India has the fastest growing domestic airline industry in the world with players beefing up domestic operations and expanding fleet size in order to cater to the rising demand for air travel. However, the sector is facing challenging times – oil prices are increasing, airlines are suffering huge losses, and the proposed stake sale of Air India has not seen the light of day (as the debt-laden national carrier failed to attract any bidder). In this scenario, airlines are making significant efforts to stay afloat. The industry is marked by stiff competition as airlines offer discounts to the masses to increase their market share.
IndiGo continues to dominate the market with a share of 42 per cent in July 2018, primarily driven by rapid capacity addition and healthy passenger load factors (PLFs) on the back of superior on-time performance. It was followed by Jet Airways at 13.6 per cent, Air India at 12.4 per cent, SpiceJet at 12.3 per cent and GoAir at 8.9 per cent. The share of new airlines, AirAsia India and Vistara, is also quite notable at 4.8 per cent and 3.9 per cent respectively.
Most of the capital expenditure of an airline pertains to fleet acquisition. While some players go for fresh purchases, sale and leaseback mechanisms have also become quite common. The country’s aviation industry’s total fleet deployment grew from 355 in 2012 to over 570 in 2018 (as of March). Jet Airways, Air India and IndiGo are the major fleet holders, accounting for around 75 per cent of the total fleet count.
Aircraft induction continues at an unprecedented rate. Over the remaining seven months of this financial year, 55-60 narrow-body aircraft are scheduled for delivery, along with 31 regional turboprops. IndiGo is leading this aggressive expansion. Meanwhile, a working group has been constituted to formulate a roadmap to develop aircraft leasing opportunities in the country, which, in turn, will propel the aircraft induction drive.
Domestic passenger movement is skewed in favour of private carriers, and there has been a consistent decline in Air India’s share in the past few years. In 2017 (January-December 2017), the cumulative share of domestic private carriers in domestic passenger movement stood at about 86.7 per cent, significantly outweighing the share of Air India, which stood at around 13.3 per cent. In terms of international passenger traffic, Jet Airways is the front runner. The airline accounted for more than 14 per cent of the market share in international operations in 2015-16 and 2016-1, followed by Air India.
In terms of PLF, a measure of capacity utilisation of airlines, for scheduled domestic operations, SpiceJet registered the highest PLF of 95
per cent in March 2018, followed by IndiGo (89 per cent), Vistara (88.2 per cent), and GoAir (88 per cent). SpiceJet topped the list in terms of scheduled international operations with a PLF of 95 per cent, followed by IndiGo at 89 per cent, Vistara at 88.2 per cent and GoAir at 88 per cent.
In terms of efficiency, measured in terms of on-time performance, of key airlines, at the four metro airports of Bengaluru, Delhi, Hyderabad and Mumbai, the figure ranges from 75 to 85 per cent. In the past three years, the growth rate of revenue passenger km has surpassed that of available seat km.
On the financial front, profits of most airlines remain under pressure. Increasing oil prices, the depreciating rupee and downward pressure on yields have significantly impacted the bottom line of airlines. Amid high competition in the civil aviation market, airlines have a number of discount offers on domestic and international flight tickets, further stretching their balance sheets. Barring IndiGo, none of the airlines have the financial wherewithal to comfortably withstand the headwinds. However, IndiGo too, is feeling the heat as the airline’s first-quarter profits in 2018-19 were almost wiped out.
Jet Airways, amid financial crises, is evaluating various funding options to meet liquidity requirements on a priority basis. It has initiated a formal stake sale process to raise $350 million-$400 million from global private equity firms. It is also trying to monetise its frequent flyer programme. Besides, the airline is looking to issue new shares to raise primary equity capital to inject funds into the company.
After it failed to get any buyers for the debt-ridden national carrier, the government has shelved its plan of privatising Air India. Measures such as cutting down costs as well as monetising the airline’s assets will be adopted in order to run the airline. The Ministry of Finance has turned down the Rs 300 billion fund infusion proposal for Air India in the absence of a clear turnaround plan and has instead suggested transferring its non-core assets and subsidiaries to a special purpose vehicle. The airline has about Rs 500 billion debt, of which around Rs 220 billion has been termed as unsustainable as it cannot be serviced with the cash flow income. Therefore, its non-core assets and subsidiaries can be monetised to reduce the unsustainable portion of the company’s debt. To this end, the government is mulling a strategic sale of Air India Air Transport Service Limited, which provides ground handling services. The expression of interest (EoI) for bidders will be floated soon after the Group of Ministers clears the EoI.
- IndiGo and GoAir have grounded a total of 14 A320 neo aircraft fitted with Pratt & Whitney 1100 engines (beyond serial number 450) due to engine failures. There are around 45 A320 neo aircraft, powered by Pratt & Whitney engines, in India. Of these, 32 are with IndiGo and 13 with GoAir. Pratt & Whitney has replaced all the 14 defective engines.
- After a long delay, IndiGo and SpiceJet have finally agreed to shift some of their flight operations to Terminal 2 at the Indira Gandhi International Airport. No-frills airline GoAir had already shifted its entire operations to Terminal 2 in October 2017. With this positive development, Delhi International Airport Limited can now start expansion work at the overcrowded Terminal 1.
- Vistara and GoAir will fly internationally soon. GoAir will start international operations from October 11, 2018. The inaugural flights will operate to Phuket from New Delhi and Mumbai. The airline will also launch flights to Male in the Maldives from Mumbai and Delhi from October 14, 2018. The airline had planned to launch services on the international routes in October 2017 but had to defer the plan due to the grounding of some of the Pratt & Whitney engine-powered Airbus A320 neo aircraft owing to engine glitches. Meanwhile, Vistara has become a member of the International Air Transport Association (IATA). With this, the airline will be able to collaborate with other international member airlines for code share and interline agreements. Although the airline became technically qualified to operate international services when it inducted its 21st aircraft, it is experiencing delays in securing an international flying permit.
With airlines offering low fares, demand for travel will be stimulated. As a result, according to estimates by the Centre for Asia Pacific Aviation, domestic traffic is expected to grow by 18-20 per cent in 2018-19, and international traffic by 10-12 per cent. The Regional Connectivity Scheme is expected to provide an impetus to the sector by making air travel affordable for the masses. Further, with incumbent carriers such as Indigo, SpiceJet and Alliance Air winning significant routes, this is expected to result in more structured as well as stable operations under the scheme. Despite clear recognition of the issues facing the industry, and the very positive intent and action, this has not yet been fully reflected in the outcomes to date. However, a strong foundation has been laid, and with serious reorientation of the approach, the benefits are expected to accrue in the future.