In February 2014, CAPA Aviation
(a consulting firm) projected a combined annual loss of USD 1.2 billion for the
three Indian carriers, Air India, Jet Airways and Spicejet. Go Air was expected
to break even and Indigo would still be in profit but lower than what it earned
last year. This has been the situation for the past many years. The government
has poured money into Air India to keep it going, Spicejet saw new investors
and Jet Airways sold stake to Abu Dhabi Based Etihad Airways. In an extremely
price sensitive market losses of over a billion dollars can spell doom for the
industry. But this has not deterred new entrant. Air Asia India and yet
to be named TATA – Singapore Airlines joint venture will start operations this
year. Apart from granting licenses to the new entrants the Ministry of Civil
Aviation (MoCA) was also busy discussing requests from Etihad, Emirates and
Qatar Airways to increase the seat allocation in their respective bilateral air
service agreements (ASA).
This might seem contradictory, on
one hand the Indian airlines are suffering losses of over a billion dollar and
on the other hand there are new airlines starting operations and foreign
airlines want a larger share of seats. Why would someone invest money and
efforts in a loss making market? The answer is simple. Despite the losses India
remains an attractive market, thanks to its demography. In 2013, Indian
airports processed approximately 97.67 million passengers, generating total
revenue of USD 17 billion. And that’s when the total air passengers were only 8%
of India’s population. Emerging economies like India have huge potential for
air travel and it is obvious that airlines see this opportunity. What is then
the reason for losses of Indian carriers is another story and has been told
many times over by many people.
The interesting bit is the
clamour for Indian market by the three Middle Eastern airlines. Etihad, after
buying out 24% stake in Jet Airways managed to get its seat entitlement
increased from 13,700 to 50,000 seats per week under a new ASA. The increase will happen gradually over a
period of three years. Emirates pushed for a 37% increase in its share but the
government allowed only a 20% increase of 11,000 seats per week. Another Gulf
carrier, Qatar Airways wants a 200% increase. Decisions on Qatar airways is
pending, but likely to be considered at some stage.
It is no secrete that the Gulf
carriers have been carrying fifth freedom traffic from India and hubbing them
through Dubai, Abu Dhabi and more recently Doha. And that is precisely the
reason why all three are so eagerly pursuing the matter with MoCA. A quick
glance at the passenger numbers will give us an idea of the scale of the market
these airlines are trying to tap into.
As mentioned above the 2013 saw total
passenger traffic of 97.67 million. Out of this 55.67 million (57%) were domestic
passengers and 42 million (43%) passengers flew to international destinations. The
total revenue contribution of domestic passengers was USD 3.7 billion, a mere 22%
of the total revenue of USD 17.1 billion.
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Out of the 42 million international
passengers, 66% or 27.51 million flew to destinations in the Middle East,
Europe and North America. These passengers contributed USD 9 billion (67% of
total) in revenues on these sectors. The Middle East is the largest of these
three markets with a passenger share of 40% and a revenue share of 22%.
The geographic location of the
Middle Eastern carriers gives them an advantage of having a one stop connection
to markets in the Gulf Cooperation Council (GCC) countries, Europe and North
America. This is not only handy in offering cheap fares but also helps to
develop their respective airports as international hubs. These airlines are in
effect eyeing the huge intercontinental traffic that India offers. There are
27.5 million passengers, willing to pay USD 9 billion in fares to fly out of
India.
The matter is not just restricted
to the airlines. All the three airports are part of the larger government owned
enterprise which owns them together with their respective airlines. A passenger
is counted twice by an airline on a return flight, but counted four times by
the airport, if he is changing planes. A transit passenger not only increases
the passenger count but also spends anything between two to four hours in the
transit lounge at the airport. Four hours is enough time to entice passengers
to spend on snacks, drinks and high margin products in the Duty Free. In 2013
Dubai Duty Free posted total sales of USD 1.8 billion.
This is the reason the three
airlines are clamouring for Indian passengers. However, it does not mean that
the Indian aviation industry is doomed and foreign airlines will sabotage the
market. The two new entrants will possibly have the options of going international
without any cooling off period. The enhanced seat limits to the Middle East will
benefit them. Air India will hopefully be privatized in the tenure of the next
parliament and would end up in professional hands. The other low cost airlines would
probably expand their international network or find their niche and allow the
full service carriers to serve the long haul markets. All this is a lot of hope
and probability, but a realistic one. Until then the passengers will keep on
flying via the GCC hubs and contribute to their retail and passenger revenues.
