CAPA India International Outlook 2012/13: Some surprises ahead, Jet could join Star, A380 may debut


While the Indian aviation sector has been through various ups and downs since the introduction of major reforms in 2003/04, international traffic has been the steady performer, growing at a compound annual rate of 11.8% over the last eight years. Even during the economic downturn in 2008/09, when domestic traffic registered a double-digit decline, international traffic remained in positive territory, growing at 6%.

As outlined in the first part of our India outlook series last week, FY2012/13 will be a challenging and uncertain year for India's aviation sector overall.

However, in India's international operations, which are expected to see steady growth, CAPA foresees a number of developments which could surprise and re-define the sector. Alliance relationships may be an important part of that re-definition.

  • Indian international traffic has been steadily growing at a compound annual rate of 11.8% over the last eight years, even during economic downturns.
  • FY2012/13 will be a challenging and uncertain year for India's aviation sector overall.
  • CAPA expects international traffic growth of 8-10% in FY2012/13, with short-haul international traffic growth expected to be above 10%.
  • Capacity growth is likely to be in single digits as foreign carriers have exhausted their bilateral entitlements, and the Indian government is not prepared to liberalize further until Indian carriers have utilized their entitlements.
  • Jet Airways is expected to lead long-haul expansion by Indian carriers, with plans to increase frequencies to existing destinations and evaluate new routes to Asia, Europe, the US, and the Pacific.
  • The current crisis in Indian aviation could lead to foreign airline investment and liberalization, benefiting Gulf carriers such as Emirates, Etihad, and Qatar Airways. Jet Airways is likely to become the first Indian carrier to join a global alliance, potentially Star Alliance.

Indian international traffic has blossomed since the government took a more modern approach to the industry. Thanks to the still-weak home-grown national industry, much of this growth has been on foreign airlines, but the overall economic benefits to India's economy have been marked. However, the government is now - as always - re-evaluating its approach.

CAPA India's Aviation Outlook seeks to decipher some of the intricacies of developments to come and to suggest where India's international airline industry may be headed.

Indian airports international passengers numbers: FY2004 to FY2012

The comprehensive 80+ page CAPA India Aviation Outlook 2012/13 offers the most detailed insight into the direction of the sector at this critical juncture. To order your copy, please download the order form above left, or contact Binit Somaia on bs@centreforaviation.com or +61 2 9241 3200. Special discounts are available for CAPA Members and for advance purchases.

CAPA expects international traffic growth of 8-10% in FY2012/13

International passenger traffic is projected to grow by 8-10% in FY2012/13 to reach over 44 million. However, much will depend upon developments at Air India, which has the largest share of international capacity to/from India at 14.4%. If the failure to address human resources issues leads to ongoing industrial action and even a possible temporary shutdown of the carrier, there would undoubtedly be an impact on traffic growth.

Short-haul international traffic growth - to South and Southeast Asia, as well as the Gulf and Central Asia - is expected to be above 10% as IndiGo and SpiceJet ramp up their overseas operations. GoAir has also applied for permission to launch international services, despite the fact that it has not yet met the qualification threshold of having a fleet of at least 20 aircraft (it has just 12). However, its application is likely to be approved. Meanwhile Jet Airways may also deploy its hybrid subsidiary, Jet Konnect, to develop its regional international network.

Capacity growth is likely to be in single digits as the foreign carriers that are most interested in expanding their operations - such as Emirates, Qatar Airways and Turkish Airlines - have exhausted their bilateral entitlements. The Indian Government has indicated that it is not prepared to liberalise further until such time as Indian carriers have also utilised their entitlements.

On the Indian side, the most robust international expansion will be seen by Jet Airways on long-haul routes and by IndiGo and SpiceJet on regional international sectors of up to 4-5 hours duration. The exceptions are SpiceJet's proposed services to Guangzhou and Hong Kong, which exceed 5.5 hours. In addition to allocating dedicated aircraft to international operations, the LCCs will also be able to increase the utilisation of their existing domestic aircraft by deploying them on international routes overnight.

IndiGo's expansion will focus on proven routes from Delhi, Mumbai and other metro cities to Bangkok, Dubai and Singapore. SpiceJet, on the other hand, aside from Bangkok, Hong Kong and Singapore, is evaluating lesser served destinations such as Almaty, Kabul, Hanoi and Tehran. Other destinations that could be considered include Guangzhou, Macau, Male, Tashkent and Yangon.

Indian private carriers have submitted requests with the Government to use an additional 130,000 seats per week from existing bilateral entitlements on the Indian side as outlined below:

Some of these applications have recently been granted.

Foreign carriers remain interested in the India story despite challenges

In the last few months a number of carriers have either suspended services to India (including AirAsiaX, American Airlines and Qantas) or reduced frequencies on certain routes (Air France, Austrian and Lufthansa). Jet Airways recently announced plans to suspend its Mumbai-Johannesburg service from Jun-2012. Reasons for these reductions have included insufficient traffic, poor yields and high airport charges.

Aside from AirAsiaX, these are largely carriers that face strong competition from sixth freedom Gulf and Asian carriers on routes to/from India. AirAsiaX's withdrawal was in part due to the weakness of its direct distribution strategy in the Indian market which could not support the capacity generated by 11 weekly widebody services into Kuala Lumpur.

But for every airline that has faced challenges, there are several incumbent carriers that see growth opportunities, primarily those from emerging regions such as Asia, Africa and the Middle East, with examples including:

Virgin Atlantic will benefit from the suspension of Kingfisher's Mumbai-London operation, and is planning to schedule the service so as to facilitate convenient onward connections to at least four US destinations. The airline is expected to emerge as an important player on Mumbai-UK and Mumbai-US routes.

Meanwhile Africa is a region of growing interest. Kenya Airways, which launched its second Indian destination in May-2012, has already identified Ahmedabad, Bangalore, Chennai and Hyderabad as cities that it plans to expand to over the next few years. Ethiopian Airlines has similar expansion plans and has suggested that its Addis Ababa hub could play an important role in carrying traffic between India and South America.

Several airlines that do not currently operate to India are understood to be evaluating the possibility of entering the market in the next 12-24 months. These include:

But it is carriers such as Emirates, Qatar Airways and Turkish Airlines that have the most aggressive expansion plans and are pushing for additional bilaterals as their current entitlements are exhausted. Emirates, the largest foreign carrier in India, already operates 184 weekly services to 10 cities across India, not including its low-cost subsidiary, Flydubai, but has exhausted its bilaterals. Turkish Airlines, which has daily service to Mumbai and Delhi, is seeking to increase this to double daily and wishes to operate to an additional six destinations. Singapore Airlines and Cathay Pacific are also expected to seek increased rights.

Jet Airways to lead long-haul expansion by Indian carriers

With Kingfisher's international operations suspended and Air India's long-haul services likely to be subject to ongoing industrial action, Jet Airways is expected to seize the opportunity and aggressively expand its international operations. In addition to increasing frequencies to existing destinations in the Gulf and Southeast Asia, other new routes under evaluation include:

Air India crisis may trigger liberalisation

There has been a freeze on granting new bilaterals to foreign carriers since 2008, however, the Air India crisis could turn out to be the trigger that leads to a resumption of liberalisation. This would be similar to what happened in 2004 when it became apparent that the interests of the nation were far greater than those of an individual airline. At that time the position adopted was that preventing foreign carriers from serving the market simply because Air India did not have the corresponding ability to grow inflicted a huge economic cost on the country due to missed business, trade and tourism activity.

CAPA expects that a prolonged crisis at Air India will lead to a similar conclusion and a significant opening up of India's bilateral agreements. If this occurs, it will indicate the Government has decided that protecting Air India is no longer in the national interest.

Foreign airline investment and liberalisation, the perfect storm for Gulf carriers

The current crisis in Indian aviation could create the environment in which previously difficult decisions could move ahead. If foreign airline investment of up to 49% was permitted and simultaneously bilaterals were significantly increased, Gulf carriers such as Emirates, Etihad and Qatar Airways could establish a critical advantage in the Indian market, creating a quasi-domestic market to feed their hubs.

Star Alliance likely to gain its first Indian member...Jet Airways

In Dec-2007 the board of Star Alliance invited Air India to become a member and after 3.5 years, the longest qualification process any airline had taken to prepare to join, the alliance declared the carrier had failed to meet requirements for membership. Meanwhile, Jet Airways was also invited by Star, however, the Government of India had declared that it could not proceed until Air India had been inducted. Air India's ongoing problems mean that this restriction makes even less sense than it did before and this may force the Government to rethink its position. This would pave the way for Jet Airways to become the first Indian carrier to join a global alliance. Its plans to service Frankfurt and Munich are linked to this strategic development.

If Jet Airways was to join Star Alliance, the other global alliances will have to re-evaluate their options. oneworld has a member-elect in Kingfisher but given its uncertain future (and the possibility of acquisition by an airline either from a competing alliance or opposed to alliances) this is not the ideal strategic platform in such an important market. SkyTeam is understood to have shown some interest in IndiGo, which would provide very strong and complementary domestic and regional feed, without threatening the long-haul services of the incumbent SkyTeam members. In many ways an ideal partner, but IndiGo's low-cost business and operating model might not permit the linkages and complexities that would be required to participate in a global alliance. Jet's position as the most suitable Indian partner for a global alliance provides it with a strong negotiating position with its preferred Star Alliance.

A380 may finally make its debut in India

With a view to protecting Air India, the Government has to date rejected applications by foreign carriers seeking to deploy the A380 on services to India. However, this approach becomes increasingly less tenable as the market runs short of capacity, especially at slot constrained airports such as Mumbai. The A380, starting with Emirates, may therefore finally make its scheduled debut in Indian skies this year. And as and when an Indian carrier is inducted into the Star Alliance, permission is also expected to be granted to Lufthansa and Singapore Airlines to commence A380 operations.

But airports are becoming increasingly expensive

With Delhi Airport having been given permission by the economic regulator to increase airport charges and passengers fees by 334%, and Mumbai expected to be allowed an increase of 500%, airlines will become increasingly vocal in their opposition. It is unlikely that any carrier will reduce or suspend services as a result, however, it may lead to a re-evaluation of the rate of planned expansion. European carriers, which are feeling the impact of economic weakness in their core home markets, are the most sensitive to increases in costs and the consequent impact on demand.

And the European Union ETS adds further to costs

India led a group of more than 20 countries that strongly opposed the introduction of the European Union's Emissions Trading Scheme (EU ETS). However, as of May-2012 it appears as though only the Chinese and Indian carriers are refusing to comply with the requirement to submit emissions data. The matter has grown beyond the aviation sector and has become a trade and diplomatic issue between the Government of India and the European Union.

Transparency and viability, and not protection, are in India's national interests

India will come under continued pressure from foreign airlines and their governments to increase market access, with bilaterals being linked to broader trade, commerce and strategic geo-political issues.

At present, India does not have a clear strategy with respect to bilaterals. They are national assets and should be handled in a manner that maximises India's economic and strategic interests. Protecting Indian carriers may not necessarily be the best outcome. The Government should conduct an assessment of the ability of all Indian carriers to expand over the next five years bearing in mind their financial situation, and compare this with the capacity requirements of the economy. Foreign carriers should be permitted to expand to provide the balance. Bilateral access in the case of markets which are dominated by sixth freedom traffic could be tied to airline allocating budgets to promote India as a tourist destination.

Meanwhile, using Air India as a smokescreen to close bilaterals, stop Jet Airways from joining Star Alliance and prevent foreign carriers from deploying A380s on Indian routes is not in the national interest. The focus should instead be on making Indian carriers, especially Air India, competitive and viable. CAPA therefore calls for an open and transparent policy for international operations.

The full 80+ page CAPA India Aviation Outlook 2012/13 offers the most detailed insight into the direction of the sector at this critical juncture. To order your copy, please download the order form above left, or contact Binit Somaia on bs@centreforaviation.com or +61 2 9241 3200. Special discounts are available for CAPA Members and for advance purchases.

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