The Indian airline industry has grown significantly over the years. Lower ticket prices, a pick-up in air traffic, the release of the National Civil Aviation Policy (NCAP), 2016, a relaxation in aircraft import norms and the foreign direct investment limit in domestic airlines, and the listing of InterGlobe Aviation Limited were the highlights of the past 18 months.
Market share
The present industry structure is marked by a dominance of low-cost carriers (LCCs) such as IndiGo, SpiceJet and GoAir. Their success has also attracted foreign players such as AirAsia in the LCC segment. With regard to market share, LCCs continue to dominate. In 2016 (till July), their share is about 60 per cent, led by IndiGo, which continues to be the market leader.
While the Indian airline industry has grown significantly over the years, the contribution of domestic players in catering to international passenger traffic has remained stagnant at 35-38 per cent. This has mainly been an outcome of the 5/20 rule. As such restrictions are not imposed on foreign airlines, their Indian counterparts are at a huge disadvantage. However, under the NCAP, 2016 this rule has been replaced with the 0/20 rule.
Fleet size
The majority of the capital expenditure of an airline pertains to fleet acquisition. While some players go in for fresh purchases, sale and leaseback mechanisms have also become quite common. The aviation sector’s total fleet deployment grew from 355 in 2012 to 413 in 2016 (as of June). Jet Airways, Air India and IndiGo are the major fleet holders, accounting for over 75 per cent of the total fleet count.
Launch of new airlines
During calendar year 2015, four new airlines joined the Indian aviation market. These were Vistara, a full-service carrier and Air Pegasus, TruJet and Air Carnival, all regional players.
Vistara commenced operations in January 2015 with its inaugural flight between Mumbai and Delhi. With plans to expand its fleet size by 2018, the airline is looking at increasing its capacity by 50 per cent. It plans to add Kolkata, Chennai and some Tier II cities to its network by the close of 2016-17.
Air Pegasus started commercial operations in April 2015 and serves a number of destinations – Bengaluru, Hubli, Trivandrum, Madurai and Kadapa. However, in July 2016, the
airline cancelled scheduled operations on account of acute cash problems and non-payment to lessors and maintenance providers. As of August 2016, the airline is in discussions with a private equity fund and a Southeast Asian airline to dilute up to 30 per cent stake to raise money and resume operations.
TruJet launched commercial operations in July 2015. With a fleet of three ATR72 aircraft, the airline operates flights to 10 airports. It is looking to get support/subsidy (extended by some state governments) to connect new destinations, such as the one provided for connecting Puducherry.
The Directorate General of Civil Aviation (DGCA) sanctioned an air operator permit to Coimbatore-based Air Carnival, making it the fourth regional airline in the country. The airline started operations in July 2016 on four routes – Coimbatore-Chennai, Chennai-Madurai, Madurai-Chennai and Chennai-Coimbatore – and has plans to expand operations to Tirupati, Hubli, Visakhapatnam, Rajahmundry and Mangaluru.
Financial performance
Most of the airlines in the country continue to be in the red. This can be attributed to the high cost structure and limited room for increasing fares (and thus revenues) owing to fierce competition. Over the past 16-18 months, falling crude prices have resulted in the lowering of aviation turbine fuel (ATF) prices. ATF costs account for about 40 per cent of the total costs of an airline. However, higher taxes and the weaker rupee are dampening some of the gains. IndiGo and GoAir remain the only profitable airline businesses in the country. The national carrier, Air India, incurs the highest losses, followed by Jet Airways and SpiceJet.
Impact of NCAP, 2016
The launch of the long-awaited NCAP, 2016 has been a landmark move for the civil aviation sector. The 5/20 rule has been amended yet not scrapped completely. Under the new 0/20 rule, all airlines can commence international operations provided they deploy 20 aircraft or 20 per cent of total capacity (in term of average number of seats on all departures put together), whichever is higher for domestic operations. The rule is being seen as “playing safe” by sector experts, who remain sceptical that it may not have the intended effect on the sector.
The NCAP, 2016 suggests moving away from the “single till” method of determining airport tariffs and the adoption of the “hybrid till” method. This, in turn, is expected to render air travel more expensive for the domestic passenger segment, which is highly price sensitive.
Airlines will be free to enter into code sharing agreements with foreign carriers for any destination within India on a reciprocal basis. Code-sharing will help Indian airlines fill their seats with foreign travellers, thereby improving their occupancy.
Key recent developments
- In March 2016, IndiGo received the first A320 Neo aircraft, after a delay of three months. In August 2015, IndiGo had firmed up an order to purchase 250 narrow-body A320 Neo planes, the single largest order placed by any airline in terms of number of aircraft. The order is worth over $26.5 billion.
- In January 2016, Air India invited bids for inducting up to 15 A320 aircraft on dry lease. The delivery of these aircraft is expected by end-2017. The aircraft will be leased for a period of up to 12 years and may include both new as well as old planes (though not older than six years).
- The government announced that Air India could be expected to post an operating profit of Rs 80 million during 2015-16. This would also be the first time since the merger of Air India and Indian Airlines that the national carrier would be reporting an operating profit.
- In December 2015, Air Costa received a no-objection certificate from the Ministry of Civil Aviation to carry out pan-Indian operations. However, the airline is awaiting the DGCA’s approval for the same.
- In October 2015, IndiGo launched an initial public offering (IPO) to raise over Rs 30 billion. The issue was oversubscribed more than six times. The price band for the offer had been fixed at Rs 700-Rs 765 per share.
- Following IndiGo, GoAir announced plans to launch a Rs 10 billion IPO in 2016-17, post clarity on the delivery of its new Airbus aircraft. In February 2016, the airline appointed Goldman Sachs, Bank of America Merrill Lynch and Kotak Mahindra Bank for managing the proposed IPO.
- Equity shareholders of Jet Airways approved the merger of the airline with its wholly owned subsidiary JetLite. Post amalgamation, the existing equity shares of Jet Airways and its nominees in JetLite will stand cancelled without any financial consideration and JetLite will stand dissolved without winding up. Further, JetLite’s flying permit will be retained and the airline will be operated as a separate division of Jet Airways.
Outlook
According to CAPA, airlines in India are likely to face headwinds in profitability in 2016-17 in the face of rising risks from increasing capacity and pricing pressure due to increased competition. Though the airlines will be largely profitable, the pressure on yields is expected to be over 5 per cent in 2016-17.
The creation of efficient and cost-effective hubs is important to enhance the viability of future operations of airlines. In this regard, the government is already taking steps, such as Guwahati being developed as an intra-regional hub for the Northeast. In the time to come, the tweaking of the route dispersal guidelines and the Regional Connectivity Scheme to link these hubs may pay off. Overall, a calibrated approach is imperative.
The NCAP, 2016, although still being debated on certain aspects, is nonetheless being seen as progressive by the aviation industry in general. Overall, the outlook for the sector remains positive, mostly backed by buoyant traffic projections. India is expected to become the third largest aviation market in the world before 2025.
