CAPA Sees Industry Consolidation Ahead Near Term, Industry may reduce fares to remain Attractive for Customers.

CAPA India Outlook FY2023 has been shared. Highlights of the study have some key indicators for the Indian aviation industry. These include:

    Domestic Traffic

  • Domestic traffic is expected to reach 130-140 million passengers, perhaps remaining slightly lower than the FY2020 levels. The impact of higher fares on demand is becoming visible in Q2 with traffic recovery slowing down.
    International Traffic

  • International traffic is expected to reach 55-60 million passengers, around 20% below pre-COVID.
    Airline Financials

  • Airline losses are expected to moderate from around USD3 billion in FY2022 (including adjustments) to around USD1.4-1.7 billion.
  • LCCs are expected to account for around USD400-600 million and FSCs around USD1.0-111 billion.
  • The removal of fare caps may lead to significantly higher losses.
    Financial Assumptions

  • Brent Crude is assumed at USD105/barrel and the USD=INR78-80

  • Airlines are unlikely to continue with current fare levels, especially in Q2. Fares are expected to moderate significantly in Q2 and going forward.
  • The removal of price regulation will see the return of pre-COVID competitive intensity.
    Airport Financials

  • Indian airport operators are expected to report a modest profit of USD420 million.
  • If the revenue share for FY21 and FY22 is to be paid in FY23 the industry may end up breaking-even.

  • Aircraft deliveries are expected to be moderate at around 40+ inductions
  • Net additions to the fleet will be lower due to some of these aircraft being for replacement.
    Fleet Financing

  • Aircraft financing — especially for narrowbody deliveries — may be particularly difficult for one or two carriers.

  • The aviation industry will require recapitalisation of around USD2.0-2.5 billion.
  • Up to USD1.4 billion of requirements can be easily raised, however around USD800 million may be difficult, as was the case last year.
  • IndiGo’s earlier planned QIP is likely to be back on the table.

  • We continue to believe that consolidation is inevitable amongst Indian airlines, even after Air India’s privatisation. The long-term impact of COVID and likely losses in FY2023 will make it very difficult for the sector to raise funds for some of the airlines.
  • Consolidation is also expected in the airport sector within the next 12 months, possibly sooner.
    Market Structure

  • Indian aviation will consolidate around 2-3 major players in each segment which will have a critical impact on consumer interests and competition in the near term, which would need to be addressed:
    • Airlines: 2 at present, possibly 3 later
    • Airports: 2 at present, a third may emerge later, however one of the incumbent operators will become much stronger especially after the expected consolidation.
    • Ground handling: 2-3
    • MROs: 2-3
    • Distribution: 2-3

For airlines, this post-COVID phase is characterised by a very hostile cost environment, increased competition and tough economic conditions, a combination that will prove highly challenging.

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