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December 20, 2017 location Mumbai

Twin headwinds threaten to alter Indian aviation’s flight path

Infra issues, pricey fuel to cull passenger growth by an average ~800 bps in 5 fiscals

Despite a raft of policy facilitations, domestic airlines are flying into two major headwinds – crippling infrastructure constraints at major airports, and an uptick in fuel prices – which could mean growth in domestic air passenger traffic may have peaked out for the medium term.

 

CRISIL Research sees growth decelerating ~800 basis points (bps) to 13-15% annually in the five fiscals through 2022, compared with a blistering 22% seen in fiscals 2016 and 2017. This fiscal, it’s seen slowing 300-500 bps to 17-19%.

Passenger traffic took off in the past two fiscals as fares fell following a decline in crude oil prices to an average $48 per barrel in 2016 compared with $108 in 2014. That also brought down the operating cost – aviation turbine fuel accounts for ~30-35% of the cost – of carriers.

 

CRISIL Research expects the average price of crude oil to be $50 -$55 per barrel over the next five fiscals, so fares would nose up and moderate passenger traffic growth.

 

Says Prasad Koparkar, Senior Director, CRISIL Research, “The bigger problem, however, is the severe congestion at airports metastasizing into structural gridlocks. Mumbai and New Delhi airports (63% of domestic passenger traffic either originate or terminate at these two airports) are edging towards capacity crunch during peak hours, which is amplifying the infrastructure constraints.”

 

Mumbai’s problem is it has only one operational runway (the second one is in cross alignment, so can’t be used), while Delhi has three. And capacity utilisation at other metro airports such as Hyderabad and Bengaluru have already crossed the 100% mark.

 

Plan to build a new runway at Mumbai has been mired in issues of rehabilitation of slum-dwellers abutting the airport, acquisition of private land, and removal of obstructions such as buildings in the take-off and landing paths.

 

To boot, a second airport in Navi Mumbai, in the works since the past two decades and now seeing some traction, is unlikely to come up in the next 3-4 years.

 

In the first half of this fiscal, growth in passenger traffic dropped to ~16% because IndiGo’s plan to induct the A320neo aircraft flew into engine issues leading to grounding of 9 aircraft. The aircraft supply has been restored now, and more planes (A320 and ATR72) have been inducted, so growth should rebound in the second half.

 

To beat congestion at major airports, and to ferry more passengers from a single slot, airlines have started deploying bigger aircraft. IndiGo has upgraded its order for 25 A320neo aircraft to A321neo, which will increase its seat capacity by 20-25% per take-off, but deliveries will commence only from end-2018.

 

Says Binaifer Jehani, Director, CRISIL Research, “Such steps can at best boost capacity in the short term. Over the long term, however, significant investments in airport infrastructure are necessary to help the industry grow faster. We expect infrastructure constraints to deteriorate in the medium term.”

 

Such constraints have also impacted operations under UDAN, the regional connectivity scheme (RCS) of the government. As of October 2017, Alliance Air, SpiceJet and TruJet had commenced operations in 28 of the 128 routes allocated under Phase I of RCS.

 

But there is dearth of infrastructure at RCS airports, and new carriers such as Air Deccan and Air Odisha are facing teething troubles.

 

Difficulty in getting slots at major airports only aggravates the situation as 68 of the 128 routes either commence or terminate at metro airports and hence require slots there. However, airport operators have little incentive to provide slots for regional flights as these do not add to their revenue.

Questions?

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    Prasad Koparkar
    Senior Director
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    binaifer.jehani@crisil.com 

  •  

    Binaifer Jehani
    Director
    CRISIL Limited
    B: +91 22 3342 3000
    binaifer.jehani@crisil.com