Air traffic growth seen plunging 800bps on infra, fuel worries

Warning that twin headwinds of creaking infrastructure at major airports and rising fuel prices will cull passenger growth by an average 800 bps in the next five years, a report has said domestic air traffic growth has peaked out for the medium-term.

The domestic air traffic market has been the fastest in the world since the past two years and has crossed the 100 -million-market in the first 11 months of the year, with November traffic clocking 10.6 million, with an average growth of 17 per cent in the year.

"Despite a raft of policy facilitations, domestic airlines are flying into two major headwinds—crippling infrastructure at major airports, and an uptick in fuel prices--which could mean growth may have peaked out for the medium-term," Crisil warned on Wednesday.

The agency sees "growth decelerating by 800 basis points (bps) to 13-15 per cent annually in the next five fiscals through 2022, compared with a blistering 22 per cent seen in fiscals 2016 and 2017. This fiscal, its seen slowing by 300-500 bps to 17-19 per cent."

Passenger traffic took off in the past two fiscals as fares fell after crude plunged to an average USD48 a barrel in 2016 from USD 108 in 2014, bringing down airlines' operating cost massively. Fuel alone accounts for 30-35 per cent of the operating cost of any airline.

But the agency expects the crude price averaging at USD50-55 over the next five fiscals, so fares would nose up and moderate passenger traffic growth.

"The bigger problem, however, is the severe congestion at airports metastasising into structural gridlocks. Mumbai and Delhi airports which account for 63 per cent of domestic traffic, are edging towards capacity crunch during peak hours, which is amplifying infra issues," Prasad Koparkar, a senior director at Crisil said.

Mumbai's problem is it has only one runway-making it the busiest single-runway airport in the world handling almost 900 average movements a day, while Delhi has three and Hyderabad and Bengaluru are near saturation.

On the second airport in Navi Mumbai, which has been in the works since for the past two decades, is unlikely to come up in the next three-four years, he said though the state administration has been claiming that the first flight will land in 2019.

In the first half of this fiscal, passenger traffic growth dropped to 16 per cent as IndiGo's plan to induct the A320 Neo aircraft flew into engine issues leading to grounding of nine aircraft. Since the supply issue has been restored and more A320s have been inducted along with getting ATR72s as well, growth should rebound in the second half.

To beat congestion at major airports, airlines are deploying bigger aircraft. IndiGo has upgraded its order for 25 A320 Neos to A321 Neos that will increase its capacity by 20-25 per cent per take-off, but deliveries will commence only from end-2018.

According to Binaifer Jehani, another director at the agency, "such steps can at best boost capacity in the short- term. For the long-term, significant investment in airport infra is necessary to help the industry grow faster. But we expect infra constraints to deteriorate in the medium-term."

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The report also notes that infra constraints have impacted the regional connectivity scheme. As of October, only 28 of the 128 routes in the first phase are being operated by Alliance Air, Spicejet and Trujet.

Difficulty in getting slots at major airports only aggravates the situation as 68 of the 128 routes either commence or terminate at metro airports and hence require slots there too.