The clamour for India

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.

Just a tiny bit more

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.