Domestic airlines to add 50 planes in FY17

Buoyed by strong passenger growth, domestic air carriers are set to add close to 50 planes to their fleets in 2016-17, from 34 additions a year before.

Market-leader IndiGo will induct 24 Airbus A320neo aircraft till next March, nearly double the 13 it inducted last year. GoAir is expected to receive eight of these, its highest ever addition in a single year. The additions would enable expanding of plying frequency and new routes (such as Chennai to Guwahati and Delhi to Thiruvanathapuram).

AirAsia India, Vistara and SpiceJet are also inducting planes. Jet Airways says its focus remains on "higher fleet utilisation to increase capacity on domestic routes". Its spokesperson said in the first nine months of FY16, it raised capacity utilisation by 23 per cent without adding any aircraft.

However, increased capacity and competition is likely to put pressure on yields. Jet and Vistara are discounting on business class seats, to push up load factors. Sector-wide yields are down 15-20 per cent on a year-on-year basis as crude oil prices remain soft and airlines are keen to keep growth momentum intact. According to aviation consultancy CAPA's preliminary outlook for FY17, yields are expected to decline five per cent as airlines ramp up capacity and this could impact profitability. CAPA expects domestic carriers to add 50-60 planes in this financial year.

Experts believe airlines have been able to absorb the yield decline till now due to sharp cut in fuel prices and robust passenger demand. Lower fuel prices have been a factor in adding of capacity.

Driven by lower fares, domestic airlines flew 81 million passengers in calendar year 2015, up 20 per cent over a year before. The passenger load factor in India at 83.2 per cent was the second highest among all countries (next to the US), as demand growth in the domestic market exceeded capacity addition in 2015.

According to SpiceJet chairperson Ajay Singh, the requirement of additional aircraft is in fact higher than the 40-50 planes to be inducted this year, considering total fleet size of all airlines and 20 per cent passenger growth. "We are increasing capacity not for market share alone. We want to achieve strong and profitable growth," he said.

SpiceJet has 43 aircraft at present, including seven planes on a wet lease (taken with aircraft and crew from a lessor). Over the next few months, it will replace all its wet lease planes with dry leases (taking only aircraft, not crew). Additionally, another five or six on dry lease, Singh said.

"Capacity induction will keep pace with demand growth, expected to be 15-20 per cent. That would mean induction of 40-45 aircraft this year. Yields will remain suppressed as they were during the last fiscal but that is okay, as the crude oil price is expected to remain soft. Yields in FY16 have come down 15-20 per cent over FY 15 but have stabilised. Low fares leading to more traffic, leading to more aircraft inductions, will be the cycle for the next few years until oil prices start firming up," said aviation consultant Anurag Jain.

CAPA's South Asia head, Kapil Kaul, believes the gap between capacity growth and demand growth might be bridged this year, and that the former might even exceed demand. The first sign of capacity growth outstripping demand in India was noticed in February. According to the International Air Transport Association, this "perhaps suggests that the strong rise in passenger load factor over the past two years might have peaked out. But, at more than 85 per cent in February, the domestic load factor in India is well above the industry average."

Another concern among airline executives is slot constraints at the Mumbai and Chennai airports. Addition of planes by all airlines could lead to over-capacity on certain routes. This could also result in an increase in fares in capacity-constrained airports and a drop in fares at airports where additional capacity might not be actually required, said a senior executive of a private airline.