in a 15 day window which goes against the very core of airline pricing where tickets booked earlier, carry a better discount. The rail-air parity that is where airfares are at similar levels as railway fares (in AC1 and AC2 categories) is not only a reality, but in many cases, airfares are lower than railway fares. This has the effect of stimulating additional traffic which otherwise would not have travelled by air. Airlines are banking on the fact that once a passenger travels by air, he is likely to stick to this form of travel.
On the distribution front, the online travel agents command a 40 to 50 per cent market share. This channel of distribution however, is dilutive to yields as passengers searching on these channels, gravitate towards lowest fare offerings. Airlines are under pressure to pull traffic towards direct bookings via the airline website as it is the channel with the lowest cost of sales and thus highest margins.
Growth prospects for the sector also require talented personnel both for operations and management. There is a shortage of skilled operations personnel across airlines and expatriate talent across airlines, is a reality including in senior management. As airlines grow exponentially, the market will see talent wars and a supply demand imbalance will lead to rising salary levels within the sector. This trend has already been seen with pilots with attraction and retention strategies including flexible contracts, generous allowances, joining bonuses and in some cases, outright poaching.
Despite challenge, the growth potential for the Indian civil aviation market remains strong. Forecast across aircraft manufactures, banks and IATA indicate that the Indian domestic market will grow at 15 to 18 per cent while the international market will grow at a 10 to 14 per cent for the next five years. The Indian consumer continues to embrace air travel and indeed weekend trips, cultural festivals such as literary fests and experiential and adventure travel are trends that are here to stay. While the market is attractive, growth prospects include intense fare wars, a challenging operations environment, negligible consumer loyalty, high constraints and a talent crunch. To fully harness the growth prospect of Indian aviation, problems have to be addressed with deliberate and decisive measures. With these, for Indian aviation, sky is the limit.
|Airport||Peak slots available||Parking available||Expansion|
|Delhi (DIAL)||x||x||4th Runway by 2021|
|Mumbai (MIAL)||x||x||2nd airport by 2024|
|Bengaluru (KIA)||Limited||Limited||2nd Runway by end 2019|
|Kolkata||x||x||Efficiency improvement project underway|
|Hyderabad (GHIAL)||x||x||2nd Runway to be commissioned. Date not determined|
|Goa||x||x||2nd Airport by 2020|
|Airline||Aircraft in service||Aircraft on order (including options)||Ratio (aircraft on order to aircraft in service)|
The writer is Satyendra Pandey has held a variety of appointments in the aviation business. Most recently, he was the Head of Strategy & Planning at GoAir. Previously he was with CAPA where he led the Advisory and Research teams. He joined CAPA after working through a merger and restructuring at a legacy US carrier. Having lived and worked across four continents, he is an alumnus of the University of New South Wales and the London Business School. He is also a certified pilot with an Instrument rating.