The domestic passenger traffic has crossed 10 million mark (in a single month) for the first time in the history of Indian aviation during the month of May 2017. This was achieved as a result of peak season demand whereby the passenger load factor (PLF) for the domestic aviation industry touched a new high of 88.9%, the highest over the last seven years.
According to an ICRA note, with planned expansion by existing airlines and scale up by new airlines, the capacity addition in the industry is likely to remain healthy in the current year, despite the industry capacity growth (measured in available seat kilometers – ASKMs) being moderate at 14.9% in May 2017. As for the domestic passenger traffic growth for May 2017, it was 17.6% and remained lower than 20% for the fourth successive month, impacted by lower capacity addition in the industry.
The moderation in supply growth is likely to have benefited airline yields to some extent in Q1 FY2018. Further, sequentially stagnant aviation turbine fuel (ATF) prices are expected to provide support to profitability of the airlines during the quarter. However, intense competition and expected capacity addition growth are likely to keep pressure on airfares going forward.
According to Anand Kulkarni, AVP and Associate Head, Corporate Sector Ratings, ICRA, “Moderation in supply growth, peak season demand and sequentially stable ATF prices augment well for the financial performance of airlines in Q1 FY2018. Indication of softening of fuel prices in Q2 FY2018 is also a positive for the industry. However, supply is likely to remain high going forward, considering the large order backlog of Indian airlines and the same might impact yields.”
As for the scene on international routes, the fleet expansion by incumbents during FY2017 has also resulted in addition of sizeable capacity. Though the passenger traffic growth on international routes in May 2017 was a moderate 9.8%, the Indian airlines, with year-on-year (Y-o-Y) growth of 14.4%, outperformed the industry growth on the back of capacity additions. Indigo has deployed sizeable capacity on international routes over the last two months, which is reflected in increasing market share of the airline on international routes.
“Going forward, maintaining price discipline in an intensely competitive environment would be essential for maintaining / improving the financial risk profile of airlines. Furthermore, ICRA has been highlighting the weak performance of regional airlines due to intense competition, and the same is reflected in the suspension of operations of Air Carnival, the third regional airline to shut down in the recent past. This is an indication of an intensely competitive environment, becoming unsustainable for new players,” says Kulkarni.