Aviation is a critical component of the country’s transportation sector and plays a pivotal role in economic growth and employment generation. The Indian aviation sector followed a phenomenal growth trajectory over the past decade. However, in 2020, it took a massive hit owing to the Covid-19 pandemic and the subsequent lockdown, resulting in restrictions on international and domestic flights.
The outbreak of the pandemic halted air travel throughout the country. With the resumption of passenger flights, the situation has improved slightly. However, it is still very difficult to determine the outlook for the sector.
At a recent Airports in India conference organised by Indian Infrastructure, Kapil Kaul, Chief Executive Officer, CAPA India, discussed the global aviation trends over the past two years, observations for financial year 2022-23, the strategic challenges being faced by the sector and the outlook for the next fiscal. Excerpts…
Global aviation trends
The International Air Transport Association, which supports aviation with global standards for airline safety, security, efficiency and sustainability, estimates the global aviation industry to have registered losses to the tune of $190 billion in 2020–2021. Of this, approximately $138 billion was lost in 2020 and an estimated $52 billion in 2021. After significant recapitalisation by the governments, the industry reserves stand at around 55 per cent of pre-Covid-19 levels. The global recovery in air travel in 2021 was around 42 per cent of 2019 (with domestic travel recovery being much better than international travel recovery). That said, cargo revenue is at a historic high of $175 billion, $74 billion higher than the revenue of $101 billion in 2019. While global revenue passenger km reached 55 per cent of pre-Covid-19 levels in December 2021, there is a significant variation by region.
Observations for financial year 2021-22
The aviation sector witnessed stronger than expected recovery in domestic traffic in the first six months of financial year 2021-22. India registered 6.2 million international passengers in the April-September 2021 period, with daily passengers standing at 56,000 in September 2021. Meanwhile, domestic traffic stood at 29 million passengers, with 229,000 daily passengers in September 2021. There was a rapid recovery in passenger traffic after Covid-19 cases peaked during the second wave from April to June 2021. However, this was reversed by the impact of Omicron in January 2022. In December 2021, Vistara had exceeded its pre-Covid-19 domestic traffic, while IndiGo and Go First were close to full recovery. In terms of airport traffic, Cochin airport witnessed the strongest recovery followed by Delhi airport.
With regard to the performance of airlines, the loss before tax reported by IndiGo for the April-September 2021 period stood at Rs 46.1 billion (against the CAPA India forecast of Rs 70.7 billion for 2021-22) while that for SpiceJet stood at Rs 12.9 billion (against the CAPA India forecast of Rs 24.5 billion). The fleet size of Indian airlines largely remained at 700 during the first half of financial year 2021-22. In September 2021, 887 aircraft were ordered including five wide-body aircraft from Vistara. Further, IndiGo has placed an order for 556 narrow-body aircraft, SpiceJet for 186, Go First for 94 and Vistara for 29.
According to CAPA India’s analysis, the sector is expected to witness a change in the top management of nearly all airlines and a competition for human resources. With Tata’s acquisition of Air India and entry of two new players, the sector will see a fight for skilled workforce at all levels. IndiGo is likely to face the most significant impact. Some airlines may find it difficult to rehire staff. This challenge is already apparent and is likely to continue. The aviation industry will also witness a shortage of 50-70 senior/upper middle managers across the sector. It is expected that there will be a renewal of senior executives/leadership across airlines. A new management order is likely post-Covid-19. Some carriers may need to strengthen their management teams across functions while others may need to replace existing staff.
Akasa Air, which will commence operations by the end of July 2022, is likely to have a similar impact on other low-cost carriers as Kingfisher had on traditional full-service carriers in 2005. It is not certain yet whether disruption will be felt in 2023-24. However, once Akasa Air scales up and achieves a competitive cost base, the impact will be seen from 2025 onwards. Meanwhile, once restrictions of Covid-19 are lifted, and the environment becomes more competitive, consolidation risks may also increase.
Outlook for financial year 2022-23
Domestic traffic is expected to reach 130-140 million passengers, perhaps remaining slightly lower than the FY2020 levels. Meanwhile, international traffic is expected to reach 55-60 million passengers, around 20 per cent lower than pre-Covid level.
It is important to note that risks related to the resurgence of cases amidst Covid-19, fuel prices, the Russia-Ukraine conflict and other geopolitical events as well as the possibility of recessionary economic conditions globally remain key challenges to the recovery of the sector. Another strategic challenge that will plague the sector in 2022-23 is fundraising. Owing to this, some carriers may need to consider alliances or mergers to remain in the market.
Till fare caps and floors on domestic services are removed, the yields are expected to remain soft. In 2022-23, the cost headwinds related to fuel prices and currency depreciation may be compounded by yield pressures due to the relatively slow recovery of business travel. Therefore, 2022-23 is likely to be yet another year of losses at this stage. Even if conditions improve, the last two years’ losses will weigh heavily on the industry. Structural risks in the sector may become more evident than in the previous couple of years.
Air India is likely to launch strong domestic low-cost carriers, making the company more competitive in the market. New entrants, including Jet Airways, without the burden of legacy issues, may pose a serious challenge to weaker carriers. Going forward, over the next two to three years, the privatisation of brownfield airports and increased investment in greenfield airports will be core features of the sector.