Turbulence and uncertainty can best describe the year 2012 for the Indian aviation sector. In 2012 major airline companies’ profits plunged into red, staff unrest crippled two airlines and the year also saw one the major players grinding to a halt.
This was also a year when air fares shot up, forcing travellers to think twice before booking air tickets, finally resulting in declining air traffic.
Hit by rising fuel costs, hostile cost environment, continued regulatory uncertainty and rupee depreciation, the aviation sector has major challenges to overcome. For 2013, however, there are signs of a turnaround, aviation analysts feel.
Demand downfall
Lower competition arising from Kingfisher Airlines’ exit due to financial turmoil and subsequent consolidation in industry has helped in shoring up realisations in 2012-13. Predictably, demand growth has been a casualty of this hike in ticket prices, accentuated by the slowdown in the economy.
“Domestic air passenger traffic is estimated to have recorded a negative growth of around four per cent year-on-year (YoY) during April-October 2012. We expect domestic passenger traffic to shrink by eight to 10 per cent YoY in 2012-13 — a sharp contrast to the double-digit growth recorded in domestic traffic, ever since the advent of low-cost carriers five years ago,” said Ajay Dsouza, Director, CRISIL Research.
In order to ensure greater transparency in the pricing of domestic air tickets, the Ministry of Civil Aviation is also expected to set up a new unit to monitor domestic fares. The move may provide a cooling effect on the shooting air fares.
However, aviation experts and industry players do not expect the air fares to come down in the first few months of the year at least.
“Air fares have gone up by 30 per cent this year as compared to last year. With Kingfisher Airlines unlikely to revive anytime soon, we do not expect an immediate relief in the fares in the near future,” said Sanjay Bhasin, Managing Director, Goibibo (an online travel portal).
International operations
India’s international operations are, however, expected to see marginal growth as Indian carriers are still in a position to add capacities unlike international carriers who have more or less exhausted the seat quotas available to them under bilateral treaties. “We expect international passenger traffic in India to grow at a muted one to three per cent year-on-year in 2012-13,” Dsouza added.
This trend in passenger traffic is expected to sustain during the next fiscal and constrain air travel. Therefore, the domestic passenger traffic is expected to grow at a muted three to five per cent YoY in 2013-14. However, India’s international operations are expected grow at a relatively better rate of four to six per cent year-on-year in 2012-13.
However, improved alignment between capacity and demand is expected to strengthen passenger yields during 2013-14, driving the profitability of Indian carriers, Dsouza added. The operating margins of the airlines are expected to remain steady at five to seven per cent.
Following one of the most significant developments of 2012, the decision to allow 49 per cent foreign airline investment, the sector may see more than one such transaction during 2013-14. This will have a positive impact, in terms of capital and sentiment, analysts feel.
Big burden
While the profitability outlook for the coming years seems to be relatively better, there are structural issues that continue to plague the airline industry. In India the problem of high crude oil prices (translating into high ATF prices) is compounded by the fact that nearly 20-25 per cent of the ATF price is on account of both Central and State taxes. Consequently, ATF prices in India are nearly 40-50 per cent higher than global prices. “It is, thus, necessary for the Government to rationalise duties on fuel prices to ensure that airlines remains financially viable even in an era of high crude oil prices,” Dsouza said.
Further, Indian carriers are saddled with a collective debt burden of around Rs 90,000 crore as on March 2012 and a high debt-equity ratio. Given the poor financial health of the industry, bringing down the debt levels is essential. On the operational front, the airline industry will have to ensure a healthy trade-off between high air ticket prices and the need to maintain robust growth in passenger traffic and high passenger load factors.
New aircraft orders will be placed in 2013-14 as the market starts to look ahead to the next phase of growth. But cost pressures and a weak policy environment will continue to be a challenge, according to the Centre for Asia Pacific Aviation (CAPA).
CAPA also expects that with the commissioning into service of the new terminals at Chennai and Kolkata, and the partial opening of T2 at Mumbai during the year ahead, all six Indian metros will have world class airport infrastructure, a dramatic leap forward in the eight years since the modernisation program was announced. But 2013-14 must be the year in which certainty about economic regulation is achieved if there is to be strong investor interest in the upcoming tenders for the Navi Mumbai and Goa greenfield airport projects.