With Air India’s announcement of the largest aircraft order in aviation history and with demand levels soaring, Indian aviation is finally settling on a new normal. In this changing phase of Indian aviation, there will be just two airlines, namely Indigo and Air India will have more than 80 percent of market share, and another fast growing airline to create some fresh competition will be Akasa and the rest will be at the fringes.
And that’s not all, there is still Jet Airways that may emerge in its new avatar (Jet 2.0) where the nature and form of revival is yet to be determined, the sale of the government owned regional airline Alliance Air and possibly another new entrant. Overall it is a very different market than twelve months ago and several stakeholders are hoping that this will finally give Indian aviation the stability that is required.
Changed credit risk profile of the market
Just 15 months ago the market picture comprised of two full-service carriers Air India and Vistara and four low-cost carriers: Indigo, SpiceJet, GoFirst and AirAsia India. Into this fray was to enter a much celebrated startup (Akasa) and possibly a seventh player – namely Jet 2.0 . Banks and financiers had varying degrees of apprehensions and with the exception of Indigo, the path to profitability for airlines was foggy at best. This was both due to the airlines’ own planning and the macro-market dynamics.
Fast forward to today and demand is soaring and yields have held high. With approximately 171 million travelers taking to the skies in 2022, 2023 will almost certainly outdo this volume. For the first time in a while airlines have not entered a race to discount to the bottom though the jury is out on when that will start. Capacity constraints due to a variety of reasons have meant that the supply demand spreads have increased and this is reflected in the occupancy factors which averaged 85 percent for stronger airlines in Q3 and pricing levels that were 15-20 percent higher than forecast.
High yields and strong demand have helped better cash-flow especially for stronger airlines and the market now effectively has 5 airlines of which three are quite stable from a credit risk perspective. This will help with financing of the fleet and presumably the overall market premium. However, the weaker airlines continue to face headwinds for these airlines contraction, consolidation or collapse cannot be ruled out.
The overall credit risk is further aided by the fact that the three contenders in Indigo, Air India and Akasa have fairly clear plans for the future. Stand-alone balance sheets for these airlines are comparatively better due to reduced debt, cash-levels, the slow but sure leaning towards more assets on the balance sheet and of course parent-company backing. Add to this a focus on operations reflected in on-time performance, cancellations and dispatch reliability shows that the teams are delivering.
That said, the path ahead is not easy by any means and the product in many cases leaves many travelers distraught and dismayed by the overall experience. It is hoped that this too will improve over time.
Geopolitics is further aiding the revival
Indian aviation also finds itself in a flight-path where geopolitical dynamics are acting as a strong tailwind. From an aviation perspective there are challenges and weaknesses seen in markets such as Vietnam, Thailand, Indonesia and Malaysia. These challenges are impacting the airlines of these respective countries and are not limited to traffic flows. Russia continues to be a market where financiers are reducing exposure and limiting further business and SAARC markets notably Pakistan and Sri Lanka also have seen challenges.
As such on a relative basis India stands out and even on a stand-alone basis trends are pointing in the right direction. The recent world-bank forecasts peg India’s growth as the highest not only in the region but also globally. Compared to global growth forecasts of 2.9 percent and emerging markets and developed economy growth forecasts at 4.0 percent, India is forecast to have GDP growth of 6.1 percent. The growth will outpace that of China and with a clear correlation between GDP growth and air-travel demand, Indian aviation is looking at a better path ahead.
Tempered only by the foreign exchange and interest rate environment – both of which have to be carefully planned for. Finally there are policy initiatives which focus on additional airports, additional access and ease of travel.
Capacity will follow and in cities like Goa that is now home to two airports, the National Capital Region which will see expansion of the current airport and the development of the Jewar airport and Mumbai where the Navi Mumbai airport project is finally taking off, demand growth is likely to continue.
Will profitability return or remain elusive
Credit risk and sentiment notwithstanding, in the final analysis its profitability that counts. And profitability continues to be elusive. 2022 was a year when India’s airlines collectively lost more than 2 billion dollars (INR 16,000 crores) and 2023 too will not see the industry emerge to a point where airlines are profitable for the most part and delivering returns on capital.
While airlines have reported profits including Indigo which recently reported their highest quarterly profit for Q3, the profits are driven by short-term patterns which will not sustain. The yields cannot hold at current levels and indeed softening has already started with a 7 percent - 10 percent difference in fares already being seen compared to the previous quarter. This in the backdrop of rising exchange rates and rising airport charges.
Foreign competitors are also getting more aggressive and price wars will follow. Supply challenges at the OEMs will take a while to sort out and capacity will have to be planned accordingly.
Airlines like Indigo have already extended leases on aircraft and accelerated induction, Air India too has been speeding up induction and Akasa will reach a fleet of 20 aircraft within the next few months thereby meeting the policy threshold for international deployment. Other airlines again are found wanting and will lose the opportunity to capture some of the demand. And all of these dynamics will be reflected in profitability or lack thereof.
Forecasts call for 137-145 million domestic passengers and another about 55 million international passengers taking to the Indian skies in 2023. And between five large airlines flying 650 aircraft and all major airlines with large order books – it is not execution that will count the most. But for now, the changing nature of Indian aviation now has a new word in the lexicon which until now was missing that is ‘stability’.
— The author, Satyendra Pandey, is the Managing Partner for the India based aviation advisory firm AT-TV. The views expressed are those of the author.
Read his previous articles here (Edited by : C H Unnikrishnan)
First Published: Mar 6, 2023 1:24 PM IST
