An excess capacity big concern for a volatile aviation sector in India!

Indian airlines have been under continuous vicissitude since the inception of the pandemic. The aviation sector witnessed its worst nightmare in the form of grounded aircraft for two months at the time of the national lockdown. A slump in demand followed this, along with a restriction on capacity deployment by the civil aviation regulator. This was followed by the volatility of the fuel prices and the dropping value of the rupee which continued to dip the chances of profitability. However, the equation of capacity deployment continued to act as a matter of perpetual worry for the aviation sector.

The government cap on capacity deployment by the airlines ranged from 33% to 85% from May 2020 to October 2021 which naturally generated excess capacity with airlines that could not be used because of Covid-19-related restrictions. As the situation reduced the chances of revenue escalation the profitability of this sector also came under question.

The largest LCC carrier in India faced 58% losses in the domestic aviation market for nine quarters consecutively. With the rise of capping capacity deployment in October, the aviation sector faced additional challenges. Though the airline had an ambit for deploying 100% capacity. The implementation had a key challenge that the passengers’ urge to travel did not grow back sustainably. The travel sentiment of the people dipped due to several reasons and inflationary rates of air tickets were one of the reasons that affected air traffic. The escalation of the fuel prices aggravated due to the ongoing Russia-Ukraine war has put further pressure on the airlines to choose between flying routes with barely any demand or parking the aeroplane until a suitable network is chalked out.

The amalgamation of all these factors has impacted the level of capacity deployment, as mentioned by Suprio Banerjee, sector head and vice president, of corporate ratings, ICRA Ltd. The primary issue regarding excess capacity resulted from demand volatility for air travel in India. This is evident from the latest data on capacity deployment in August. IndiGo, the largest airline, operated 43,171 flight departures in August, which translated to 9,748 flight departures per week. DGCA has sanctioned the airline to 11,130 flights every week under the summer schedule which shows that Indigo operated 88% of their approved schedule, while Air Asia operated 63% of their schedule which makes it 1010 flight departures every week.

SpiceJet which has been under the restriction of the DGCA of operating only 50% of its capacity has managed to operate 37% of its schedule which sums up to 1547 departures against the approved figure of 4192, while GoFirst operated 52% of its schedule and Vistara managed to operate 91% of its schedule. The momentum has been rapid enough in terms of recovery and the passenger traffic is expected to reach the pre-covid levels by FY24. However, Aviation consultant CAPA predicts limited capacity induction for FY23 as the airlines were constrained due to financial reasons and the rest of them are undergoing supply issues.

As per the quarterly report from CAPA in the domestic segment, the capacity expansion for Indian Airlines will be moderate and reasonable. As per the remark of CAPA India, they have witnessed a rational capacity induction with industry consolidation around two players.

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