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Thursday, 20 June, 2019, 14 : 56 PM [IST]

Indian LCC’s set for record profitability in FY20: CAPA

In Its Quarterly Market Update for the period April-June 2019, CAPA presents its perspectives and analysis on key trends in the Indian aviation market across strategic, financial and operational issues. CAPA Advisory monitors all aspects of the industry on a 24x7 basis. TravelBiz Monitor offers some key aspects of this review.

Tranformation of Market Dynamics for Indian carriers after the closure of Jet Airways
  • In FY2020 Indian airlines are likely to report a combined net profit at an industry level, for the very first time since CAPA India started tracking the sector in 2003. In an optimistic scenario the industry could post a profit of USD500-700 million in FY2020.
  • This would represent a positive turnaround in financial performance of USD1.0-1.4 billion from the previous financial year. These projections are subject to oil prices at USD70-75/barrel, the USD at INR70-72, and airlines maintaining pricing discipline.
  • Air India could break even at a net level for the first time in over a decade. The favourable market conditions represent a unique opportunity for a structural re-set of the national carrier, which Air India must take advantage. The domestic market will remain competitive, however the international sector has the potential to be very positive.
  • The three leading Indian LCCs – IndiGo, SpiceJet and GoAir – are each expected to report record profitability in FY2020. IndiGo alone could be on track to report a profit of USD 400-500 million. Meanwhile the combined fleet size of Indian LCCs is expected to cross 500 aircraft this year.
  • Inclusion of ATF under GST could deliver further significant upside to Indian carriers: This fiscal reform alone would reduce airline operating costs by up to 10%, potentially converting some carriers into investment grade opportunities.
  • Domestic traffic growth will be muted, with full-year traffic growth expected to be below 5% year-on-year. This will largely be as a result of growth picking up from Q3, with traffic expanding by 5-8% in the second half. The high double-digit growth rates observed during the last five years are unlikely to return for the foreseeable future.
  • International traffic is likely to be flat at best, and could show a slight decline of up to 5%. Growth is expected to resume from FY2021.
  • The initial international expansion by LCCs will be on routes of up to 5-6 hours, within the non-stop range of re-engined narrow bodies. However, 1-stop narrow body services to Europe (via Central Asia) are expected to launch shortly, and long haul non-stop services on wide bodies will follow, possibly before the end of FY2020, or in FY2021.
  • SpiceJet is strengthening and emerging as the clear no. 2 airline in the market. Within 12 months its domestic market share could approach 25%, a size that accords it strategic importance in the sector. This is a tremendous achievement for an airline that was within hours of closure less than five years ago.
  • India needs to take a fresh long-term look at its bilateral policy: With capacity tightening in light of Jet’s exit, India needs to set a new direction on bilaterals to ensure that its economic, trade and tourism interests are not compromised. The policy should not wait for Indian carriers to achieve a certain scale if delaying liberalisation is not aligned with national interests.
  • At the same time, market access should be balanced and dispersed across all regions. India should avoid becoming dependent on Gulf carriers, given that the region is facing its own economic and geopolitical challenges.

Airways Opportunities and risks for Indian airline system
  • Industry impact: Within less than 3 months from the time that Jet’s financial challenges started to impact its operations, the airline suspended operations. And with that decision, the Indian airline system saw the exit of 120 aircraft that carried close to 30 million annual passengers, generating more than USD3.5 billion in revenue.
  • Strategic impact: This is the second major Indian airline to shutdown in less than a decade, after Kingfisher closed in 2012. At their respective peaks, the two carriers represented a combined 200 aircraft. This highlights the strategic and systemic risks that exist in the Indian airline sector, and should be a wake-up call to the industry.
  • Financial impact: Jet Airways leaves a trail of around USD2.5- 3.0 billion in liabilities, consisting of bank debt, unpaid vendors, overdue salaries and advance sales to passengers. Combined with Kingfisher, the two carriers had a direct cost to the system of close to USD5 billion.
  • Stakeholder impact: The entire minority shareholders have seen the value of their holdings wiped out, and 20,000 staff is without employment.
Three critical challenges at the start of the year: 1) pilot shortages 2) slot constraints and 3) over-capacity in the domestic market

CAPA has revised its FY2020 profitability outlook from a consolidated loss of USD550-700 million to a profit of USD500-700 million
  • India’s leading airlines are expected to report record profits, while Air India could break-even at a net level.
  • LCCs are likely to report a combined profit of USD500-700 million, of which IndiGo alone could account for USD400-500 million.
  • Both SpiceJet and GoAir are expected to report record profitability.
  • AirAsia India and Vistara could be close to break- even for the first time since they launched. For their long-term strategic plans it is important that they achieve this milestone.
  • Air India could break-even (or have a small loss) at a nett level for the first time in well over a decade.
  • The above projections assume oil at USD70-75/ barrel and the US Dollar at INR 70-72, and are subject to airlines maintaining pricing discipline. It is uncertain whether this latter point will be adhered to, since it is already noticeable that the positive impact of Jet’s exit on yields is diminishing. It will be important to observe how yields perform in Q2.

India’s airlines are expected to induct 134-151 aircraft in FY2020,of which 40-55 will be former Jet Airways aircraft
SpiceJet could take 30-40 Jet Airways aircraft, while Vistara is expected to induct 10-15 aircraft. Between them, these two carriers may entirely replace Jet’s domestic capacity. AirAsia India is expected to accelerate its expansion and add 10-11 more A320s this year than originally planned.

Overall domestic traffic growth could moderate to less than 5% in FY2020, although it is likely to reach 5-8% in the second half of the year
Domestic traffic: In Feb-2019 CAPA projected that domestic traffic would grow by 14-16% in FY2020. As Jet’s operations came under stress this was reduced to 10%. However, with the suspension of operations, the projection has been further revised to less than 5%.

  • This growth is subject to SpiceJet and Vistara inducting close to 50 of Jet Airways’ aircraft, and AirAsia expanding by 11 aircraft more than its original plan.
  • Growth will be most severely impacted in the first half of the year with some acceleration expected from Q3 onwards.
  • International traffic: Growth is expected to be flat or slightly negative. This is despite the fact that, Indian carriers will add significant capacity on international routes, and foreign carriers such as Virgin Atlantic, Delta, Air France, KLM and United have announced plans to up-gauge equipment or launch new services. At best, traffic could be flat in FY2020. Westbound routes in particular, to Europe, the Middle East and North America will experience severe capacity constraints.
  • These projections would be subject to revision should Jet Airways be revived, but this appears very remote at this stage.

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