Special to Leeham News and Comment.
May 30, 2018, © Leeham News: As one of the fastest growing airline markets in the world, India represents a large and growing part of the Airbus and Boeing order books. Although the absolute numbers seem unwieldy at first glance, a closer look at the data show that the country’s aircraft orders may actually make sense given population and consumer trends.
Indian-domiciled airlines operate 562 aircraft of 37 seats or more, with an average age of less than eight years. DGCA rules were recently changed to allow passenger aircraft up to 18 years old to be flown commercially, which points to a relatively low replacement need over the next decade.
Meanwhile, India’s order book comprises 978 aircraft, a 74% increase if no replacements were needed. From a seat capacity perspective, that figure is 73% before replacement demand using assumed operator-specific LOPAs for MAX and neo.
These orders make up 9.2% of Airbus’s unfilled A320ceo/neo orders and 7% of Boeing’s 737 family backlog. Twin-aisle skyline exposure to India is near all-time lows at both manufacturers.
Figure 1 – Indian carrier unfilled orders, May 2018
India’s GDP averaged 7.6% annual growth from 2004 to last year; most forecasts through 2022 are in line for slightly faster growth. Scheduled seats in India from domestic and foreign operators have increased 11.6% annually since 2004, while ASKs increased 10.1% annually. Even if one looks just at growth since the 2009 financial crisis, seat capacity increased 8.3% annually.
At 8.3% annual seat growth, India’s current order book – including SpiceJet’s latest 737 MAX order – would be justified within just seven years, even if one assumes zero replacement demand.
When combined with market leader Indigo’s strong profitability and recent turnarounds at SpiceJet and Jet Airways, these numbers paint an optimistic picture of India’s future airline market. However, there is still plenty of reason for concern.
With a population of nearly 1.3 billion and a growth trajectory that has India on course to become the world’s largest country by 2024, one would expect a large enough middle class to support a much larger airline market than India’s. But “middle class” in India often means lacking sufficient disposable income to travel.
The most recent Indian Consumer Economy or ICE360° survey revealed that 86% of Indians never travel. Even the top 1% of Indians average just $173 (11,655 rupees) of annual travel spend. SpiceJet estimates 97% of Indians have never flown. All this begs a question: Even with the rising tide of a growing middle class, will enough Indian consumers be able to afford air travel at profitable yields within the next decade?
The country has also long been one of the most difficult regulatory environments for airlines, with a thicket of rules designed to protect state-owned financial laggard Air India. The result has been a long list of failed carriers in India. Air India has long been known as a highly irrational competitor, adding capacity in markets that make little financial sense and offering fares out of line with its cost structure even on routes that might otherwise be viable for others. Future economic growth won’t matter if India’s carriers have to financially slaughter each other just to defend market share in a future downturn.
Mercifully, Narendra Modi’s government has recently undertaken meaningful strides toward liberalization, including a drive to sell 76% of Air India. However, potential buyers are being asked to accept a long list of difficult provisions, including the assumption of $5 billion of debt. Sydney-based consultancy CAPA believes Air India could lose another $2 billion in the next two years – and few industry observers see any realistic prospect of profitability on the horizon. Not surprisingly, no domestic or foreign companies are known to be actively considering a bid under these terms.
The Indian Directorate General of Civil Aviation (DGCA) has also recently scrapped the requirement for new operators to only fly domestically for five years before getting international rights. This “proving period” rule kept the domestic market overcrowded with capacity and yields below viable levels. With this impediment now gone, will previously domestic-only carriers instead overcrowd short-haul international routes? Seat capacity from India to the Middle East and Asia averaged 13% annual growth in the period from 2004 to this year, with a CAGR of >15% over the past three years.
On top of concerns about Indian carrier growth, there is a rising wave of rising foreign capacity into the country. Emirates, Etihad, and Qatar Airways have long built their growth strategies on shuttling the Indian diaspora throughout the Gulf region and beyond. But now a host of low-cost carriers like Air Arabia, Lion Air, and Malindo Air are seeking to grow their respective footprints in India. And AirAsia India could rapidly accelerate its growth via the outsized order book of parent company AirAsia and deep-pocketed local partner Tata Group.
If foreign competitors continue to grow over the next decade at rates like those seen in recent years – at the same time that India’s own carriers seek to nearly double their combined fleet – sustained profitability seems like a potentially dubious prospect into the next decade.
Will Airbus’s and Boeing’s future deliveries to India be jeopardized as a result? Time will tell. But investors and suppliers would do well to watch this market closely for signs of what’s to come.
This is the concluding segment to our India series. This installment is provided by an analyst who has worked in multiple parts of the commercial aviation world for well over a decade. LNC is well acquainted with his bona fides and industry perspective, but circumstances require that he remain unidentified for the moment.