- The Growth Story
- Legacy Issues
- Emerging Risks
The Indian Aviation industry traces its history back to 1911 when the first commercial aircraft took off in the country. The industry has since come a long way, growing exponentially to become the third largest domestic civil aviation market in 2018. The industry comprises of a total of 7 scheduled airlines which cater to more than 98% of the domestic air travel demand. Out of these, the large low-cost carriers, i.e., Indigo, SpiceJet and Go Air have a combined market share of ~74.5% as on December 2020. The industry has seen a period of price competition in recent years which has severely impacted the large full-service operators like Jet Airways.
The Growth Story
The rapid expansion of the Indian Aviation industry was unleashed due to the strong pace of economic expansion witnessed in India post the year 2000. The industry has been supported by government policies like the UDAN scheme and the large number of travelling citizens and tourists in the country. The Indian aviation industry has seen an expansion in the total number of passenger count from a level of 27.73 million in Q4 FY 2016 to 44.63 million in Q3 FY 20, growing at a CAGR of 12.63% during the period.
The industry has seen an expansion in the number of passengers on both domestic and international routes during 2016-20. However, the industry is still largely domestically driven with the total passenger growth in domestic routes outperforming the passenger growth in international routes. The share of passengers travelling to international routes has remained at levels below between 15-18% during the period 2016-2020.
The key factors behind the strong growth in the Indian aviation industry largely include the economic pricing of air travel tickets due to the price competition in the industry, the coverage of new serviced destinations including both domestic and international destinations, and the rapid expansion of the aircraft orders booked by the scheduled airlines in light of the low availability of aircraft seats per capita as compared to other large economies. The strong growth in air passengers has helped the industry register a domestic load factor of 87.8% in 2018 (IATA Data) which is the highest amongst the top 7 aviation markets globally. However, the industry has been plagued by issues during the year 2019, that have constrained the overall growth and profitability of the industry.
Despite the strong buoyancy in passenger growth, the Indian aviation industry has been plagued by key constraints and risks that have impacted its performance during 2019. The key factors are as follows:
- Issues constraining capacity utilization: The top 3 low cost operators in the industry have been impacted by issues related to their airplane fleet. The utilization of Indigo and Go Air has been constrained due to the Pratt & Whitney engine issues in their recently inducted fleet of A320 NEO aircrafts while SpiceJet has been impacted by the grounding of the Boeing 737 MAX aircrafts. This has constrained the ability of the players to utilize their available service fleet.
- Pilot Shortages: The rapid increase in the orders and deliveries of new aircrafts has created a shortage of trained pilots, especially at the senior experienced level. This has reduced the utilization of the available fleet and has restricted the airlines from providing longer booking windows to passengers.
- Weakening profitability due to the price competition: During the period 2018-19, the crude oil prices began to rise, which led to a rise in the cost per seat kilometer as a result of the higher Air Travel Fuel costs. During the same period, the industry was also undergoing a period of price competition amongst the large low-cost airline operators which impacted the revenue per seat kilometer of the industry. As a result, the spread per seat kilometer of the key industry players has declined significantly and hit negative levels at year end FY 2019.
The combined effect of the capacity under-utilization and price competition during the period of increased crude oil prices has resulted in weakening operating profitability for all players in the industry. The effects of this have impacted the full-service operators like Jet Airways severely which has resulted in the grounding of its aircraft fleet during the year. The year 2019 brought a difficult period for the industry and the difficulties are all set to intensify in light of the new emerging risks, going forward.
In 2020, the global spread of the coronavirus disease (COVID-19) has spelled a new challenge for the aviation industry which has already been reeling under challenges and constraints during the previous year. This has thrown up new issues that threaten to further derail the performance of the industry. The key issues set to impact the industry as a result of the virus spread revolve around:
- Reduced Revenue Visibility: Curtailment of travel as a result of the virus has impacted the daily booking volumes of airline operators which is expected to hit the revenue significantly. News agencies have reported that the largest airline Indigo is experiencing a decline of between 15-20% in its daily ticket bookings. One of the largest travel portals has stated that fresh bookings to several locations and airfares have dropped by 20-30% recently. International travel restrictions have also resulted in the cancellation of flights to several key global destinations which is expected to further reduce the utilization of the available aircraft capacity.
- Repayment of Capitalized Lease Obligations: The spread of the virus has also led to a sharp depreciation in the INR which is expected to increase the burden of lease obligations which are largely dollar denominated. This can impact the servicing capability of the key players who are already facing other severe challenges.
The impact of these risks is expected to further dampen the fortunes of the industry. However, a silver lining has emerged that should help the key players weather this storm. A sharp decline in crude oil prices during March 2020 should support the operating profitability of the industry players going forward as fuel costs form a significant share of the total operating costs in the airline industry. This should provide some support to the industry which is expected to face significant revenue headwinds in light of the coronavirus pandemic.
Going forward, we expect the large airline operators to experience a weak period in light of the highlighted risk factors. The key factor which will play a major role in shaping the outlook of the industry in the near term will be the control and curtailment of the spread of the coronavirus epidemic.