Domestic airlines eye bigger share of foreign traffic

Unlike many countries, international air traffic to and from India continues to be dominated by foreign airlines, primarily from West Asia. But Indian carriers have been growing their share of the pie steadily.

From about 30 per cent in FY14, the share of domestic airlines in India’s international traffic rose to 34 per cent in FY16 and further to 35 per cent in FY17, says a report by rating agency ICRA. This is a result of Indian carriers outperforming their international counterparts in traffic growth.

For instance, in FY17, while overall traffic growth to and from India was 8.4 per cent, the domestic carriers grew their international traffic at a faster 11.8 per cent.

While this is much slower than the about 22 per cent growth in domestic air traffic in FY17, the foreign traffic opportunity is also getting much attention from Indian carriers. More flights by both established players (Air India and Jet Airways) and relatively new entrants (IndiGo Airlines and SpiceJet) have aided the trend of growing market share on foreign routes.

The Jet Airways and Air India groups have, over the years, built up significant share on the international routes (13.5-15.5 per cent), while IndiGo and SpiceJet are gradually building up their presence (about 3 per cent share each).

In the coming years, the share of domestic carriers in India’s international traffic is likely to grow. One, with the government replacing the 5/20 rule with the 0/20 rule last year, airlines such as Vistara and Air Asia India are ramping up their fleet to reach the 20 aircraft threshold that will let them fly foreign routes; there’s no more waiting to complete five years in domestic operations before going international. These airlines could start international flights in calendar 2018. GoAir, which already has more than 20 aircraft, has plans to start flying foreign routes in the current fiscal (FY18). Next, a fair portion of the large aircraft orders placed by many Indian carriers is likely to be placed on international routes.

A recent ICICI Securities report says that in April-May 2017, the total capacity of IndiGo Airlines, which has the largest order book among domestic carriers, increased 21 per cent y-o-y. The chunk of this was deployed on international routes, with 17 per cent capacity growth in the domestic segment and 64 per cent in the international segment.

In the case of Jet Airways, too, while domestic capacity increased 7 per cent y-o-y in April-May 2017, international capacity grew 10 per cent. GoAir, in the medium term, intends to deploy as much as 30 per cent of its expanded capacity on international routes.

Are foreign routes of Indian carriers doing better than domestic ones? Not quite. Jet Airways gets more than half its revenue and profit from international operations, aided by the tie-up with its strategic investor Etihad Airways. But this segment did worse than the domestic business last year (FY17), with a sharper fall in operating profit and margins. Similarly, the international operations of IndiGo, which contribute about a tenth of its overall revenue and profit, did worse than the domestic business last year.

Competition and higher costs, including fuel expense, which impacted the domestic business, took a bigger toll on the airlines’ international business.

Despite this, domestic carriers are likely to step up on their international business. For one, margins in the international segment remain better than the domestic operations, aided by lower fuel costs.

Also, airlines in India would prefer deploying a portion of the impending huge fleet capacity expansion on foreign routes, lest they drag down domestic fares.

According to a report by ICRA, the current order book of Indian carriers is nearly double their current fleet size.

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