Domestic air traffic shrinks, but IndiGo continues to gain

New Delhi: The government’s decision to allow foreign airlines to invest in Indian carriers has brought optimism to the sector, but it is unlikely to expand domestic aviation, at least in the short term.

Over the last three months, the domestic air travel market has shrunk by about seven lakh passengers! Only 43.69 lakh Indians took to the domestic skies in August against 45.37 lakh in July and 50.37 lakh in the month of June.

[caption id=“attachment_460384” align=“alignleft” width=“380”]  So will this fiscal see any growth in domestic traffic at all? . AP[/caption]

So will this fiscal see any growth in domestic traffic at all? All eyes are now trained on the festive season, which begins in October, for traffic to improve. But concerns remain.

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Princy Singh and Dinesh Harchandani of JP Morgan noted in their note to clients that aviation turbine fuel (ATF) prices are near all-time highs of the past 10 years and, coupled with a fall in passenger traffic over recent months, the pricing power of airlines is expected to remain limited.

But Anand Kumar and S Arun of Bank of America Merill Lynch point out that despite a seasonally weak September quarter, domestic ticket prices have not come down and pricing discipline among airlines will likely keep the yields close to the the first quarter’s levels (April-June 2012). “For the full year we expect about 15 percent rise in domestic yields….domestic traffic has been expectedly weak in the month of July on account of seasonal weakness, higher fares and (the) Kingfisher Airlines pullout. However, we expect the traffic to recover from October onwards as the festive season sets in. We maintain our full year estimates of 5-6 percent growth in traffic.”

An interesting phenomenon that is apparent in this falling market is the rise and rise of IndiGo. This, even as Jet Airways and its low-cost arm JetLite dropped down in the marketshare pecking order. According to the Ministry of Civil Aviation, IndiGo remained the single largest domestic airline for the fourth month in a row, marginally increasing its share from July to settle at 27.6 percent (27 percent) in August.

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IndiGo’s performance is remarkable since it increased its share of passengers when total passengers were declining. Over 12 lakh passengers chose to fly IndiGo against 8.16 lakh who flew Jet Airways. In fact, Jet was neck on neck with SpiceJet which accounted for just over eight lakh passengers last month. Jet Airways lost market share, settling at 18.7 percent from 19.4 percent in July. Its low-fare arm JetLite stood at 6.5 percent (7.2 percent) and 2.85 lakh passengers, also showing a decline in load factors.

Kumar and Arun point out that Jet is currently in talks with Lufthansa for a code-share arrangement for Europe and North America. It is also in talks with Star Alliance for a possible induction into the global alliance. “This would greatly enhance the already strong international franchise of Jet and would likely give incremental higher yield corporate traffic into India, thus improving both yields and traffic.”

But Jet may not benefit from the relaxation in FDI norms since its current promoter holding of 80percent is routed through overseas entities and is already deemed as FDI. Jet could be at a relative disadvantage to its competitors, which are eligible for investments.

Moreover, SpiceJet and Air India were also neck-and-neck last month, with the low-cost carrier improving its performance and Air India maintaining its loads. But a lot is going for both these airlines. SpiceJet is the current favourite and frontrunner for getting equity investment by a foreign carrier, thereby improving its balance-sheet. And Air India is expected to reap benefits from the induction of the B787 Dreamliner which will initially fly domestic.

SpiceJet’s marketshare gain could not have come at a better time. The Bank of America Merill Lynch analysts have said that strong yield recovery in the domestic segment and international route rationalisation should enable SpiceJet to post substantially lower losses in FY13 and strong profits in FY14.

Kingfisher Airlines remains at the bottom of the marketshare game, losing marginally more share to corner just 3.2 percent of the market in August against 3.4 percent in July.