An Overview of the Indian Aviation Industry

Indian Aviation, said to be in its golden age since the past decade is the fastest growing Aviation Markets in the world. According to Invest India, the National Investment Promotion and Facilitation Agency of the Indian Government, the market is the third largest domestic Civil Aviation market in the world with an annual passenger traffic growth of 11%, and the sector supporting a whopping 8 million jobs. Although the year 2019 was a turbulent one for the sector, we are only behind USA and China in terms of domestic passenger traffic and as China looks to play catch up game with USA, we are expected to follow the path of China in terms of our growth in this space. This overall rosy picture can be attributed to the very large and fast-growing middle-class population, by and large one of the fastest growing economy, higher disposable incomes and relatively lower penetration levels of the aviation industry.
India currently has connectivity with 59 countries in the world through 344 routes supported by 5 Indian Carriers and 6 Foreign Carriers. According to data from IBEF, there are 103 Operational airports currently, and the number is set to increase to 200 by FY2040.

The General Competitive Landscape of the Indian Airline Industry

With increasing capacity being added regularly, there is intense competition in the market. The major carriers attracting share are Indigo, SpiceJet, Go Air and Vistara while those on whom the competition is seeming to take a toll are Air India which is marred by inefficiencies and AirAsia India, which seems to have a decelerating growth.

Key Cost Drivers:

Fuel: Air turbine fuel forms the largest component of cost. Fuel is an external factor that affects the profitability of airline. In case of Indian aviation industry, it stays upward of 50 percent thus operation efficiency becomes very important.

Labour cost: Labour cost include wages of pilots, ground staff, maintenance staff and cabin crew. On an average the number of pilots per aircraft is 15.

Operational Cost: Airlines need to pay for aircraft parking, slots, terminal space etc.

Maintenance, Repair and Overhauling (MRO) challenge: Indian aviation industry suffer from lack of dedicated hangers at airports. Many a times, aircrafts have to be sent to foreign countries like Singapore which further increases the cost of MRO. GST is 18% which is very high for an industry which is burdened by taxes. The spare parts are imported from other countries which further increases the cost.
A consolidated view of the break-up of costs of the airline industry according to Data from DGCA India can be seen as follows: (The Flight Operation expense % values are shown in the right vertical axis)

Key Revenue Drivers:

Capacity:  Revenue will be a direct relation to the capacity of the airlines i.e. the number of seats with the airline.  Higher capacity can result in higher revenue for the airlines. Capacity addition can be done by expanding the fleet of airlines. Indian aviation industry has exploded over the last decade and government focus on regional connectivity may provide further opportunity for capacity expansion.

Passenger Load Factor: This is the most important factor as it impacts the profitability of airline as well. As the load factor increases Airlines increase the ticket prices resulting in higher revenues. Depending upon the load factor airlines also decide their expansion of fleets.
A Comparison of the Passenger Load Factor for major airlines is given as follows:

Passenger Yield: Passenger yield is passenger revenue for every mile flown. Higher yield is indicative of higher revenue for the airlines.

Fee/Other services: Charges for luggage, Seat selection, on-board meals, Cancellation charges, rescheduling charges, inflight entertainment, in flight sales and other fees adds to the revenue streams.
 
Why was 2019 turbulent for Indian Aviation and what lies Ahead?

2019 was a rough year for many Indian Airlines, with the major hit coming from Jet Airways losing share and finally discontinuing operations in July. This led to a lot of market share being up for grabs for the major players like Indigo, GoAir, Spice Jet and Vistara. Even parking slots of Jet Airways became vacant for the other companies, especially those looking to make headwinds in International routes. It was assumed that on the pricing front, there would be changes owing to the demand-supply mismatch, but that could not really materialise over time. With the increase in parking slots and an opportunity to benefit from with one player opting out, the major airlines like Spice Jet and Indigo started leasing more and more aircrafts. This led to any seat capacity constraint that was expected to crop up to be overcome with ease. No real gap between supply and demand ended up, leading to no significant hike in prices. Not only this, the economy overall was in a bad shape, further adding to downward pressure on tariffs since yield started reducing. There was a possibility that seats would’ve gone empty had prices seen a jump.

It was finally in November that tariffs started increasing by around 10% which was important to bring viability back, but then operators faced another setback.  IndiGo faced a debacle because of the requirement to replace the Pratt & Whitney Engines on its fleet, leading to a number of cancellations and reduced capacity in the last two quarters. Similarly, for SpiceJet, the suspension of Boeing’s 737 Max Planes Production brought a stall into capacity expansion plans.
A rise in demand from the festive end-of-year season is all that brought respite to the sector, even though not greatly.

Entering 2020, a key parameter to be monitored by the airlines would be yields. With expansion happening, though slowly, the airlines are expected to be incentivised to offer discounts to passengers, which is expected to transform into increased profitability in the longer run. Another key event to watch out for will be the proposed privatisation of Air India. The airline’s estimated losses for the last financial year have increased owing to over 26 of its aircrafts being grounded without any maintenance checks. The government has agreed to halve its debt followed by completely exiting the carrier and what remains to be seen is who buys it. Ideally, the decision would depend on the price that the bidders would be offered by the government and the framework which would be negotiated as a part of the deal including dealings with past dues, potential disruptions etc.