Air traffic in India has made a comeback, and how. From the bleak days of calendar 2012, when it fell 3.5 per cent, passenger traffic in the domestic skies has picked up strongly. It grew 4 per cent in 2013 and gained momentum in 2014 growing 10.5 per cent.
The first two months of 2015 so far have also been quite encouraging with domestic passenger traffic up a sharp 23 per cent year-on-year. The sector, it seems, is back to the double-digit passenger growth seen before 2012.
The rise in passenger numbers in recent times is thanks to many factors playing out in tandem — the sharp dip in the price of aviation turbine fuel (ATF) due to the rout in crude oil rates, attractive fares offered by several carriers in an increasingly competitive market, and an improvement in economic sentiment.
Going foreign too
And it’s not just domestic air traffic that has the wind beneath its wings; passenger numbers on the international flights of domestic private airlines have also been growing robustly.
Even in 2012, when fewer passengers took domestic flights, the country’s carriers flew 18 per cent more passengers to and from India. International passenger traffic growth of Indian carriers moderated in 2013, but more than made up with a 28 per cent rise in 2014. And so far in 2015, the growth has been at about 13 per cent.
A low base may have helped the pick-up in international air traffic for Indian carriers, but there’s more to it. International routes are often more profitable than highly competitive domestic ones, thanks primarily to lower fuel and airport costs.
International traffic accounted for 20 per cent of the nearly 83 million passengers carried by Indian carriers in 2014, up from less than 15 per cent of the 70 million total passengers flown in 2011. Jet Airways, the country’s second largest airline, has in fact shifted focus from the domestic to the international market. The share of international operations in the airline’s revenue has been rising steadily; it is now about 65 per cent.
Both the domestic and international traffic of Indian carriers should rise in the coming years. The aviation market is significantly under-penetrated and there is considerable scope to increase passenger numbers. No surprise, then, that three new airlines (Air Asia, Air Costa and Vistara) commenced operations last year, and five to six more are waiting in the wings. Existing airlines have also lined up ambitious fleet expansion plans. But it’s a dog-eat-dog world out there, and only the fittest survive — as the examples of the out-of-business Kingfisher Airlines and the restructured SpiceJet show.
Staying profitable
At the other end of the spectrum are players such as IndiGo, which has beaten the odds, remained profitable, and grown its market share to emerge the largest carrier in India. For an Indian carrier, turning in profits is tough simply because the country’s aviation market is among the toughest in the world – fuel costs are steep due to high taxes, pricing power is weak due to intense competition, and capacity additions are not always rational and calibrated.
And while higher passenger numbers help, they don’t guarantee a good show. Case in point: In fiscal 2012, passenger traffic was weak, losses were huge, and the year was considered annus horribilis for the sector. But in 2014, when passenger traffic increased, the sector’s losses were actually much higher. Blame this on the rupee’s rout increasing fuel cost sharply, and irrational price wars among airlines to garner market share. The profitable airlines – IndiGo and GoAir managed to keep their heads above water, but only just.
Fiscal 2015 and 2016 should be better, primarily due to lower fuel costs. It follows that while passenger traffic is indeed important, a tight rein on costs and rational pricing policies are also essential to sustain profits.
Hands tied
There is also much room for Indian carriers to add to their international traffic numbers. With about two-thirds share, foreign carriers, mostly from the Middle East, dominate international traffic to and from India. Indian carriers can well eat into this. Most of the country’s older carriers have started flying abroad.
The exception is GoAir which is one aircraft short of the 20 – the number needed to make it eligible to go international. Indeed, restrictive regulations have tied up the country’s carriers. The 5/20 rule requires that an airline have at least five years of experience in the domestic skies and 20 aircraft to be able to start international operations. This is now sought to be replaced by a new rule.
Under this, Indian carriers having five aircraft will be allowed long-haul international flights once they earn 300 domestic flying credits and short-haul flights on earning 600 such credits. Domestic flying credits can be earned by flying to under-served destinations in the country.
Experts reckon that it could take a new airline about two years to go long-haul international routes and four years to fly short-haul (read: lucrative India – West Asia routes). No wonder new entrants such as Air Asia and Vistara have opposed the new proposal, as well as the existing 5/20 rule.