Data released by the DGCA has got many celebrating 2015 as one of the better years in the history of Indian aviation, atleast as far as domestic passenger numbers are concerned. The year 2015 flew 81 million domestic passengers, translating into a 20% growth in domestic passenger traffic over calendar year 2014. Industry optimism is high, but most overlook what happened in the last 15 years. Since the year 2000, there have been five years, including 2015, when the domestic passenger numbers have grown by over 20%, year on year.

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Year 2004 – the calendar year immediately following the birth of Air Deccan, witnessed a 25% growth in domestic air traffic. The low fares that Air Deccan introduced brought in more people to fly. Capacity increased by 12%, and load factors jumped up by around 6 percentage points (pp). Growth continued in the year 2005, as most low cost carriers that exist today started operations that year, including Go Air and SpiceJet. 2005 was also the year when Kingfisher started operations.

Year 2006 – the year immediately following the birth of these airlines, was also the year IndiGo commenced operations. That year, domestic passenger traffic witnessed a 45% growth in traffic. Low cost airlines had truly revolutionised air travel. IndiGo and other airlines continued to scale up, which is how the year 2007 witnessed a 31% growth in domestic air traffic. Load factors on average touched 70% in 2007, which was the highest achieved, back then.

But capacity addition was perhaps faster than the growth in demand, resulting in overcapacity. In the year 2007, six airlines decided to merge into three, resulting in consolidation, and the hope for a better shot at profitability through lower competition and better control on pricing. Sahara was bought over by Jet Airways, Indian Airlines merged into Air India, and Air Deccan was bought over by Kingfisher Airlines. The three mergers – which had the effect of reducing competition -, and a slowing global economy resulted in a slump in air travel demand. Domestic passenger traffic shrunk by 6% in 2008, and load factors touched a five year low.

Fuel prices fell in 2009, and despite the global economic slump, demand picked up while capacity shrunk. India was one of the few countries to have kept its head above the waters in that period. It was the same year that MDLR folded up operations, and the same year that Kingfisher airlines started ramping down domestic flights and increasing international flights. Paramount airways too started reducing the number of flights it operated. With the reduction in full service capacity and increase in low cost carrier (LCC) capacity, and with a net capacity reduction, load factors bounced back to 70% in the year 2009.

LCCs, which were growing and capturing a larger share of the domestic market, stimulated demand through competitive pricing. Load factors in 2010 rose to 76%, while demand grew by 19%. Growth continued in 2011.

In the year 2012, Kingfisher airlines ceased operations, while IndiGo inducted a large number of aircraft, resulting in no net capacity growth that year. Low capacity, fuel prices that had touched a four year high, and lesser competition drove up prices, which resulted in a slump in domestic travel demand, which contracted by 3% in 2012. Load factors, thus, took a beating.

Since the fall of Kingfisher, IndiGo’s rate of capacity addition has been unmatched. Other airlines were slower in filling the void left behind by Kingfisher. The dominance of LCCs was visible – capacity grew in 2013, load factors slightly increased, and demand picked up by 4%. The high fuel prices, however, kept demand in check.

2014 was another turning point in Indian aviation. Fuel prices started to fall. SpiceJet started a slew of sales, encouraging the population to purchase seats that would have otherwise flown empty. This behaviour, which gained momentum in the summer of 2014 and beyond, drove up SpiceJet’s cash flows and load factors. Other airlines observed and implemented this much later. The falling fuel prices also helped. 2014 ended with slightly higher load factors, a more than 11% growth in demand, and a 6% increase in capacity, most of which was from IndiGo. AirAsia India started operations, while SpiceJet shrunk its fleet as lessors repossed aircraft.

In 2015, the supposedly stellar year, SpiceJet started re-building capacity, re-inducted five aircraft while taking a few more on wet lease. IndiGo inducted 11 aircraft, while Vistara started operations and ended the year with nine aircraft. AirAsia India added three aircraft, while startups TruJet and Air Pegasus ended the year with two ATRs each. Air India Regional added four ATR 72-600s, while Air India inducted five new Airbus A320s to augment capacity. In total, 41 mainline narrowbody and regional aircraft were added to the Indian skies, while Air Costa returned one aircraft, brining the net addition to 40, excluding SpiceJet’s wet leases. The net addition of aircraft, higher utilisation, and the contraction of SpiceJet’s capacity in 2014 resulted in a growth in capacity of around 11% over 2014. DGCA data may not account for AirAsia India in 2014.

Had SpiceJet not reduced its fleet (which led to 38% lesser departures in December 2014 compared to January 2014 at the airline), capacity growth would have remained single digit.

Low fuel prices, increased competition, and sales by airlines lowered airfares, leading to average annual load factors of 82%, an increase of 6 pp over 2014. Higher capacity and higher load factors resulted in a near 20% growth in domestic air travel demand. The numbers in the graph slightly differ from that reported by the media as the data in the graph excludes charter (non-scheduled) operations undertaken by airlines, and may exclude AirAsia India’s numbers for the year 2014.

The increase in load factors has contributed significantly to the growth in domestic passenger traffic throughbetter utilisation of increased capacity. In the 15 year period from 2000 to 2015, 2015 had the highest average domestic load factors, averaging 82%.

Will the growth sustain?

Low fuel prices have already driven up aircraft utilisation through the introduction of red eye flights in 2015. Utilisation may slightly increase, as more carriers are inspired by red eyes. This may lead to addition of capacity. However, airlines may also cull certain red eye flights. IndiGo appears to have withdrawn its 2am departure from Mumbai to Delhi (6E 154), and 11:30pm departure from Delhi to Mumbai (6E155) in the summer schedule, reducing the daily frequency between Mumbai and Delhi vv to 16 from 17.

2016 may witness the addition of between 60 to 80 domestic mainline and regional aircraft. IndiGo is expected to induct 30 Airbus A320s in calendar year 2016. Go Air may induct close to 10. Vistara will induct 4 Airbus A320s this year, while AirAsia India may add around 4 aircraft. Regional airlines are expected to add around 10 aircraft in 2016.

If the 5/20 rule is abolished, carriers such as AirAsia India and Vistara may start international operations, which may result in international capacity affecting domestic capacity. Go Air is expected to start international operations this year.

Average domestic load factors are already in the low 80s, which is a fairly high number. This number may only slightly increase as more airlines resort to low fare advance sales, and generally lower fares in the light of increased competition and falling fuel prices. However, load factors in 2016 may not contribute as much to domestic traffic growth as it did in 2015.

Domestic traffic growth in 2016 may largely be driven by an increase in capacity. If airlines increase their fleets as forecasted, and oil prices continue to remain low, calendar year 2016 may witness a 13% to 20% growth in capacity (less than 2015), which may translate to an equivalent growth in domestic passenger traffic. 2016 may end with a passenger traffic of 93 million domestic passengers, with a tolerance of -2/+4 million (between 91 and 97 million domestic passengers). There however may be signs of overcapacity, when factors such as real (and not stimulated) demand and infrastructure bottlenecks are considered.

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Months in 2015 which recorded the highest growth may have the lowest growth in 2016. This includes the months of January, February, April, July, October, November, and December. Most of these months had witnessed a huge growth largely through the use of pricing as a tool.

2016 will see the industry driven by optimism, which may very quickly tip over to over-optimism. 2016 will witness a reduction in domestic traffic growth rates, while 2017 may witness a further reduction. Most growth is driven by, and relies on the very attractive prevalent fuel prices.

History has a way of repeating itself, and should it, the graphs above may help you predict the future.