Indian airlines set to fly high in 2010 as growth returns

After a couple of turbulent years, 2010 should be more positive for the Indian aviation sector provided airlines can maintain discipline on cost, capacity and pricing, said Capa, India's Research and Intelligence Unit.

Indian Aviation: A Review of 2009 and Outlook for 2010 said the industry will return to profitability in 2010, although it will be some time before the accumulated losses of recent years are reversed.

"Private [Indian] carriers, excluding Air India, are expected to achieve a combined profit of $250 million (Dh917.5m) to $300m in 2010-11," it said.

Domestic air traffic within the country is expected to grow by 15 per cent or more in 2010-11 as the industry returns to its long-term growth trajectory.

This, the report said, is higher than the expected increase in capacity of just under 10 per cent, which should assist carriers in achieving higher load factors and improved yields.

Firm yields

Capa expects yields in both economy and premium classes to be firmer, with premium volumes and revenue overall likely to recover faster outbound as opposed to inbound.

Overall, domestic yield is expected to increase by five to seven per cent in 2010-11 and possibly by as much as 10 per cent in the third quarter of next year, which will make it the most profitable quarter.

Maintaining yields will be the key as it was the loss of focus on yields that has contributed to the industry's current difficulties.

It will be important for airlines to maintain discipline on capacity and costs, especially since fuel prices remain the great unknown factor and continue to remain a constant threat to the industry, said the report.

"Airlines should not allow growth to distract them from focusing on restructuring their operations and profitability," it said.

As far as international traffic is concerned, which has remained positive even during the downturn, particularly outbound travel, it is set to grow at 10-12 per cent.

As per the report, India's GDP growth declined from more than nine per cent in 2007-08 to 6.1 per cent in 2008-09.

"However, given the global contraction, this was a relatively a good result.

"The economy appears to be recovering earlier than expected, with GDP growth of 7.9 per cent in the last quarter, ahead of expectations.

"The World Bank projects annual growth of eight per cent per annum from 2011 to 2014," said the report

After the past subdued years, domestic traffic is also showing a return to growth.

"After 12 consecutive months of year-on-year decline in domestic traffic, July 2009 saw a return to positive territory, which has continued since then.

"This is partly due to the impact of a lower base resulting from last year's decline.

"However, discussions with the industry indicate a discernible increase in demand as business and consumer confidence increases, although yields continue to remain depressed."

The operating environment is also improving, with airports and airspace gradually being upgraded and ground access being developed, which will not only enhance the passenger experience but should allow airlines to achieve faster turnarounds and higher aircraft utilisation, the report said.

As far as airlines are concerned, the landscape in India has been transformed in recent years.

In 2003, there were just four carriers – Air India, Indian Airlines, Jet Airways and Air Sahara – all operating full service models. And private carriers in those days were limited to operating domestic routes only.

Today, there are effectively seven airlines operating 11 different brands – Air India + Air India Express, Jet Airways + Jet Konnect + JetLite, Kingfisher Airlines + Kingfisher Red, IndiGo, SpiceJet, Go Air and Paramount.

On the domestic front, the three large airline groups – Air India, Jet Airways (+JetLite) and Kingfisher Airlines command a 67 per cent market share. The most significant recent strategic development in the Indian domestic market is its rapidly turning low cost, said Capa.

"An operating model, which did not exist in the Indian market until six years ago, could account for almost 70 per cent of domestic capacity within the next two to three quarters."

This is due to the decision taken by carriers such as Jet Airways and Kingfisher Airlines to reconfigure the

majority of their domestic aircraft to operate all economy, no frills service. Air India is also planning to follow suit.

Full service

There has been a clear recognition that there is a limited market for full service travel, particularly business class, beyond the key metro routes. Full service may in future be restricted to just a handful of services, or may even disappear entirely, said the report.

"It is driven by a decisive change in the demographic profile of the Indian domestic traveller. Whereas five years ago, about 80 per cent of air travel in India was for business, today that figure is less than half. This means that 2010/2011 could be a different year in Indian aviation, with Jet Airways, Kingfisher Airlines and Air India possibly being the largest low-cost carriers.

"The transition to low- cost operations should allow the big three carriers to develop a more competitive cost structure, which is essential for their survival.

"Jet Airways and Kingfisher are both faced with a cash crunch and are urgently seeking to raise capital.

"Deleveraging their balance sheets is a primary objective. The three large airline groups – Air India, Jet Airways and Kingfisher Airlines – have a combined debt of about $10bn.

"They will require capital-raising of a further $10bn-$12bn over the next two to three years to finance aircraft deliveries.

"In the short term, the carriers will need to increase equity by $1.2bn over the next three to six months."

Airport modernisation

The airports in the country are also in a major drive towards modernisation.

India's airports have suffered from decades of neglect and underinvestment.

When the Naresh Chandra Committee presented its report to the Ministry of Civil Aviation in November 2003, it said the country's "passenger airports are for the most part an embarrassment", the report said. "The inadequacy of the state-of-the-art- airport infrastructure was exposed as air traffic expanded dramatically from 2004 onwards, pushing several metro airports well beyond their design capacity.

"Congestion in the terminals, on the runways and in the air resulted in a deteriorating passenger experience and an increasingly inefficient (and costly) operating environment for the airlines.

"Recognising the potential for airport infrastructure constraints to stifle the aviation industry, in 2005 the Government of India announced a $10bn airport upgrade and modernisation programme. A further $20bn of investment is expected in the next 10 years. Acknowledging that it possesses neither the expertise nor the capital to carry out such an undertaking by itself, the government has invited private sector participation in the process, with joint venture operators now in place in Delhi, Mumbai, Bangalore, Hyderabad and Cochin. All other airports remain under the control of the state owned Airports Authority of India (AAI)."

Regulations will also play a decisive role in the development of the sector.

The government, after setting a blistering pace in aviation sector reform during the first half of its term, lost momentum in the last couple of years of its first administration, during which more could have been achieved.

The first three years of Civil Aviation Minister Praful Patel's tenure were remarkable and the speed and direction of change was unlike anything that India had seen before, Capa said.

Genuine deregulation of the domestic skies; liberal bilateral agreements with all key markets, including open skies with the United States; modernisation of New Delhi/Mumbai airports; fleet purchase orders and a merger of the national carriers; allowing domestic airlines to fly overseas; open skies in cargo and many other initiatives created a solid platform for further growth and for the development of a world class aviation industry in India. This initial burst, the report points out, should have been strengthened by further reforms and policy initiatives.

"Instead, the pace slackened and several issues have been left unaddressed, in particular, the New Civil Aviation Policy; Foreign Direct Investment regulations in the airline sector; abolition of the five year/20 aircraft rule to allow more private airlines to fly international; city side development of non-metro airports; postponement of the ground handling policy; under investment in ATM and CNS infrastructure and underresourcing of the DGCA.

"As aviation becomes an increasingly important sector of the economy, consideration must be given to developing an aviation policy and governance framework that is aligned with the needs of the industry.

Positive environment

"The focus should be on creating an environment that is equitable, efficient, transparent and in the national interest, and strengthening the technical and policy framework.

"The institutional and regulatory environment needs to be sculpted to support the growth of the industry from 2010 onwards.

"The current Director-General is indeed proceeding strategically and quickly to bring Indian regulations in line with international standards, with a key focus on safety," the report said.

The critical role of skilled human resources in supporting the growth of the industry is also vital.

Capa's research reveals great concern amongst both operators and suppliers that skills shortages could constrain the sector.

"India today faces not only insufficient training capacity, but the quality of that which is currently available is in many cases questionable. This not only has implications for the efficiency of operations and the quality of the customer experience, but more importantly for safety.

"Developing incountry capabilities and reducing reliance on offshore training will not only be more cost effective, but can also contribute to the development of a globally competitive ancillary support sector and a vibrant aerospace industry with potentially long term economic benefits to the nation," the report said.


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