Indian aviation 2012 review Part 1: Overall trends

by Vinay Bhaskara

This is part 1 of our 2012 review of Indian aviation. Part 2 will come next week with a carrier by carrier review of  2012 in Indian aviation. 

When the story of Indian commercial aviation in 2012 is told, the overarching narrative across almost the entire industry will be one of cautious optimism (though Kingfisher Airlines obviously belies this trend). But the theme I’d rather focus on is capacity discipline, or rather the change that single handedly catapulted the Indian airline market back to some semblance of normality. If you remember my 2011 reviews for US and Indian aviation respectively, one of the biggest themes was how capacity cuts pushed the US airline industry to steady profitability, while the Indian airline industry added to much capacity and commensurately reported record losses.

It’s incredible how simple the airline industry can often be; it really boils down in many cases to the simple supply-demand equation. Match supply to demand and price accordingly; control supply to raise prices when your costs increase and you can maintain profits. This is basic microeconomic strategy yet the tendency in the airline industry has always been to chase market share at the expense of profitability.

The specific numbers are particularly heartening. Since March of 2012, monthly capacity growth in the domestic Indian market has not crossed 3% except in May after averaging more than 12% over the previous 20 months. And in the last part of the year, capacity actually decreased sharply, falling to -7.0% in October 2012, and -5.9% in November 2012.

It is important to note that all of this was sparked by the demise of Kingfisher, which had already pulled lots of capacity out of the market before its shutdown. While some mourn the loss of an airline that dared to dream big (and indeed there will be plenty of time to eulogize in 2013), I say that it was a necessary sacrifice insofar as much as the goal was to ensure a viable and sustainable airline industry.
While this process has certainly raised fares in the short term, I’d argue that that is good for the Indian market, in the sense that it will drive long run sustainability. Any unreasonably high fares are obviously bad for the consumer, but the flip side is that fares need to reflect the cost of operation, and through most of 2011 and into 2012, they just weren’t doing so.

The stabilization of fuel prices is another key contributor to the stabilization, if not quite success, of Indian airlines. Over the course of the year, rising oil production from unconventional sources and the easing of tensions in the Middle East after the Arab Spring have pushed the price of a barrel of oil (West Texas Intermediate measure) down to around $90 per barrel, where it has stabilized. While this has not reduced costs any versus 2011, the stabilization has at least bought the Indian carriers some time to reorganize their operations to operate in a high cost environment.

It is interesting to note that the Indian carriers face many of the same challenges as the broader economy. As economic growth slows to an anemic (by BRIC standards) 5-6%, the demand for air travel will continue to soften, not in the least because discretionary purchases like air travel are often among the first cutbacks made by consumers during economic slowdowns. Whether or not this derails the shoots of positivity amongst Indian carriers depends a lot on the government, more specifically the Ministry of Civil Aviation.

2012 was a good year in the Indian government’s management of aviation. The primary achievement of course, was the approval of foreign direct investment (FDI) by foreign airlines, as well as several other smaller rule changes that made the operating environment slightly more conducive to India’s airlines. (The move to end required flying to Northeast states early this year is also very beneficial).  But the main goals for India’s government in 2013 should be to reform the convoluted and confiscatory fuel taxation structure which has been crippling Indian aviation. A reduction in fuel taxes as well as unification under one single national tax combined with reduction in the sometimes exorbitant airport fees charged by places like Delhi Airport (which are hurting traffic growth beyond the existing economic slowdown) would be a very good agenda for the Ministry of Civil Aviation in 2013.

Turning back to FDI, whether or not Etihad buy a stake in Jet Airways in the near term, the clash around FDI in Indian aviation mirrors a broader question that pervades Indian aviation, and even the economy. At some point, India will have to decide whether it wants to let foreign carriers have expanded access and control over the market, or continue to support the Indian airlines. The former option can take two forms, first through direct investment, but also through expansion of bilateral capacity for carriers like Emirates, who has hit its 54,000 seat bilateral capacity limit. And the question is really something that the Indian people will have to make a decision on in the near future.

Basically, the choice lies between two paths. The first is to give foreign carriers near complete access to the Indian market. This would drive significant traffic growth, expanding affordable air travel to the growing middle class. However, this option would likely preclude the development of a robust Indian airline industry. So the question for India moving forward is, would it rather maximize the air service provided to its citizens at a quality price, or strategically opt for a strong aviation sector. My personal preference is towards economic growth, which is best achieved by maximizing aviation growth and lowering prices, but it is really a question for the broader Indian citizenry to decide.