Airlines may hit air pockets as passenger traffic dips

After four years of phenomenal growth, Indian carriers seem to be heading towards an air pocket. The growth in passenger traffic has slowed down to 11% in the first quarter of 2008 at 1.11 crore passengers, from a phenomenal 38.97% a year back.

In 2007, for the whole year, the passenger traffic growth was 33.18% at 4.28 crore, much lower than 2006?s all time high of 44.23%. In 2006 Indian carriers flew around 3.21 crore passengers.

Most of the carriers, both full service and budget carriers have seen a dip in passenger growth. For example for state-owned Indian the passenger growth was ?14.97% in the first quarter of 2008 from a growth 11 % in the first quarter of 2007 and for the budget carrier Air Deccan the growth plummeted to ?12.68% for the same period from 70.32 % in the first quarter of 2007.

?This has mainly been attributed to the sharp rise in ATF costs and hence the even higher rise in fuel surcharges,? an aviation analyst with a major Mumbai based brokerage said.

Airlines see the sharp increase in ticket prices due to sharp increase if jet fuel prices and operations cost as the main reason for travellers shying away from flying.

Currently, ATF prices in India are 50% higher than international prices making them the highest in the world and since fuel constitutes the highest component of around 40% of an airline?s operational cost, airlines? bottom lines are taking a severe hit.

Just a year ago (May 2007) the fuel surcharge stood at Rs 750 making an air ticket for a trip from Delhi to Bombay at a base fare of Rs 500 cost just Rs 1,250. Now, exactly a year later, the same ticket costs a total of around Rs 2,850. A rise of around 130%.

Similarly for ATF, in May 2007, the per kilolitre price of aviation turbine fuel in Delhi touched Rs 37,421.94 up from Rs 36,149.04 the previous month. In May 2008, the per kilolitre price of aviation turbine fuel in Delhi touched Rs 58,387.92 showing a rise of around 56% over the same period of the previous year.

Aviation analysts say that as a result of the rise in the prices of flight tickets, passengers are not migrating from railways and other modes of transportation to flights. Even travellers that had moved from the railways to air travel due to the low cost boom are now rethinking the move.

While passenger growth was 33.4%, the companies added capacity at a much faster pace than demand. ?The Commercial aircraft fleet is expected to register a CAGR of 13% in India till 2015,? Dhiraj Mathur, Executive Director/Partner, PricewaterhouseCoopers said.

The dip in traffic numbers is already forcing many of the carriers to cut back on their capacity addition plans despite getting a major part of their aircraft orders this year. Seeing a slump in traffic growth, market leader Jet Airways has decided to bring down its capacity addition to just 10% from its original plan of 20-30%.

It will add only only five ATR planes and two Boeing 737 planes this year. JetLite too, would add no more than two planes by December.

The Kingfisher-Deccan combine has also adopted a policy of fleet rationalisation. It is said to be adding 8-10 aircraft a year instead of 20 as envisaged earlier. The rest will either go towards sale and lease back gains or addition to the international sector.

Low cost carrier, Spicejet, had initially planned to add 4 aircraft every year but due to pressures on the balance sheet and rising fuel prices we have decided to cut this down significantly. The low cost carrier will now deploy much less.

In 2005, it was estimated India seemed an under-penetrated market with an average air travel of 0.014 trips per person per year as compared to an average 2.02 trips per person in the United States

The number of passengers travelling on the domestic aviation sector had been showing very marginal growth year on year of less than 5% till 2001 with a few years in between like 1997 (-2.22) and 2001 (-3.84) showing negative growth. Since the year 2004, the number of passengers travelling on the domestic aviation sector has been rising by more than 30%.

According to data from the Directorate General Of Civil Aviation (DGCA), in 2003 the total number of domestic air passenger was 1.45 crore showing a rise of 9.2% over the previous year. In 2004, total number of domestic air passenger was 1.81 crore showing a rise of 24.74% over the previous year.

In 2005, the rate of growth showed a slight dip to 22.75% with the total number of domestic air passenger standing at 2.23 crore. Then in 2006 the sector showed the most growth ever at 44.23% with the total number of domestic air passenger being 3.21 crore.

The year 2007 was largely heralded as the year of consolidation for the domestic aviation sector with the national carriers ? Indian and Air India – merging under one company, the National Aviation Company of India Limited (Nacil) as well as Vijay Mallya promoted Kingfisher buying majority stake in Captain GR Gopinath promoted founding low cost carrier Air Deccan.