In its 2011/12 aviation industry outlook to be released next week, CAPA India projects that the country’s private carriers will post a combined profit of US$350-400 million for the financial year ending 31 March 2012. However, state-owned Air India is expected to remain in the red with losses in the range of US$1-1.25 billion, assuming an average oil price of US$85-95 per barrel. The report also predicts India's carriers will raise US$1.5 billion in equity and order up to 200 new aircraft in 2011/12.
Capacity: Domestic capacity is projected to grow by 12-14%. However, Air India has plans to launch its low cost subsidiary, Air India Express, on domestic routes by October 2011, using 10 leased A320s. If the Board approves this plan then domestic capacity growth will be closer to 16%.
Traffic: Either way, demand is expected to outstrip capacity, with CAPA projecting domestic traffic growth of 17-18%, possibly as high as 20%. International passenger numbers, which grew by approximately 10% last year, are expected to increase towards the upper end of a 10-12% range over the next 12 months. Overseas expansion by Indian LCCs IndiGo and SpiceJet is one of the drivers of the expected acceleration in international traffic.
Yields: With traffic expected to outstrip capacity growth, yields are likely to strengthen by an average of 5-7% over the next 12 months. CAPA believes that the market could probably absorb even slightly higher fares, but that Indian carriers are reluctant to test price elasticity due to past experience, a desire not to cede market share and increased regulatory and media scrutiny of fare levels.
A key determinant of the direction of yields will be pricing and capacity behaviour pursued by Air India. The airline has assumed the position of price leader in the market with extensive discounting across its network. To date this has served to not only compound the carrier’s own financial challenges but to destabilise the market for all other operators.
Aircraft Orders: The overall positive direction of the industry in terms of traffic, yields and profitability, supported by strong long term fundamentals will lead to a resumption of fleet orders. In addition to IndiGo’s recently announced plans to acquire 180 A320 aircraft, CAPA expects that India’s carriers will place orders for up to 200 new aircraft this year, with a list price of US$11-12 billion. This will include approximately 125-150 narrowbodies, 30-50 regional aircraft and 10-15 widebodies.
Capital: Industry expansion will see the airlines turn to capital markets to raise up to US$1.5 billion (excluding infusion of funds into Air India by the government) through a combination of equity instruments. Two Indian LCCs will launch Initial Public Offers in the 2011/12 fiscal. And it may not be long before a new prospective source of investment is opened up. CAPA believes that there is increasing probability that the proposal to allow foreign airlines to acquire up to 25% equity in Indian carriers will be approved shortly.
However, the total debt of Indian carriers is expected to reach close to US$20 billion by the end of the financial year, unless serious efforts are made to de-leverage their balance sheets. Approximately half of this debt is aircraft-related, with the balance accounted for by working capital loans and trade creditors such as airport operators and fuel companies. The large three airline groups in particular need to reduce their net debt and boost liquidity as their cash positions remain low.
Challenges: Several other challenges remain on the horizon. Foremost amongst these is the direction of fuel prices. The sharp increases in recent weeks are a major concern and could seriously impact growth and profitability if prices continue to move upwards. Indeed, inflation in general is a key macro-economic challenge, the responses to which could have a negative impact on demand. And a series of scandals concerning governance and corruption have tarnished India’s image amongst global investors which has already been reflected in a decline in foreign direct investment.
Airport Infrastructure: Meanwhile, the strong growth in traffic is once again highlighting supply-side constraints, most notably in the areas of airport infrastructure and human resources. Capacity shortages are re-emerging at the 4 or 5 largest airports in the country, resulting in growing congestion and delays. Investor interest in developing the airport sector has also been impacted by the current dispute between private operators and the economic regulator on the proposed single till tariff regime.
And in Mumbai, the country’s commercial and financial capital, a delay to the launch of the tender process for the second airport at Navi Mumbai looks inevitable and may not proceed until towards the end of the 2011/12 financial year. The new airport will therefore miss its planned opening in 2015, placing significant pressure on the current facility.
Skills & Training: Airlines in particular are also concerned about where they will find the people to support their growth plans. A shortage of skills is already impacting their expansion, and this is the case not only in technical roles such as pilots and engineers but also in management positions. These concerns have been further exacerbated by the recent discovery of several cases of pilots being granted licences on the basis of forged records and documents, suggesting that the already deficient supply of skills is even weaker than presumed.
Administration: By the end of this decade air traffic in India is projected to grow 3.5 times from today, making it the third largest market in the world, behind the United States and China. Preparing for growth on such a scale requires transformational change in the overall administration of the sector. The cabinet reshuffle at the start of this year saw the aviation portfolio transferred to a new Minister as an additional responsibility.
There are concerns that this change of guard has slowed momentum with respect to addressing key structural issues which is essential if Indian aviation is to realise its potential.
The 2011/12 India Outlook can be ordered from the CAPA India Market Research & Intelligence Unit by downloading and completing the PDF form in the top left of this page. NB: This report is not included in the CAPA Membership service.
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