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What does rising air traffic mean for airline companies?

Companies and Sectors | Published on Dec 19th 2016 | Comment(s) 0
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A recent report by the International Air Transport Association (IATA) pointed out that the Indian aviation market was just 1/5th the size of China and about 1/9th the size of the US aviation market. IATA has also added that in the last one year, India has been the fastest growing aviation market in the world and is likely to remain so in the next couple of years too. Even as the major airline companies in India slug it out for market share, the key question is what does this mean for aviation companies in India?

This basically stems from low fares…

Indian aviation, perhaps, had its tipping moment in late 2014 when the prices of crude oil started falling. From a high of nearly $115/bbl, the price of crude crashed to a low of $24/bbl before settling closer to the $50 mark. Apart from making petrol and diesel cheaper, this sharp fall in crude prices also resulted in a sharp fall in the prices of aviation turbine fuel (ATF). Fuel costs accounts for more than 50% of the cost structure of running an airline and therefore the lower ATF costs has come as a big boon to airline companies. That has surely translated into lower air fares in India. According to the Directorate General of Civil Aviation (DGCA), the average air fares in the year 2015 were almost 20% lower than the fares in 2014. The ATF prices have given airline companies the leeway to cut fares and that trend has since continued.

How India’s aviation growth compares with the US and China?

India’s aviation industry in 2015 grew at 15%. This compares very favourably with Russia where the aviation industry grew at 11.1%, China where the aviation industry grew at 9.7% and the US where the aviation industry grew at 5.4%. But the big growth could come in the next 2 years. Between 2016 and 2017, the total passengers flying per annum are likely to increase by 25% from 80 million passengers to 100 million passengers. However, we need to understand that the aviation market in China and the US is substantially larger and there is a certain element of saturation in these markets. In India, where the airline penetration is much lower, the growth rate is obviously likely to remain higher.

There are challenges on the connectivity front…

The big challenge for Indian aviation is on the airport infrastructure front. Let us look at the number of airports front. According to the CIA World Fact Book, India is ranked 21st in the world with just 346 airports that are operational. Of these many airports still have outdated infrastructure and cannot even boast of basic night landing facilities. Let us compare India with other BRICS nations. Brazil has 4093 airports while Russia has 1218 airports. Both China and South Africa have over 500 airports. In fact, smaller nations like Indonesia, Argentina, Venezuela, Mexico and Chile have more airports than India. Of course, when we refer to airports here, we also include airfields under this definition.

If India’s aviation sector needs to see sustained growth, the airport infrastructure needs to be expanded substantially along with the last mile connectivity which connects the airports with the city centre through a rapid and efficient means of transport. The problem becomes a lot more pronounced when one looks at the availability of airports on a per capita basis.  For example, the US has 42 airports per million persons, Brazil has 20 airports per million people, Chile has 27 airports per million people and Australia has 21 airports per million people. China has just 0.4 airports per million people and India is still lower with just 0.3 airports per million people.

India is still a very price sensitive market…

The big challenge for the growth of aviation in India has been the high degree of price sensitivity of the Indian market. Indian consumers are still highly price sensitive. We have seen in the past that demand tends to falter quite rapidly once the prices start going up sharply. If ATF prices start rising once again, it will be difficult for aviation companies to absorb the costs and they will have to pass on the costs to the consumer. Any competitive pressure at that point of time will only worsen the financial viability of the airline’s business. That will be the big risk for airlines in this highly price sensitive market. With Brent Crude at below $50/bbl, the situation is still quite comfortable. If Brent crosses $60/bbl, the pressure will start to show up in ATF prices.

The growth in aviation market in India is surely good news for Indian aviation stocks. But capacity and costs will be a major constraint. That could be a major challenge for aviation companies as they go about expanding their market share.




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