CAPA India Market Update Q1 FY20: Key Highlights

June 10, 2019by

The suspension of Jet Airways’ services has positively transformed market dynamics for Indian carriers. FY2020 could mark a positive turning point for the sector.

10 June 2019

Read the key highlights below from CAPA’s quarterly market insights report for the period April-June 2019, or request a copy of the full report.

CAPA released its Indian Aviation Outlook for FY2020 in February 2019. Since the Outlook was initially released, the market has experienced a significant development with the suspension of operations by Jet Airways, which was the largest international and the second largest carrier in India.

This will have notable implications for traffic growth, fleet expansion, competitive dynamics and financial performance.

In FY2020 Indian airlines are likely to report a combined net profit at an industry level, for the very first time since CAPA India started tracking the sector in 2003. In an optimistic scenario the industry could post a profit of USD500-700 million in FY2020. And even in a pessimistic scenario, airlines are likely to remain in positive territory to the tune of USD250-400 million.
This would represent a positive turnaround in financial performance of USD1.0-1.4 billion from the previous financial year. These projections are subject to oil prices at USD70-75/barrel, the USD at INR70-72, and airlines maintaining pricing discipline.

Air India could break even at a net level for the first time in over a decade. The favourable market conditions represent a unique opportunity for a structural re-set of the national carrier, which Air India must take advantage. The domestic market will remain competitive, however the international sector has the potential to be very positive.

The three leading Indian LCCs – IndiGo, SpiceJet and GoAir – are each expected to report record profitability in FY2020. IndiGo alone could be on track to report a profit of USD400-500 million. Meanwhile the combined fleet size of Indian LCCs is expected to cross 500 aircraft this year.

Inclusion of ATF under GST could deliver further significant upside to Indian carriers: This fiscal reform alone would reduce airline operating costs by up to 10%, potentially converting some carriers into investment grade opportunities.

Most of the domestic capacity lost as a result of Jet’s closure should be restored by the end of the Q2, with growth resuming in the second half. However, recovery in the international sector may take 1-2 years.

Domestic traffic growth will be muted, with full-year traffic growth expected to be below 5% year-on-year. This will largely be as a result of growth picking up from Q3, with traffic expanding by 5-8% in the second half. The high double-digit growth rates observed during the last five years are unlikely to return for the foreseeable future.

International traffic is likely to be flat at best, and could show a slight decline of up to 5%. Growth is expected to resume from FY2021.

Jet’s closure leaves a notable gap in the international market. As a result Indian carriers – particularly IndiGo and SpiceJet, but also GoAir – will increase their focus overseas. Indian LCCs are expected to deploy 40 additional narrow bodies on regional international routes in FY2020. In the race to fill the space left by Jet Airways, decisions on some new routes may be rushed. As a result there are likely to be changes and adjustments to international routes until the network settles down.

The initial international expansion by LCCs will be on routes of up to 5-6 hours, within the non-stop range of re-engined narrow bodies. However, 1-stop narrow body services to Europe (via Central Asia) are expected to launch shortly, and long haul non-stop services on wide bodies will follow, possibly before the end of FY2020, or in FY2021.

SpiceJet is strengthening and emerging as the clear no. 2 airline in the market. Within 12 months its domestic market share could approach 25%, a size that accords it strategic importance in the sector. This is a tremendous achievement for an airline that was within hours of closure less than five years ago.

Consolidation will continue. Jet’s suspension of services is the first step, with further developments likely over the next 12-24 months. Industry operators must take advantage of this to strengthen their balance sheets and ensure that they do not squander the benefits. CAPA is uncertain that airlines will maintain appropriate pricing discipline. It will be instructive to observe how fares perform in Q2.

India needs to take a fresh long-term look at its bilateral policy: With capacity tightening in light of Jet’s exit, India needs to set a new direction on bilaterals to ensure that its economic, trade and tourism interests are not compromised. The policy should not wait for Indian carriers to achieve a certain scale if delaying liberalisation is not aligned with national interests.
At the same time, market access should be balanced and dispersed across all regions. India should avoid becoming dependent on Gulf carriers, given that the region is facing its own economic and geo-political challenges.

The pressure at airports has eased considerably. Airlines were facing slot constraints at most of the metro airports, particularly during peak hours. Jet’s exit has released plentiful slots, in particular at India’s most congested airport, Mumbai, which was its base. Airport operators will need to adjust to the new growth and market realities.

Both GMR and GVK will have new investors: India’s two largest operators have inducted, or are in the process of inducting, new investors. With new airport development opportunities expected to arise, continuity in economic regulation is important. The regulatory framework has stabilised recently and should not be disrupted at this time.

Government institutions should take internal responsibility for developing a vision for the sector. The competency to be able to develop appropriate polices and regulations must be developed, and discharged with rigour and discipline.

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