Thursday, December 28, 2017

Is aviation sector facing slowdown?

New Delhi: The current buoyancy in the aviation sector is likely to hit a brick wall. There are a host of reasons to be blamed. Over the next few years, there are strong chances of passenger demand slowing down. Already, the growth has started to fall in 2017. The factors that can be attributed to the slow down are short-term and long-term. The short-term reasons, the ones that led to dip in the current year, include hike in airfares and unsustainable pace of growth. The long-term reasons are upward movement of aviation turbine fuel (ATF) prices, and the major airports in India reaching saturation points.

The big push from the government to promote regional connectivity is unlikely to halt this slide, and it is now believed that the domestic air passenger growth has peaked out. For instance, in 2017, the average passenger growth for 11 months stood at 17.27 per cent. In comparison, the corresponding numbers in 2015 and 2016 stood at 20.34 per cent and 23.18 per cent, respectively. The passenger traffic growth in September plummeted to 45-month low.

Ratings agency CRISIL projects the passenger growth decelerating by 800 basis points (or 8 percentage points) to 13-15 per cent annually over five years till 2022. CRISIL expects the average price of crude oil to be $50-$55 per barrel over the next five years that would jack up fares, and in turn, affect traffic growth. ATF accounts for 30-40 per cent of the total operating costs of the carriers.

"The bigger problem is the severe congestion at airports metastasizing into structural gridlocks.  Mumbai and New Delhi airports (63 per cent 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," says Prasad Koparkar, Senior Director, CRISIL Research. The capacity utilization at Bengaluru and Hyderabad airports has also crossed the threshold levels.

The 20 per cent-plus growth over the past two years was not sustainable. The aviation sector tends to grow at 2-3 times of a country's GDP growth. The passenger growth in 2016 was 3.26 times the GDP growth. Such a high growth momentum is difficult to sustain over a long period of time. Passenger yields of major carriers like IndiGo have also moved up in the recent quarters. For instance, market leader IndiGo's yield in the September quarter (Rs 3.57) was 8.9 per cent higher than the corresponding quarter last year. Passenger yield is the average fare paid by passengers per kilometer. A higher yield roughly translates into higher air fares.
27/12/17 Manu Kaushik/Business Today