February 10, 2017

“India’s airlines posted a combined profit of USD122 million in FY2016, returning to the black at an industry level after 10 years” – reports CAPA India Aviation Outlook FY 2018


The year 2016 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 per cent while international grew by a more modest 7.7 per cent.


The study estimates that India’s airlines reported a combined profit of USD122 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.


India’s domestic market 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 cent per annum since the liberalisation of the sector commenced in FY2004. India is expected to achieve 7.5 per cent GDP growth this year, with the IMF projecting that economic performance should improve still further over the next five years.


Domestic traffic to SOAR NORTHWARDS


Domestic traffic could grow by close to 25 per cent in FY2018 and approach 130 million passengers. FY 2017 is expected to be the third consecutive year of domestic growth above 20 per cent. Growth could be as high as 25 per cent, but may be tempered 3-5 percentage points lower because of the impact of demonetisation. The introduction of GST may also reduce growth below projections, depending upon the tax rates applicable for air travel and inputs. Based on aircraft deliveries, competitive dynamics and the positive outlook for the economy, growth above 20 per cent could continue for up to a further two years.
Future of Indian Carriers 


India’s status as the fastest growing aviation market in the world creates tremendous opportunities. Indian carriers 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.


LCCs to grow by 75-80 per cent in the next 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 per cent, today, to reach 75-80 per cent within the next two years. 


LCCs to expand on international routes from Summer 2017
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, connecting primarily unconnected destinations in Central Asia, the Gulf, China and Vietnam.


However, despite the overseas opportunities, the domestic market will remain the core focus for LCCs. At IndiGo, for example, international operations are expected to account for only 10-15 per cent of total capacity. IndiGo is increasingly controlling domestic capacity growth and moving the market; its domestic market share could approach 55-60 per cent within two years. This pace of growth will create a strategic compulsion for other Indian carriers to accelerate their expansion to remain relevant.


Air India Continues International Growth 
Air India continues to expand its international footprint, primarily using 787 equipment, but viability challenges could start emerging on ultra-long haul routes starting from FY2018. 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, the study believes that the viability of ultra-long haul routes could increasingly be challenged due to cost creep and a possible softening of yields.


Indian carriers 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. 

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