Aviation sector struggling with overcapacity amidst economic slowdown

Aviation sector struggling with overcapacity amidst economic slowdown.

SpiceJet added at least 34 aircraft in FY20, but saw an 84 basis points reduction year-on-year in its average capacity utilisation in April-October.

The economic slowdown couldn’t have come at a more inopportune time for India’s aviation sector. Domestic carriers have been adding new planes rather aggressively over the past few years, as passenger growth steadily inched up over the past four years. But the slowing economic growth and poor consumer sentiment is hurting airline financials.

Data from Directorate General of Civil Aviation (DGCA) showed that passengers carried by domestic airlines grew only marginally at 3.11% between January and October 2019, compared with a 20.11% growth during the same period in 2018. Weak demand, coupled with rising capacities, have forced airlines to slash fares. India’s second-largest carrier by market share, SpiceJet, posted a loss of Rs 462.6 crore in the September quarter, owing to unsustainably low fares. Margins of domestic carriers have also been impacted by higher fuel expenses. Although crude price is lower compared to FY19 levels, averaging at around $64.11/bbl so far in FY20, it is still much higher than FY18 levels, when the average was around $57.85/bbl.

The road to recovery may not be very swift, analysts believe. With economic growth slipping to a six-year low in the second quarter of FY20, any pick up in passenger traffic will take a few more quarters. “Perhaps in six to nine months, once we see economic activity picking up, air passenger traffic may also see an uptick,” said aviation expert Dhiraj Mathur.

Passenger load factor, a parameter for measuring capacity utilisation, also remained subdued for major domestic airlines in 2019, including IndiGo and SpiceJet. SpiceJet’s load factor dropped 80 basis points year-on-year to 90% in October, while IndiGo’s load factor was marginally higher than last year at 85.1% and GoAir’s was also down y-o-y to 83%.

“Load factor dropped across airlines in October due to increase in capacity (all-time high fleet size of 616 aircraft and more to be added by year-end)… November fares so far are down around 11% year-on-year,” Axis Capital said in a report.

SpiceJet added at least 34 aircraft in FY20, but saw an 84 basis points reduction year-on-year in its average capacity utilisation in April-October. Ajay Singh, chairman, SpiceJet, has been vocal about unsustainably low fares. Last month, Singh reportedly blamed “a large monopolistic aviation player” for driving down fares. “This is ultra competition and we have an extremely strong player in the market. We need to increase fares to rational levels. Fares will largely be determined by the largest player in the market,” Singh reportedly said in November.

The largest player in the market, IndiGo, is facing additional cost pressures from an aging fleet as well. The airline recently ordered 300 Airbus A320neos. However, it will likely see a slowdown in capacity addition in the coming few quarters as a result of the recent DGCA directive – which mandated the airline to replace its A320neos with older engines with new planes that get delivered. Meanwhile, cost of maintenance for the airline, while lower than its peers, has been increasing on account of an aging fleet.

IndiGo has added at least 30 aircraft in financial year 2019-20 so far, and plans to add at least three aircraft per month. However, the passenger load factor of the airline averaged at 86.93% between April and October, only 34 basis points higher than the average for April-October 2018. In the September quarter, IndiGo posted a loss of Rs 1,062 crore, its largest ever since its IPO, driven by cost pressures. Ronojoy Dutta, CEO, IndiGo, had in October said the aviation sector was facing a ‘major softening’. “No matter what the industry does, we’ll do 5% better we think. But we see the industry itself softening,” Dutta told analysts in October. He also added that IndiGo saw declines in yield in the metro markets where low cost capacity replaced the capacity of Jet Airways. With the grounding of Jet Airways, the airline got 22 additional slots in India’s busiest airport at New Delhi.

GoAir added at least 22 aircraft, and saw a 171 basis points average y-o-y increase in passenger load factor so far in FY20. Vistara saw a 4.8 percentage points reduction in its average capacity utilisation to 82.27% during April-October, even though it added 13 aircraft in the same period.

Online travel aggregators also reported flat volumes in domestic air ticket sales this year. “In the first half of the financial year, we saw flat volumes in our India business, along with the rest of the market (players). Volumes have now started picking up since October onward,” Aditya Agarwal, head, corporate strategy, Cleartrip, told FE, adding that their revenues from India have also seen flat growth, as a large part of the company’s margins from ticket sales are linked to sales volumes.

Additionally, most seats are being sold at discounted prices. “Passenger loads are not looking up because the one of the first casualties in an economic slowdown or downturn is air travel. Meanwhile, a lot of airlines are doing flash sales because airlines are desperate to fill seats. Mostly the discounted seats are being sold. We are seeing an overall shrinking of overall traveller base, which is worrying,” said Mark Martin, aviation consultant.

In FY20, increasing capacity kept fares under stress even during the festive season, when ticket sale volumes typically pick up. “While overall slowdown in passenger traffic has not hit traffic growth of major airlines so far (due to allocated slots of Jet Airways), the impact will show up going ahead as the capacity of Jet Airways gets absorbed,” analysts from Axis Capital said.

Going forward, passenger load factor of domestic airlines may improve as major airlines like IndiGo, SpiceJet, GoAir and Vistara are expected to retire parts of their old fleet between 2020 and 2022, analysts from ICICI Securities said. “Delayed resumption of (Boeing 737) MAX, retirals of old fleet and internationalisation of Indian airlines will keep domestic supply addition low. Based on our estimates, the aggregate domestic supply is expected to grow by around 5% in FY20 (estimated) and basis induction of MAX would grow by around 15-18% in FY21,” analysts said. The brokerage firm estimates around 18% growth in total passengers carried by domestic carriers in FY21. “The cost parameters will improve going ahead with increasing share of fuel efficient fleet and efficiencies in the international segment. Revenue yield will improve with gradual improvement in passenger load factor and improved demand,” analysts said.

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