Demand spurt will help airlines soar

Shubhra Tandon | Updated on February 13, 2011 Published on February 13, 2011

Passengers boarding a flight from the Mysore Airport. - Photo: M.A. Sriram   -  Business Line

Soaring air travel demand augurs well for the airline industry, though the players will need to keep a close eye on oil price movements.

The airline industry in India has seen positive growth tends in the last few months — the industry closed the year 2010 carrying 50 lakh passengers in a single month — in December — and the going has been good so far this year.

But what happens to the growth momentum once the peak travel season ends in March? So far, market experts and airlines do not seem to be too concerned about it.

With economic recovery and increasing purchasing power, demand for travel is unlikely to dwindle, and the expectation is that the airline industry will fare well in the coming months too, say industry experts.

“Indian air travel market is expected to surpass 57 million mark in 2011, assuming that the sector does not face any major setbacks. In March 2010, domestic airlines in India carried about 3.9 million passengers; the very next month this figure jumped to 4.2 million. The airline sector will fare equally well post March 2011,” Frost & Sullivan's Aerospace & Defence Analyst for South Asia & Middle East, Mr John Siddharth, told Business Line.

Passenger traffic is growing at 15 per cent and is expected to touch 17-18 per cent, according to industry analysts.

“From the demand side the Indian market is well positioned for growth for the next three to five years. Air travel demand is likely to remain strong on the back of growth in the Indian economy, high disposable incomes and rising middle-class aspirations. A majority of the air traffic still comes from the top six to eight metro destinations and has not extended to the tier 2 and 3 cities. However, with privatisation of 35 non-metro airports that scenario should change,” said Ernst & Young's Partner, Mr Kapil Arora.

Fluctuations in oil prices have always been a cause for concern for the airlines.

Volatile Oil prices

“December had the highest traffic that we have seen in some time and demand is not a problem at all. However, if you look at crude oil prices over the last one year, they have moved from $66-$67 a barrel to around $95 now — up by 30-35 per cent,” said Ambit Corporate Finance Director, Mr Vinod Wadhwani.

From 2008 till a greater part of 2009, airlines were hit by the double whammy of high crude prices and falling passenger traffic because of the economic downturn. Oil prices had touched an all-time high of $147 per barrel, eroding airlines' bottom-lines across the globe.

However, over the last year, when the airlines started coming back into the black, the cooling of the crude oil prices had a crucial role to play, said Mr Wadhwani. “Because the prices (of crude oil) came down and the demand was going up, they (airlines) were able to sustain the ticket prices,” he said.

Other analysts also say that passenger loads remaining high, increase in air-fares will not be of much concern. “With passenger volumes growing at 18-19 per cent, which is two and a half times that of GDP (Gross Domestic Product) a 5-10 per cent increase in air-fares, can be easily absorbed,” said a senior analyst with a consulting firm.

At present, the airlines say there is not much reason to worry about rising crude prices. Brent Crude prices breached the $100 mark last week from the $90-$92 per barrel levels. However, Jet Airways recently said the airlines can pass the impact of such costs to the customer without unduly affecting demand growth.

SpiceJet has also said that the airline remains optimistic about growth in domestic passenger traffic during the next 12-18 months and expects that the industry will grow in the 14-16 per cent range.


However, it has been seen in the past that India, being a price-sensitive market, the spurt in air-fares has not gone down well with the consumers. “The rise in fares will definitely impact air travel demand in India. It is evident from the fact that in 2008 the number of air passengers dipped to 40.77 million from 42.85 million in 2007. India is a very price-sensitive market and increase in oil prices will have a direct impact on air travel demand,” said Mr Siddharth.

“On top of the oil prices, look at the fuel taxes that we (India) have, coupled with airport charges which are the highest in the world…So all these cost pressures remain (for the airline),” said Mr Wadhwani.

But the overall scenario is that soaring air travel demand augurs well for the airline industry. And this, in all probability, will continue beyond March.

Crude prices look manageable so far, but industry watchers and players need to keep a close eye on oil price movements.

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Published on February 13, 2011
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