India’s aviation: new leadership holds the promise of positive change, but there is much to do
A new government in New Delhi since May-2014 has brought heightened expectations of faster GDP growth, industry reforms and enhanced transparency. But with an entirely new team leading the Ministry and most of the government agencies involved in aviation, there is a lack of experience at the top. It will therefore take some time for the key decision-makers to grasp the complexity of the situation.
A clear roadmap is yet to emerge on the Indian government's proposed institutional framework, a strategy for Air India and the Airports Authority of India, and the intended policy settings on critical issues such as bilaterals, economic regulation and route dispersal guidelines. However, indications are that the government will push ahead and abolish the five year/20 aircraft threshold for international operations, airport privatisation, construction of low-cost airports and corporatisation of air navigation services.
The Aviation Minister has also been encouraging state governments to reduce the onerous sales tax on aviation turbine fuel which currently averages 24%. This would be the single greatest benefit that the government could deliver to the industry.
- Lack of experience at the top of the Indian aviation industry due to a new government in power.
- Unclear roadmap for the government's proposed institutional framework, strategy for Air India, and policy settings on critical issues.
- India's aviation safety oversight requires attention to restore its Category I status.
- Domestic traffic is growing at single-digit rates, while international traffic is more robust.
- Low-cost carriers dominate the domestic market, while full-service carriers struggle to cover higher costs.
- Indian airlines posted significant losses in FY2014, with only IndiGo being profitable.
This report first appeared in CAPA's Airline Leader journal, Issue #25. See Airline Leader
India's aviation safety oversight will also require attention
India's downgrade to Category II by the FAA in Jan-2014, because of a shortage of safety inspectors, was a major embarrassment for Indian aviation. With a new Director General in place at the Directorate General of Civil Aviation, the regulator is beginning to adopt a more stringent approach to safety oversight and steps have been taken to address the shortage of inspectors.
As a result India is expected to restore its Category I status by or before the end of the financial year (31-Mar-2014), although this will likely come with some conditions attached and increased scrutiny.
Domestic traffic continues to grow at single-digit rates, although the international market is more robust.
In FY2014, domestic airline traffic in India increased by 4.8% year-on-year to 60.5 million passengers. CAPA expects higher growth this year, in the range of 6-8%.
International traffic, which increased by 8.3% in FY2014 to 46.6 million passengers, is expected to strengthen to around 10% in FY2015.
LCCs continue to dominate domestic traffic with a 63.6% market share; IndiGo was the largest single airline at 29.9%. The average load factor on domestic services was 73.1% in FY2014, down 1.7 ppts year-on-year.
Jet Airways was the largest international operator to/from India, carrying 5.6 million passengers, representing a 12.0% share of the market. Air India and Emirates were the other leading carriers in the market, each carrying more than five million passengers. Indian carriers combined had a share of just over 33% of international traffic.
Domestic capacity is projected to grow by 8-10% in FY2015 and will largely be driven by IndiGo and start-up carriers. IndiGo is expected to deploy six A320s in the domestic market between Apr-2014 and Mar-2015, which will take its fleet size to 85. AirAsia India, which launched with one A320 in Jun-2014, is likely to reach a fleet size of five to six aircraft by Mar-2015. The Tata Sons-Singapore airlines JV, Vistara, may have about five aircraft in operation by the end of FY2015. However, the final number of aircraft may vary as AirAsia India's plans are subject to change, while Vistara's growth is dependent on the timing of its launch.
SpiceJet is in the midst of a restructuring programme which has resulted in several routes being terminated and some aircraft grounded or returned
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Projected induction of additional aircraft for deployment on domestic services in FY2015
Estimated average economy class fares in FY2014
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India/graph2.png" alt="" width="300" height="207" />Further downsizing is expected as cash flow challenges are visible. The airline has been in discussions with a number of prospective investors to raise USD200 million, alongside which the current promoters would infuse a further USD50 million. A terms sheet is understood to have been signed with an experienced airline investor, however the transaction is yet to be finalised.
Indian carriers are expected to pursue modest expansion on international routes this year
Jet Airways will be the fastest growing Indian international carrier and could expand capacity by 10-12%. Most of the growth will come from connecting non-metro Indian cities with Abu Dhabi to support the integrated network with Etihad. The increasing focus on the Abu Dhabi hub may distract from turning around domestic operations.
Plans to launch daily services to New York Newark and Chicago via Abu Dhabi have had to be placed on hold until India restores its Category I status with the US FAA.
Air India's international expansion has primarily been in Europe. Last year it launched Birmingham and this year it has added Milan, Rome and Moscow to its network, with Amsterdam, Munich, Madrid and Barcelona expected in the coming months. A new triangular route to Sydney and Melbourne has been performing below expectations due to the high fuel costs on the long sectors and frequencies may be reduced. However, operations to London, Paris and Frankfurt have resulted in an improvement in route economics as the carrier transitions from 777 to 787 equipment.
Air India's entry into Star Alliance in Jul-2014 was a major milestone for the carrier. However, in the short term it may increase costs due to the need to upgrade product and services, while the incremental revenue may be less than expected.
India's LCCs are expected to have limited interest in international expansion in the near term. The exception to this is AirAsia India, which will be keen to operate overseas if and when the regulation that requires carriers to operate five years of domestic services is lifted.
Etihad had the most aggressive expansion strategy in India among foreign airlines in FY2014
Taking advantage of its increased bilateral entitlements and partnership with Jet Airways, the UAE national carrier effectively doubled its weekly seat capacity to India last year. Singapore Airlines increased capacity by about 8% during the year, but most other major foreign carriers pursued more modest expansion.
In FY2015, Etihad is expected to increase capacity to India by a further 50%. This is in addition to the expansion by Jet Airways on routes between India and Abu Dhabi.
Meanwhile, Emirates and flydubai have been expanding following the renegotiation of the India-Dubai bilateral agreement in Feb-2014, which delivered an increase of 20% in weekly seat entitlements by Apr-2015. However, Dubai's carriers are still seeking a further increase of at least 40,000 weekly seats as well as access to additional points.
India's full service carriers are unable to achieve the fare premium necessary to cover their higher costs
Jet's average domestic fare, for example, (blended across economy and business class) represents a premium of just 20% above IndiGo and yet its average unit costs on domestic services are estimated to be some 70% higher.
IndiGo was the lowest cost operator on domestic routes at INR3.7/ASK, followed by GoAir and SpiceJet. Air India appears to have lower costs than Jet Airways; however this is due to it having a smaller percentage of its aircraft on lease. With adjustments to permit a more like-for-like comparison, Air India's unit costs are estimated to be closer to INR6.5/ASK.
Given the competitive challenges, the market share of full service carriers fell from 100% in 2003 to 35-40% by 2010, a level at which it has since stabilised.
However, the full service market is expected to experience a resurgence of attention with Jet Airways announcing in Aug-2014 that it would drop its low-cost brand and re-position itself as a high quality full service carrier. Meanwhile, Vistara is promising to deliver new standards in premium travel in India. And Air India is also expected to implement further upgrades to its product, which has already yielded significant improvement, prompted in part by its membership of Star Alliance.
Several LCCs have achieved acceptance within the corporate travel market due to their ability to deliver on the core features of punctuality, cleanliness, frequency and network. To convince passengers to switch and pay a premium, full service carriers will need to ensure they deliver value and that will require them to keep a close eye on costs.
LCCs are also hybridising and improving their services. SpiceJet has introduced premium economy seats and is focusing on upgrading the quality of its in-flight service, while GoAir is planning to introduce a business class cabin.
CAPA also expects SpiceJet and GoAir to introduce distribution of higher yielding inventory via GDSs in FY2015 and to consider implementing loyalty programmes.
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Cost per Available Seat Kilometre (CASK) - Domestic
Airline Net Profit/Loss in FY2013 and FY2014
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Ancillary revenues are expected to be a key focus for LCCs in FY2015
To date Indian carriers have tread softly with respect to unbundling, partly because of regulatory restrictions and partly due to a reluctance to make the first move. But strong ancillary revenues will be necessary to support a low base fare pricing strategy.
AirAsia India tried to lead the way when it launched in Jun-2014 by removing the free baggage allowance. However, its experiment was short lived as the DGCA stepped in and stated that a 15kg allowance was mandatory for all passengers.
Despite this setback, CAPA anticipates that regulations will be eased significantly over the next few months, with the DGCA expected to take a more liberal approach towards ancillaries. By the end of FY2015, LCCs are likely to be generating ancillary revenue right across the value chain.
India's airlines posted an estimated loss of INR106.6 billion in FY2014
This was 76% higher than in the previous financial year, and the worst result since FY2008. The figure excludes Kingfisher Airlines, which remains a listed entity but has been non-operational since Oct-2012.
With the exception of IndiGo - which had a net income of INR3.2 billion - every Indian carrier posted a net loss, although even IndiGo's profit was down almost 60% year-on-year. IndiGo's result included sale and leaseback and engine credits which are netted off its costs.
Air India accounted for more than half of the combined industry loss at INR53.9 billion. Jet Airways Group and SpiceJet reported their highest ever full-year losses of INR41.0 billion and INR10.0 billion respectively. CAPA estimates that GoAir posted an operating loss of INR1.2 billion in FY2014, however it may officially announce a profit as a result of a change in accounting policy which will see maintenance reserves treated as income.
CAPA estimates that there will be only a slight improvement in FY2015, with projected losses in the range of USD1.3-1.4 billion. IndiGo is expected to be the only profitable airline in FY2015. Losses could track further upwards as some LCCs have substantial major maintenance checks scheduled this year, the cost of which will be higher than the reserves currently held by lessors. These projections are subject to significant external factors, risks and assumptions.
However, industry financials could potentially experience some improvement as a result of global fuel prices easing and the possibility of some states reducing sales tax on aviation turbine fuel.
CAPA estimates Indian airlines other than IndiGo will require INR90-96 billion (USD1.5-1.6 billion) of funding this year
This amount will be necessary to stabilise their operations, let alone for investment in aircraft. Given the current environment that is likely to be a challenging exercise. Inability to access sufficient funds when required may impact the operational integrity and customer proposition of some carriers.
Despite the challenges in the market, there is no shortage of entrepreneurs and investors wanting to launch an airline
Six start-up airline projects received No Objection Certificates (NOC) in Aug-2014 and all are planning to launch by 3Q2016. There are at least a further four or five airlines at the business planning stage which are yet to apply for a licence.
If all of the recent and planned new entrants materialise, India's aviation sector is likely to have significant over-capacity in the next 12-18 months. Between them - including AirAsia India and Vistara - they could deploy up to 70-75 aircraft by the end of 2016.
The incumbents are expected to greet the new entrants with very aggressive pricing and capacity deployment as a result of which the start-ups will need to ensure they are sufficiently capitalised to withstand the competitive response.