Home / Companies / News /  Excess capacity big concern for a volatile aviation sector

NEW DELHI : Indian airlines have faced near-constant turbulence since the onset of the pandemic. Initially, the sector witnessed its worst nightmare in the form of grounded aircraft for two months during the national lockdown. A slump in demand followed this, along with a restriction on capacity deployment by the civil aviation regulator. Then came the volatility in fuel prices and the weak rupee, which continue to cloud their path to profitability. The capacity deployment equation has remained a constant worry for the sector since the onset of the pandemic.

The government cap on capacity deployment by airlines ranging from 33% to 85% from May 2020 until October 2021 naturally generated excess capacity with airlines that could not be used because of covid-related restrictions. As the scope of revenue generation shrank, the profitability roadmap has also come under pressure. IndiGo, the largest airline in India, with a 58% market share in the domestic aviation market, reported losses in nine out of the past 10 quarters.

With the removal of the cap on capacity deployment in October last year, the aviation sector has faced another problem. While airlines now had the ambit to deploy 100% capacity, the implementation had a key challenge—demand. The demand for air travel has not recovered sustainably so far. The demand faced several setbacks when travel sentiment dipped because of different waves of covid in India. In addition, the high airfares in an inflationary environment also made people postpone travel plans, affecting air traffic. The rise in jet fuel prices further pressured airlines to choose between flying routes with barely any demand or parking the aeroplane until a suitable network is chalked out.

“Since last year, there has been an unprecedented rise in jet fuel prices, which was further aggravated by the Russia-Ukraine war, which in turn has also pushed fares, impacting leisure travel demand to an extent. Hence, the combination of these factors has impacted the capacity deployment levels for the sector," said Suprio Banerjee, vice president and sector head, corporate ratings, ICRA Ltd.

The issue is excess capacity resulting from volatility in demand for air travel in India. This can be understood from the latest data on capacity deployment for Indian airlines in August. IndiGo, the largest airline, operated 43,171 flight departures in August, translating to 9,748 flight departures per week. DGCA approved the airline to operate 11,130 flights per week under the summer schedule. This shows IndiGo operated around 88% of its approved schedule. Similarly, AirAsia India operated 1,010 flight departures per week in August and, thereby, operated 63% of its approved summer schedule.

In fact, SpiceJet, which has been restricted by DGCA to operate only up to 50% of its schedule, actually managed its flight operations by operating just 37% of its schedule in August at 1,547 weekly departures as against the approved figure of 4,192. GoFIRST operated 52% of its schedule. Vistara managed to operate at 91% with 1,578 weekly departures against the approved 1,741 flights.

In this fiscal, though the momentum has been strong in terms of recovery, as per ICRA’s expectations, the passenger traffic is expected to reach pre-covid levels only by FY24, Banerjee said.

Aviation consultant CAPA sees limited capacity inductions for FY23 as airlines are constrained because of financial reasons, and the rest are facing supply issues. According to CAPA quarterly report, the capacity expansion for Indian airlines will be reasonable and moderate in the domestic segment. “With industry consolidating around two players, we see rational capacity inductions," CAPA India said.

The disruption of supply chains due to the Ukraine war has further hit the delivery schedule of spare parts, engines, as well as aircraft. “It is a peculiar situation. The disruption in supply chains is actually working for the benefit of some airlines, which are already operating a much smaller percentage of their approved schedule. Had the delivery been on time, this would have further created more capacity which would have to wait for the demand," an industry expert said.

However, some believe the onset of the festival season has come bearing strong positive sentiment for the sector.

“In the current fiscal, the global headwinds led by depreciating rupee and rising ATF prices have resulted in an increase in airfares. These pressures will also wane, and with the demand on an upswing, we will see airlines returning to profitability soon," said Gaurav Bhatia, executive director, Bird Group.

The issue of excess capacity can be met once the sector witnesses sustainable demand recovery for both its key leisure and business segments, along with the ability of the airlines to expand their RASK-CASK (revenue per available seat km - cost per available seat km) spread, which becomes their core profitability metrics, Banerjee said.“Given the elevated levels of ATF prices, CASK for the airlines has been putting pressure on the spread (RASK- CASK), impacting the profitability of the sector negatively," he added.

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