South Asia Aviation Outlook 2018
India expected to remain the fastest growing major aviation market in the world
IN FY2017/2018, INDIA CONTINUED its run as the fastest growing major aviation market in the world. Domestic traffic for the 12 months ended 31-Mar-2018 is expected to be up 18% year-on-year to more than 120 million passengers.
This represents domestic traffic growth of close to 75% in just three years. The result could have been higher still, were it not for the grounding and delayed induction of IndiGo and GoAir aircraft earlier in the year, due to issues with the geared turbofan engines on A320neo equipment. LCC domestic market share stands at approximately 66% and is expected to approach 70% within the next few months.
International traffic is on track to increase more than 10% in FY2017/18 to approximately 65 million passengers. CAPA estimates that the natural growth rate of the market is in the range of 12% to 15% and is being constrained by bilateral restrictions. Several of the largest foreign carriers operating to India - including Emirates, Qatar Airways, Singapore Airlines and Malaysia Airlines - have exhausted their seat entitlements, especially to the metro cities, and are unable to expand capacity. Many carriers are achieving year round average load factors of 85% to 90%, suggesting that traffic is being displaced during peak periods.
- India remains the fastest growing major aviation market in the world, with domestic traffic expected to increase by 18% in FY2017/2018.
- Low-cost carriers (LCCs) dominate the domestic market, with a market share of approximately 66% and expected to reach 70% in the near future.
- International traffic is projected to grow by more than 10% in FY2017/2018, but is constrained by bilateral restrictions and seat entitlements.
- Indian airlines are estimated to post a consolidated net loss of USD350 million to USD375 million in FY2017/2018, with LCCs being profitable and full-service carriers (FSCs) incurring losses.
- Fleet expansion plans are underway, with several airlines placing orders for narrowbodies and considering widebody aircraft to support international expansion.
- Metro cities in India are best positioned to handle the increased capacity, but slot constraints may impact domestic networks and schedules.
CAPA estimates that India's airlines will post a consolidated net loss of USD350 million to USD375 million in FY2017/18. This includes an estimated USD62 million to USD78 million of compensation received by LCCs from engine manufacturers due to aircraft delays and groundings. All Indian LCCs, except AirAsia India, are profitable, and are expected to report a combined profit of USD450 million to USD500 million. In contrast, FSCs are projected to lose USD825 million to USD850 million, although most of this is accounted for by Air India. Vistara is also loss making, while Jet Airways will either report a modest profit or be closer to break even.
Fleet expansion plans started off strong in 2017 with SpiceJet's order for 105 Boeing 737 MAX aircraft and 50 options. As the year progressed a key feature was the level of activity related to regional equipment, with IndiGo placing an order for 50 ATR 72s, while SpiceJet ordered 25 Bombardier Q400s, with options for a further 25 aircraft. However, regional airline Air Costa, which had an order for 50 Embraer aircraft, suspended operations in 1Q2017.
In 2018 Jet Airways is expected to place an additional order for 75 narrowbodies and to make a decision on its wide body plans, including the 10 787s on order that it has repeatedly deferred. Vistara will likely order 50 narrowbodies, together with a modest initial order for less than 10 widebodies, which may increase later. IndiGo and SpiceJet could place orders to support international expansion, including widebodies, and we do not rule out the possibility of a turboprop order by GoAir. Air India's fleet plans are currently on hold pending its proposed privatisation.
India's airlines are expected to induct an unprecedented 124-130 aircraft in FY2018/2019, with IndiGo accounting for close to half of this number. However, there may be some delays and deferrals due to engine-related issues. These estimates exclude equipment operated by small regional carriers.
Metro cities are best-placed in terms of demand, to absorb the sheer volume of capacity scheduled to come into the market. However, slot constraints are emerging at some metro airports, particularly during peak hours, which may start to impact airline domestic networks and schedules.
India domestic airline traffic FY2009-FY2019F
Indian airline aircraft in service and on order as at 31-Jan-2018
Meanwhile, incumbent airlines including IndiGo, SpiceJet, Jet Airways and Air India, are showing more interest in taking advantage of the concessions available under the Regional Connectivity Scheme (UDAN) to operate services to smaller towns and cities. However, the viability of undercapitalised, independent regional operators remains a concern.
With the capacity of most foreign carriers constrained, Indian airlines have an opportunity to expand their international footprint and several of them are likely to do so. Indian LCCs are expected to deploy 25 narrowbodies on international routes in FY2018/2019. The induction of re-engined equipment, which extends the ideal operating range of narrow bodies from four hours to six hours, introduces a number of new route opportunities from India, particularly in Southeast Asia and mainland China.
Comparison of four hour and six hour narrow body aircraft range from Delhi
In fact, IndiGo, SpiceJet and AirAsia India are also likely to debut long haul LCC operations using widebody equipment from winter 2018/2019 or summer 2019. Jet Airways is expected to grow its widebody operations, continuing recent capacity expansion to London, Paris and Amsterdam, leveraging its strategic cooperation with Air France, KLM and Delta. Meanwhile, Air India's international expansion has stalled since its privatisation plans were announced, although the carrier is planning to launch a Delhi-Tel Aviv service in Mar-2018.
The year ahead is expected to see continued expansion, with domestic traffic expected to grow by 18% to 20%, on capacity growth of 25% in FY2018/2019. Traffic growth may be tempered to 15% if aircraft inductions are delayed due to engine-related issues. International traffic is likely to grow by 12% or more, to reach 70 million to 75 million passengers.
Industry profitability is expected to be similar to the current year, with consolidated losses of USD430 million to USD460 million. This estimate assumes that oil prices remain below USD70/barrel, and excludes compensation from engine manufacturers.
The proposed privatisation of Air India will be a highly complex transaction. However, if successful, it has the potential to make a significant and positive, strategic impact on the airline itself and the industry as a whole.
Projected Indian airline industry net profitability in FY2019
