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Feb 20, 2013 06:35 PM IST | Source:

Aviation may return to 11% CAGR growth in medium-term: ICRA

The pressures in the near-term remains on the aviation industry, it would return to a growth of 11% CAGR over the medium-term as some of the cyclical variables become less spiteful, says ICRA

Indian aviation industry: Operating environment improves even as cost-based headwinds persist, says ICRA.

ICRA believes that while pressures in the near-term remains on the aviation industry, it would return to a growth of 11% CAGR over the medium-term as some of the cyclical variables become less spiteful.

India’s favorable demographics characterized by burgeoning middle-aged population, rising disposable income levels and accompanied willingness to spend on air travel is likely to drive demand besides relatively low penetration of air travel and improving infrastructure, ICRA said in its report on aviation industry.

The higher cost of travel and the impact of economic slowdown have affected passenger traffic growth during the current year, which over the past five years has grown at a CAGR of 9.2%.

The ICRA report says that after years of steady increase in capacities, the industry has witnessed a decline of 3.2% in capacity during the current fiscal largely prompted by discontinuation of services by Kingfisher Airlines and to an extent by route rationalization measures of other airlines. While expected deliveries of new aircrafts are significant, we believe a majority of these will either replace less-fuel efficient models, expiring leases and aid in improving expansion plans of airlines on regional routes.

A sizeable share of these aircrafts may also get deployed on international routes as LCCs expand presence on international routes, especially the short-haul ones. Having recognized the need to maintain pricing discipline, ICRA expects airlines to maintain capacity discipline in the near-to-medium term, the report said.

With multiple headwinds, sharp increase in operating losses and accompanied weakness in balance sheets; Indian carriers have adjusted their business models. Although the attempts have been more common among full-service airlines, LCCs have also continued to focus on maintaining
lean cost structures. Airlines have also implemented rigorous cost rationalization measures right from phasing out-loss making routes to renegotiation of maintenance contracts to ride over the turbulent phase. These initiatives are likely to help airlines in challenging the adverse impact of high crude oil prices and currency depreciation.

ICRA says the fiscal 2012-13 has so far been characterized by decline in industry-wide capacity and resultant improvement in pricing discipline, which have collectively supported improvement in the operating performance of airlines even as growth in passenger traffic has been muted and cost-based headwinds have remained formidable.

ICRA believes that overall the operating environment for Indian carriers is now showing an improving trend. This is not just supported by Industry’s effort to maintain pricing discipline but also by attempts to rationalize cost structure, follow a strategy of unbundling services to expand ancillary revenues (similar to what airlines have been successfully doing, globally) and also supported by Government’s efforts to allow foreign airlines to pick-up stake in domestic carriers and import jet fuel directly. While directly sourcing jet fuel faces practical constraints, which are yet to be resolved, allowing foreign carriers to invest in domestic carriers could address the issues of funding constraint of airlines.

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