India is a market that has been attractive for OEMs for many years. The following two charts explain why. The first chart shows how strongly the domestic air travel market has grown. Typically, passenger traffic doubles every 15 years – in India between 1995 and 2010 traffic grew by four times. If we look back 15 years from 2015, traffic has grown by over fives what it was.
Just to provide some perspective – India’s railway network is the world’s fourth largest and in 2014 transported 8.4 billion passengers. For every Indian domestic air passenger in 2014, 138 passengers took a train.
The red line shows that even as traffic has grown, load factors have grown too – but much more slowly. The typical 60% has risen to over 80%. Does this highlight an opportunity for OEMs? It should.
Look at another chart. Here we have used base years for both domestic air traffic and the nation’s fleet. As one would expect based on the first chart, the fleet has grown but more slowly than the traffic. On the face of it, this should be a signal for the OEMs to be all over India’s airlines, all the time. India shares some similarities with the Australia, Canada, China, Russia and the US – vast distances that mean time efficient travel means using aircraft. China has been building a high-speed rail system to help because it can’t build airports fast enough. India is facing the same problem with congested airports and it’s trying to build a high-speed rail system.
IATA reported (second link) that India now has the highest air travel growth. With congested airports driving a need for larger aircraft and high-speed rail lagging, the Indian market must be the dream place for an OEM to trade. As of September, domestic traffic had grown over 22% in 2016.
India hampers its aviation sector’s growth because of its myriad taxes. Topping it off is the country’s ATF (aviation fuel tax). Use this link to read a dated, but pertinent, paper on the matter. Turboprops, because they use props, pay less tax than aircraft with turbines even though both use the identical fuel. India’s fuel taxes can be as high as 30%, on top of an 8.2% excise duty. Consequently, Indian airlines see fuel costs at about 45% of total operating costs compared to the global average of 30%.
Doing business as an airline in India is tough even with demand for travel growing as fast it is.
Then there is competition, which may be the most brutal anywhere. Fare wars are common. LCC tickets prices are around $12 one-way. Air India has an eye-popping one-way fare from India to New York for $12.50! Even with the most restrictions possible, this price is irresponsible. But doable as a state-owned company, where profits are not the primary goal. Meanwhile, the private Indian airlines have their own myopic behavior.
But to top it all is the decision to change the currency. The impact on consumers is causing massive disruption. The government removed 86% of the cash in circulation. Not smart where 98% of all consumer transactions are in cash. Following this awkward decision, India is about to impose a nationwide sales tax (passengers are going to 9-12% more). While it is assumed this tax will simplify the maze of taxes in use now, consumers are almost certainly going to cut spending as they struggle to get their hands on cash that works. Which means the wonderful growth the airlines have seen may be seriously impacted and slow down.
Co-Founder AirInsight. My previous life includes stints at Shell South Africa, CIC Research, and PA Consulting. Got bitten by the aviation bug and ended up an Avgeek. Then the data bug got me, making me a curious Avgeek seeking data-driven logic. Also, I appreciate conversations with smart people from whom I learn so much. Summary: I am very fortunate to work with and converse with great people.
