Wednesday, September 27, 2023

Aviation Industry: Recovery, International Vs Domestic

By Ameya Joshi

Airline network analyst Ameya Joshi analyses the rates of recovery made by the domestic & international aviation industry following COVD-19 inflicted turbulence.
Ameya Joshi, Airline Network Analyst

On 27 March 2022, as the IATA (International) scheduling season transitioned from Northern Winter to Northern Summer, it was a momentous occasion in India. After over two years of remaining shut, the scheduled International air service commenced without restrictions.

This came after a false start in December 2021, when the announcements were made but were rolled back at the last minute as the world was hit by the fast-spreading Omicron variant, and though the impact on India was not so dramatic, the risks led to a cautious decision to continue with suspension. The decision to open up was backed by the Ministry of health and family welfare (MoHFW), dropping the quarantine requirements and moving to just monitoring

What Do The Numbers Say?

Indian aviation had been impacted on the international side for quite a while. Jet Airways, which had an excellent global presence and was the only other carrier apart from Air India to operate widebody aircraft, went kaput in 2019. Jet Airways kept its international presence even as it shrunk domestically. Nevertheless, come April, the international presence fell, and on 19 April 2019, it hit the dead end.

The peak from October to December 2019 averaged 87214 departing passengers on the international side, a combination of Indian and foreign carriers. The changes were twofold: passenger traffic had veered away from Indian pages since nobody could fill the void left by Jet Airways, and the overall traffic started going down post-January 2020 with news of Coronavirus, then not a pandemic, trickling in.

Vistara expected to take deliveries of its widebody aircraft, and things looked upbeat until the pandemic stuck. International operations were smoking up a chimney as the world headed into a lockdown. Three months of operations post restrictions (April – May-June 2022) and passenger numbers are already at 62,24,966 in the quarter per data released by the Ministry of Civil Aviation daily, an average of 68,406 daily passengers, thus translating to 80% of pre-COVID traffic. The demand has been rapid compared to the domestic traffic, which is yet to cross the pre-COVID peak.

What Does It Mean For The Industry?

20% to 35% of the expenditure of airlines in India is dollar-denominated. This means that any currency fluctuation will have an adverse impact on the balance sheet of airlines. The INR has been sliding for multiple reasons, primarily because of the current global challenges – a raging war, oil embargoes and a pandemic. International operations with sales coming in from foreign shores guarantee a certain inflow of foreign currency, which buffers the impact of the sliding rupee to a certain extent.

Taxation on ATF for foreign operations is significantly lower than taxation for domestic
operations. Fueling about 35% of all expenditure adds a significant burden to international operations. The dollar-denominated ticket sales help earn some revenue in dollars, which offsets the sliding INR and helps balance a portion of the dollar-denominated expenditure.

Who Benefits The Most?

The two carriers, which benefit the most, are Air India and IndiGo. Air India, now a private entity, is the largest Indian carrier on international routes in capacity by ASK (Available Seat Kilometres), while IndiGo is the largest Indian carrier on international routes by a number of departures. While IndiGo has always spoken about international expansion, only 8.83 percent of its total scheduled departures were international in 2019 – the last year of operations before the pandemic.

Yet the very nature of global operations is such that this translated to 21.35 percent
of capacity by ASK (Available Seat Kilometres). Post pandemic, the airline has invested in codeshares and grown it with Air France – KLM, American Airlines and Qantas partnerships. SpiceJet, Go FIRST, and Vistara have an international presence; however, they are limited. Vistara’s two widebody aircraft are utilised effectively for London Heathrow, Frankfurt and Paris, but the narrowbody expanse is limited. SpiceJet is still struggling with its own problems on the financial side.

The Tata group-owned Air India and Air India Express also benefit from this recovery; the airline has a new owner after successful privatisation. If there were an airline that could take a hit, it would be this one. Air India had 69.9 percent of its capacity by ASK deployed on International routes. These amounted to 25.6 percent of its total departures. From relief flights to flights under Vande Bharat Mission (VBM), Air India and Air India Express either had monopoly and exclusivity or had the lion’s share.

Lack of competition, rules favouring non-stop flights, and
highest capacity deployment have meant that the airline made the best of the situation. However, that run will soon end, as passengers have multiple choices on the Middle Eastern carriers’ return with a total capacity to India.

Air India has not deployed its full capacity back to Europe. It has restricted itself to London, Birmingham, Frankfurt and Paris. This has meant that the airline has withdrawn services from Stockholm, Vienna, Madrid, Rome and Milan. It may get back over a period or maybe a part of route rationalising by the new management, Airports too, will benefit from this move. A lot of the airport revenue comes from non-aero activities like retail; an increase in passenger numbers increases potential customers and, subsequently, revenue from these activities.

Countries Dropping Requirements But Travel Is Not Seamless

Some of the countries opted for a zero COVID strategy. This meant locking down cities and countries until substantial vaccination was complete and going back to restrictions as and whena new case was reported. This also meant that these countries had almost isolated themselves without any flights. This included places like Singapore, Australia, New Zealand and Saudi Arabia. So much so that the Vande Bharat mission flights to Saudi Arabia from India were operated empty one way.

The Wider Impact On Tourism & Travel Ecosystem

The air, travel and hospitality ecosystem has been the worst hit due to the pandemic, and in the case of India, where there was no direct bailout, the challenges were completely different. The last quarter has seen both IndiGo and SpiceJet clock profits. Coupled with profits and data from listed hospitality chains, it is established that the appetite for travel has not just returned but is increasing.

Tourists have been flocking to every place open for business. When it opened, the rush to reach the Maldives saw swift business for both airlines and hotels. This could be replicated across the country as more international tourists are set for travel. The present woes faced by passengers at airports and indiscriminate flight cancellations due to a lack of trained workforce are, however, not helping with the smooth flow of international travel.

The ramp-down was rapid, but none of the airlines anticipated a demand which could not be met due to ramp-up problems. So much was the hurry to cut losses that implications of a hunger for travel were not anticipated at this speed. A good question to be addressed to CEO’s of airlines who raced to cut capacity and workforce when borders slammed shut at the start of the pandemic. All this against rising oil, a falling rupee and a raging war in Europe.

Ameya Joshi is an airline network analyst


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