Aviation industry in India set to take off with new foreign investment policy

Over the last ten years, the Indian aviation industry witnessed a period of high growth, with total passenger traffic growing at a CAGR of around 18% during 2003-11. The industry has also helped in stimulating other sectors of economy such as tourism, hospitality and trade. However, over the last 18 months, the industry went through a period of subdued growth, particularly in domestic passenger traffic.

FY13 was a good year in terms of international passenger traffic growth for scheduled Indian carriers. The industry was also able to bring down its losses by a great extent. Yet, all scheduled Indian air carriers except IndiGo, incurred losses in the year. High airport charges, deprecation of the Indian rupee, expensive aircraft turbine fuel and low air fares were the major challenges faced by the carriers in FY13. The year also saw discontinuation of services of Kingfisher Airlines as a result of severe financial crisis. Much awaited FDI policy allowing investment by foreign airlines in the sector was also cleared in September 2012.

Low cost carriers gained significant market share during the first five months of 2013. IndiGo became the largest carrier upstaging Jet Airways in the domestic market. In terms of operating performance, IndiGo emerged as the best carrier on many parameters.

Despite the challenges, the rising middle class and consistent growth in tourism bodes well for the aviation sector. Depreciation of rupee, rise in fuel prices and highly leveraged balance sheets are the biggest challenges for the sector.

Salient Points

• In the first five months of 2013, domestic passenger traffic of scheduled Indian carriers grew by 0.8% y/y. International passenger traffic, meanwhile, declined by 9% y/y in the first four months of 2013.
• In the first four months of 2013, domestic cargo carried by Indian carriers grew by 1.1% y/y while      international cargo contracted by 4.3% y/y.
• The utilization of available capacity for scheduled domestic carriers was around 78% for the first five      months of 2013. IndiGo recorded the highest passenger load factor, followed by GoAir.
• At the end of May 2013, IndiGo became the largest domestic carrier with a market share of 29.5%, rising from 26%      share in June 2012. Jet Airways’ (combined with JetLite) share declined      from 27.4% to 22.5% but was able to hold on to its second spot. SpiceJet held to its third position on the list with a market      share of 19.8%.

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Most Indian air carriers operating at a loss

India’s GDP grew by 5.3% in the fourth quarter of fiscal year 2012, recording its worst performance in the last nine years. This slowdown in growth was primarily a result of high inflation, high interest rates and policy paralysis. Indian aviation industry had a good year in terms of passenger traffic growth but one of its worst in terms of profitability.

All scheduled Indian air carriers except IndiGo, incurred losses in the year. Kingfisher Airlines and Air India suffered from several payment defaults and pilot strikes. Their flight schedules were disturbed many times during the year.

The total loss for all the airlines during the period 2008-11 was around USD 4 billion and for FY12 was approximately USD 2 billion according to the Ministry of Civil Aviation. High airport charges, depreciation of Indian rupee, expensive aircraft turbine fuel and low air fares were the main reasons cited by the companies for their successive losses. According to the Center for Asia Pacific Aviation (CAPA) the combined debt of Indian airline companies was around USD 15 Billion as of March 2012.

All was not bad as Indian aviation witnessed growth, both in domestic as well as international passenger traffic in first six months of calendar year 2012. Domestic passenger traffic grew by 11% in calendar year 2011 and by 4% in first six months of calendar year 2012. International passenger traffic registered 8% growth in first six months of calendar year 2012 after contracting by 19% in calendar year 2011. The working group on civil aviation for 12^th Five Year Plan expects the international passenger traffic to touch 60 million and domestic passenger traffic to touch 209 million by year 2016.

Low cost carriers gained significant market share during the first six months of year 2012. IndiGo became the second largest carrier in the domestic market with a share of 26% while SpiceJet became third with a share of 18.6%. Together, the low cost carriers held a market share of more than 58%. Kingfisher saw substantive erosion in its market share and slipped to the sixth position, below GoAir. In terms of operating performance, IndiGo emerged as the best carrier on many parameters. It held the best position in terms of on time performance, employee to aircraft ratio, flight cancellation data and passenger load factor. IndiGo was also the only carrier which made profits in the fiscal year 2012 according to Ministry of Civil Aviation.

Chart: Market Share of Scheduled Domestic Airlines (June 2012)

Source: DGCA

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