March 28, 2018 I Research Airlines and Airports the Airline Industry Is Among the Sunrise Sectors in India Post 2014
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March 28, 2018 I Research Airlines and Airports The Airline Industry is among the sunrise sectors in India post 2014. Contact: India is the fastest growing airline market as per International Air Transport Association (IATA) for the past three years followed by China. Madan Sabnavis Chief Economist As per IATA and Oxford Economics Report, the sector contributes to [email protected] approximately 1 million jobs directly. The Indian Airline Industry also 91-22-67543489 witnessed addition of new service providers in the last few years as well Ashish K Nainan as multinational airline companies investing into domestic service Research Analyst providers. [email protected] Three factors contributing to the growth of this industry in India are- Mradul Mishra - Lowering cost of air travel [email protected] - Growing middle-income population 91-022-6754 3515 - Public transport services over medium/long distances like Railways being unable to deliver efficient alternatives or enough capacity to cater to demand. This sudden growth in Airline industry provides opportunities and poses a challenge at the same time. Airline industry has matured over the last decade and the potential market size is expected to grow manifold its current size. At the same time, the evolution of airlines into public transport requires comparable investment into development and expansion of new & existing airports and other aviation facilities. Disclaimer: This report is prepared by CARE RATINGS LTD. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing The Government implemented the “UDAN” (Regional Connectivity this report based on information available in public Scheme) scheme which aims at connecting tier-3 and 4 cities to larger domain. However, neither the accuracy nor completeness of information contained in this metro cities and other cities providing an affordable travel medium to a report is guaranteed. CARE Ratings is not responsible for any errors or omissions in much large population. In the initial two rounds of bidding for the analysis/inferences/views or for results obtained scheme, the Government announced operationalising of 56 new from the use of information contained in this report and especially states that CARE Ratings has no airports and 31 new helipads. The scheme is expected to add 1.3 financial liability whatsoever to the user of this million new passenger seats across new networks. The major benefit is report in terms of strengthening the airline network across the country. Research I Aviation Aviation Industry: Global perspective The Global aviation industry has been on an uptrend post 2008-09. The negative trend during the years 2008 and 2009 marked significance on the back of two major events- - High crude prices affected financial performance of airlines - Global Financial Crisis of 2008 further weakened demand for airline services across major economies like USA, Europe and Japan. Graph 1 Passengers handled by the global airline industry (in millions) 4500 4,081 4000 3,810 3,561 3,328 3500 3,152 2,999 2,864 3000 2,700 2,493 2,483 2500 2000 1500 1000 500 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: IATA As per IATA, the number of unique city-pair connections exceeded 16,600 in 2015, 350 more than in 2014 and almost double the connectivity by air 20 years ago. The price to users of air transport has fallen, meanwhile, after adjusting for inflation. Compared with 20 years ago, real transport costs have more than halved. The passengers handled by airlines worldwide grew by 5.4% CAGR during 2013-18. Asian markets like India and China led this growth. Apart from demographic factors and higher economic growth, the industry in these geographies benefitted from the dip in oil prices that began in 2014. Total passenger handled by airlines globally stood at around 4.1 billion during 2016-17. Major countries accounting for this passenger traffic are USA, UK, Germany, China, India and Japan. Region-wise, Asia Pacific led with 1/3rd the total global passenger share followed by Europe (26.5%) and North America (23%). Capacity across these regions grew faster than the previous year with Asia and Latin America reporting a growth of around 9.25% followed by Europe at 8.2% and African region at 7.5%. Table 1 Major economies and aviation industry statistics - India U.S.A.# China GDP/Per Capita (in $) $ 2.2 Trillion/ $1,760 $ 18 Trillion/ $56,000 $ 11 Trillion/ $ 8,100 Number of airports* 86 909 205 Passengers Ferried 158 million 823 million 487 million (Annual) International passengers 54 million 104 million 133 million Domestic Passengers 104 million 719 million 354 million *As listed by flightradar24 #US Department of Transportation “GDP and Other Data from IMF and World Bank” 2 Research I Aviation Indian aviation industry In 1953, the Indian Airline Industry was nationalized. With nationalization, eight pre-independence domestic airlines were merged to form two national carriers- - “Air India International” operating international flights - “Indian Airlines Corporation”, for the domestic operations. Airline industry chronology (1990-2018) - Post liberalisation of economy, the Government adopted an open-sky policy and private airlines were allowed to participate in the airline sector. East-West Airlines was the first private airline and started its operations in 1990. - In 1994, the Air Corporations Act was repealed and replaced by a new act, thereby enabling private airlines in India to begin their scheduled airline operations. By 1995, 6 private airlines which included East West, Sahara, Jet Airways, Modiluft, Damania and NEPC accounted for 10% of the domestic traffic. Jet Airways started its operation in 1993. Barring Jet Airways, the other 5 airlines ceased operations during 1995-97. - 1996-2004: Successive Government’s introduced legislations and implemented slew of measures which included formation of Airport Authority of India- an umbrella body for operation of airports across the country, setting up of airports under the PPP model etc. These policies and measures shaped the initial contours of the aviation industry in India. - The concept of “Low Cost Carrier” in India was introduced by Air Deccan in 2003(later acquired and merged with Kingfisher airlines). - 2004-09: The Airline Industry witnessed new players being given permission to operate in the country and policy to develop and expand infrastructure of airports in both metro as well as non-metro cities. The policy for domestic airlines to operate overseas was also introduced during this period known as 5/20 rule. As per 5/20 rule, national carriers were required to have five years of operational experience and a fleet of minimum 20 aircraft to fly overseas. This rule was abolished in 2016 and replaced by 0/20 rule. - Three “Low-Cost-Carriers” (LCC) namely Spicejet, GoAir and Interglobe commenced operations in the year 2005 and 2006. - By 2010, high crude prices and global financial crisis caught up with the Indian airline industry and slowed down the overall industry. Kingfisher Airlines (along with now merged Deccan airways) ceased operations in 2012 which led to major slump in the industry. The same year, Jet Airways acquired Sahara Airways for Rs. 2,300 crore in an all cash deal. - Falling crude prices led to recovery in demand post 2014. Two new scheduled airlines- AirAsia and Vistara, received licenses to commence operations in 2014 and 2015 respectively. - Currently, there are 7 scheduled airlines operating in the country and 5-6 regional operators under the regional connectivity scheme-“UDAN”. The 5 largest airlines have a 90% market share in terms of passenger traffic in 2017. - Among the regional operators, Air Odisha and Zoom Air started operation in 2012 and 2013. Air Deccan has been the latest entrant making a comeback in 2017. During 2007-2017, the total passengers including international and domestic passengers grew from 71.6 million in to 158.4 million – growth of 121.2% in absolute terms and 8.2% CAGR. The domestic airline passenger traffic grew by 11.4% CAGR during 2012-17. Global passenger traffic soared 5.3% during the same period. Indian railway during the same period recorded a decline in passengers from 700 million passengers in 2012-13 versus 695 million passengers in 2016-17. 3 Research I Aviation Relation between Passenger Traffic and Economic Growth: The domestic passenger traffic is positively correlated to the GDP growth of the country. As the GDP slowed in the year 2012-13, the domestic passenger growth fell by almost 5%. Recovery in GDP post 2013-14 led to sustained growth in domestic passengers. Graph 2 Passengers handled and GDP (%) growth 120 10 9.3 8.9 8.6 8.0 103.7 7.5 7.1 6.7 6.7 6.4 85.2 70 5.5 70.1 5 60.8 60.6 53.8 57.6 54.7 45.3 45.7 49.8 44.4 39.5 38.1 40.3 43.1 28.9 32.1 35.1 20 27.2 0 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Domestic passengers International Passengers GDP Growth % Source: DGCA The share of domestic passengers has been greater than 55% over the last decade. In 2007-08, the share of domestic passengers was 62%, which dropped to 58% in 2013-14. In 2016-17, the share of domestic passengers to total passengers stood at 65.5% indicating a recovery in domestic passenger numbers in line with the GDP growth. Market share of Airlines: In India, low-cost carriers (LCC) have been more successful. LCCs provide low cost airline services with optimum luggage carrying allowance and a no frill service. Interglobe, Air India Express, Spicejet, GoAir can be categorised under this segment.