Indian Aviation Market: Past Tense, Present Imperfect, Future Bright!

 
 Airline stocks are once again in the focus after the Government of India (GOI) announced this week that India aims to build 100 more airports in 15 years. The mega plan to develop 100 new airports will need a whopping Rs.4 lakh crore in terms of investments. Out of the 100 new airports, almost 70 airports are planned to be opened at new locations. This ambitious plan to expand connectivity and meet potential demand by establishing about 100 airports will double the current number of airports in coming 15 years. This development augurs well for the airline industry and the airline stocks can only benefit in the long run from such kind of massive investment plan by the GOI. 

Indian domestic aviation market is going through a phase of healthy growth rate, majorly driven by the changing social economic profile of the Indian consumers due to increasing income levels. What is interesting to note here is that this healthy growth is seen amidst low level of air travel penetration in India. 

AVIATION MARKET IN INDIA:-

 Indian aviation market has grown impressively over the last decade and it is now is the third largest in the world in terms of domestic passenger traffic. India unseated Japan in 2016 to become the third largest market. The US and China are the two leading markets globally in aviation. It was previously estimated that India will be the third largest domestic market in the world by 2020. However, India achieved the third position three years before 2020 owing to the phenomenal growth seen in the last 2-3 years. The domestic air traffic has grown consistently at 20-25 per cent in previous two years, i.e., in 2015 and 2016. If we consider both international and domestic flying, Indian market is fourth largest globally. 

Positives

1. India’s air passenger traffic has shown a growth of at least 16 per cent annually during the last decade
2. Wide geographical expanse
3. Large population and higher mobility
4. Economic progress and gradual change in policy framework
5. Lower fuel cost and liberalised FDI norms helped the sector
6. National Civil Aviation Policy of June 2016 covers the broader areas including rural connectivity, safety, and bilateral traffic rights. 

Negatives 

1. High operational costs
2. Slow pace of reforms
3. Monopoly of the state and policy discrimination towards private players historically.
4. New entrants to make the space crowded, which may put pricing pressure on existing players.

UDAN - A POSITIVE MOVE :- 

The GOI initiative under Ude Desh Ka Aam Naagrik (UDAN) will help improve connectivity in India at a faster pace. As of now, the Mumbai-Delhi air corridor is one of the busiest aviation routes in the world. However, there are very many regions, especially rural areas, which are yet to be connected in India. One can expect a new rural connectivity plan under UDAN. 

FINANCIALS OF AIRLINE COMPANIES :- 

The aviation companies have recorded strong financial results in the recent quarters, following a powerful revival trend. Interglobe Aviation, which operates Indigo Airlines, posted a whopping 294.39 per cent jump in its profit to Rs.551.56 crore for the quarter ended- September of FY18 on a yearly basis. However, the company's annual net profit for FY17 stood at Rs.1,659.19 crore, a decline of 16.46 per cent on a year-onyear basis. Jet Airways (India) recorded a rise of 106.72 per cent in its net profit to Rs.53.50 crore in the first quarter of FY18, as against Rs.25.88 crore in the same quarter of the previous fiscal. However, on an annual basis, the company's profit after tax declined by 66.73 per cent to Rs.390.43 crore in FY17. Spicejet posted a 17.58 per cent rise in its net profit to Rs.175.23 crore in the first quarter of FY18, while its net profit declined by 4.24 per cent to Rs.430.73 crore in FY17 on an annual basis. 

IATA predicts India to have 6 million aircraft movements and 300 million passenger departures by 2030

CONCLUSION:- 

With Indian equity markets outperforming their emerging market peers and touching record highs, investors are keenly looking for investing opportunities in sectors that are infrastructure-related and are linked to domestic consumption story of India. As liquidity in Indian markets remains abundant and the FPIs' flow into Indian market reverses, airline stocks are also expected to see some buying interest. However, investors should look at opportunities in airline stocks taking into consideration the key risks facing the sector such as sudden rise in oil prices and regulatory changes. 

The opportunity for Indian airline companies is real when it comes to tapping the huge domestic market. In spite of the challenges, the Indian aviation market is expected to grow at a rapid pace. India has already become the third largest aviation market in terms of domestic passenger traffic, beating Japan. Only the US and China aviation markets have more domestic air passengers. 

Long term investors who intend to capture the India growth story holistically can include aviation stocks in their portfolio considering the benefits of diversification.