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Tuesday, January 17, 2012, 14:00 Hrs  [IST]

Robust growth in Indian domestic aviation market fails to translate into profits: CAPA

India’s domestic aviation market has grown exponentially in the last 5 years with a growth of 85% since November 2006. However, this growth has rarely translated into profits for aviation players owing to high fuel costs, taxes and poor infrastructure. TravelBiz Monitor presents an analysis on this phenomenon by CAPA

India’s domestic aviation traffic posted double digit growth of 11.1% in November 2011 to reach 5.4 million passengers for the month. Although growth has slowed from the 17-22% rates seen since June 2011, India remains one of the fastest growing domestic markets in the world, with growth expected to continue despite the current financial challenges experienced by key players in the Indian aviation market.

In the first 11 months of 2011, domestic passenger numbers increased 17.6% to 55 million passengers, averaging out at five million passengers per month. India’s domestic market has seen passenger growth now for 30 consecutive months, with 15 consecutive months of double-digit growth. Domestic traffic has increased by 85% in the past five years since November 2006, with domestic traffic now 41% above November 2007 levels, 80% above November 2008 levels and 32% above November 2009 levels.

Indian carriers domestic passenger numbers and passenger number growth: Nov-2009 to Nov-2011

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Source: CAPA – Centre for Aviation & Indian DGCA

Indian carriers domestic passenger numbers and passenger number growth (trend line in green): Jan-2006 to Nov-2011

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Source: CAPA – Centre for Aviation & Indian Ministry of Civil Aviation

Robust growth fails to translate into profits
However, growth has failed to translate into profits for India’s airline industry, where all the major carriers except IndiGo are believed to be loss-making, as a result of the impact of high jet fuel costs and an inability to raise fares in a competitive market. CAPA estimates Indian carriers combined will lose USD 2.5 billion in the 12 months ending March 21, 2012. This is on total revenues of just under USD 10 billion – a worse result than even FY 2008/09, when traffic was declining and fuel prices spiked at USD 150/barrel. In the domestic market, India’s airlines lose USD 25-30 every time a passenger boards an aircraft.

The nation’s airlines and associations, as well as IATA, have warned that infrastructure and taxation represent key challenges for the industry. Other concerns impacting airlines in the market include a highly competitive domestic market characterised by aggressive and, at times, predatory pricing, which has resulted in an unsustainable yield-cost imbalance. High fuel costs and rising debt levels are also having a negative impact on margins. Meanwhile, a depreciating rupee is leading to increased payments for fuel and aircraft rentals.

DS Rawat, Secretary General, Associated Chambers of Commerce and Industry of India (Assocham), at the end of December 2011, stated changes are required to improve the profitability and functions of the civil aviation sector in India, with the association preparing an eight-point strategy for the Indian aviation sector. Assocham has suggested “opening foreign direct investment [FDI] by international airlines to bring in capital and technological expertise, allowing easier access to global routes by Indian carriers for increasing their yields (and) enhancing air traffic management infrastructure”. The association also suggested a lowering of sales tax on jet fuel, upgrades to airport infrastructure, the development of an infrastructure fund to construct airports in Tier-II/Tier-III cities and improved access to global routes.

IndiGo and Jet Airways the largest standalone carriers in November 2011 while Kingfisher slips to fifth
While IndiGo and Jet Airways were the largest carriers in the domestic market in November 2011, Kingfisher Airlines fell to fifth place in domestic market share during the month, from third in October 2011. The airline, which was already trailing behind Jet Airways and IndiGo, lost market share to Air India and SpiceJet in November 2011, with Kingfisher Airlines passenger numbers declining to a three-year low of 760,000. The carrier, which was until the end of September 2011 the second largest carrier in the domestic market, is now the second smallest, behind only GoAir. The decline occurred after the cash-strapped carrier grounded aircraft and cut routes, resulting in significant capacity reductions in the month. With continued service cancellations, Kingfisher will likely continue to see passenger number and market share losses in the coming months.  

Jet Airways, including its unit JetLite, had the largest market share of 27.1% in November 2011. Jet Airways is the largest beneficiary of the developments at Kingfisher Airlines, as it has also been able to increase its corporate travel market share. Most carriers saw double-digit yield growth in November 2011, with Air India reporting 10% yield growth and a 12.3% increase in passenger revenue in the month.

India domestic market share by carrier: Nov-2011

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Source: CAPA – Centre for Aviation & Indian Ministry of Civil Aviation
NB: Jet Airways and JetLite combined share is 27.1%

Up until recently, IndiGo and Kingfisher had been almost neck-to-neck in the market share race, both holding around an 18% market share. However, with IndiGo adding capacity and operating with high load factors, it has now surpassed Kingfisher. Kingfisher is unlikely to recover lost ground in coming months as cancellations at the loss-making carrier continue over the next few months. Kingfisher will ground its A320 aircraft on a rolling basis for cabin re-configuration after it decided close down Kingfisher Red. The carrier has also cancelled some unprofitable routes due to heavy losses and large debt levels

Indian domestic passenger traffic: Nov-2011

 
Traffic  (000s) 
Year-on-year change
Load factor (%)
Marketshare (%)
Indigo
1072.0
+27.2%
88.7%
19.8%
Jet Airways
1072.0
+14.8%
76%
19.8%
Air India
942.0
+12.7%
76%
17.4%
SpiceJet
839.2
+29.1%
76.9%
15.5%
Kingfisher
758.0
-18.7%
79.6%
14%
JetLite
395.2
+15.2%
79.7%
7.3%
GoAir
335.7
0%
79%
6.2%
Total
5414
+11%
-
100%

Source: CAPA – Centre for Aviation & Indian DGCA

LCC penetration doubles in past five years to 48% of the market
The most dramatic passenger growth in November 2011 was, as is generally the case, witnessed by the LCCs, driven by SpiceJet and IndiGo with surging growth of around 39% and 27%, respectively, based on CAPA calculations. JetLite also reported double-digit passenger growth of above 15% in the month.  LCCs held 48.8% of the domestic market in November 2011, based on CAPA estimates, up from 44.5% in November 2010. LCC penetration has doubled over the past five years, with LCCs commanding 24.1% of the domestic market in Nov-2006. Domestic LCC penetration in India is significantly higher than worldwide levels and LCC penetration in most Southeast/North Asian countries, with the exception of a few markets such as Australia, Malaysia and Philippines.

India domestic LCC market share: Jan-2006 to Nov-2011


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Source: CAPA – Centre for Aviation & Indian DGCA

Load factors increase in Nov-2011
November 2011 witnessed a continued increase in seat factor as compared to October 2011 levels despite the Kingfisher effect and due to the ongoing peak season. IndiGo, in addition to being one of the largest and fastest growing domestic carriers, reported the highest domestic load factor in November 2011 at 88.7%, to be the only carrier with load factors of above 80% in the domestic market in the month. All carriers reported load factors of above 75% in the month.

OTP rate of 85.1% in Nov-2011
The Indian Ministry of Civil Aviation also separately reported an on-time performance (OTP) rate of 85.1% for domestic scheduled carriers in Nov-2011. Kingfisher Airlines reported the best OTP rate of 91.9%, with Jet Airways reporting OTP rates of 90% or above. Air India again had the worse OTP rate at 65.6%.

Indian carriers’ seat factor: Nov-2010 vs Nov-2011

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Source: Indian Ministry of Civil Aviation

Indian carriers’ seat factor: Nov-2011

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Source: CAPA – Centre for Aviation & Indian DGCA

India domestic on-time performance rate: Nov-2011

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Source: Indian Ministry of Civil Aviation

Reasons for delays in Nov-2011

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Source: Indian Ministry of Civil Aviation

India’s domestic aviation market expansion has been the strongest in the world, tripling in the past five years, according to IATA, to become the ninth largest aviation market in the world. Given the strong market fundamentals, the robust rate of growth is expected to continue with the Indian Ministry of Civil Aviation’s Vision 2020 statement envisaging a compound annual growth rate of around 15% in the next five years. However, growth is not without its pains, with CAPA noting that Indian aviation enters 2012 facing its most critical challenges since the advent of the 2004 industry reforms. The key challenge going forward, amid an environment of slowing GDP growth, will be to ensure yields and profitability are maintained. At the same time, the nation’s full service carriers continue to suffer under the burden of approximately USD 16 billion in debt, ensuring financial recovery will be slow in India’s aviation market.
 
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