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As global aviation struggles to get a foothold, the aviation story for the Indian domestic markets is turning out to be very different. Domestic demand is showing strength, defying forecasts.
Travellers are thronging airport terminals, with majority of the travel driven by leisure demand. But in the euphoria that surrounds positive signals, the deception of demand remains.
Demand for domestic air travel has risen steadily after the second wave of the pandemic hit the country. Current demand levels are at around 3 lakh passengers a day – helped by muted capacity on rail and gradual easing of restrictions such as RT-PCR requirements. Remarkably, this demand is at hugher price levels, attributed to government-mandated price caps. Effectively, flyers are paying more to fly.
Other proxies that speak of demand revival are also trending upwards. For example, Goa is likely to be the first city where five-star hotels will command pre-Covid rates; Calcutta has seen healthy booking levels for Durga Puja; and all indications are that Diwali bookings for cities like Delhi, Varanasi and Jaipur are firm.
A changing industry
Yet, the deception of this demand is in the fact that the market structure has changed.
Business travel — a core driver of revenue stability for airlines — remains tepid. Technology has replaced a portion of this demand — perhaps permanently. Gone are the frequent morning-evening trips and the weekend getaways. It has now been replaced with longer trips — with an average of four days or more.
The purpose and nature of travel is changing, making an impact on profitability profiles. Flights between metro cities, including the famed Delhi-Mumbai runs, are not generating operational profit for most airlines. Compare this with destinations such as Dehradun, Coimbatore, Patha, Leh, Udaipur and Goa — which all figure squarely on the profitability list (again operational profit).
But such a list coupled with the length of trips also leads to a unique problem of route-imbalances; where flights are full going out in one direction and almost empty on the same return segments.
If one amortises the cost over the round-trip, then the numbers shift dramatically. If it is amortised over the network, the picture gets worse. It is a challenge with no simple solutions.
Meeting the demand
Then there is the supply-demand dynamics. Looking at supply, airline capacity, or the number of flights deployed in the domestic skies is now is at approximately 70 per cent of pre-Covid levels. But the utilisation per aircraft has dipped significantly. As the airlines have not shrunk their fleets drastically, it has resulted in cost implications. Lower aircraft utilisation means that each plane is producing less revenue for the airline. Until recently, the government had capped the number of flights deployed – a cap now removed effective October 18. It has hurt the occupancy factor, which means the passenger load factor is only at around 70 per cent, after clubbing and cancellation of flights. A supply-demand imbalance exists. Again a challenge with no simple solutions. There is also the inward turn of international demand. International flights help airlines by providing a natural currency hedge and also with asset utilisation. However, on both fronts, airlines are found wanting. The 27 million Indian travellers that, only 19 months earlier, opted for foreign destinations for leisure travel and spent an estimated $25 billion, are no longer doing that. Travel constraints have nudged a portion of this travel demand inwards. How much is anybody’s guess? But what is discernible is that travellers are now exploring their own country, from the foothills of Himachal to the beaches of Kanyakumari; from the natural beauty of the North East to the temples at Palitana, and everything in between. It is a unique phenomenon, and whether airlines can leverage this benefit continuously remains to be seen. As airlines head into the third quarter, traditionally the busiest travel period of the year, optimism is in the air. Demand is rising, but this cannot be confused with profitability. At some point, the earnings for the airlines have to be more than the cost of capital, which may not happen for some time to come.
The author is the Managing Partner at the aviation services firm AT-TV
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