Skies were never bigger, bluer

But current upturn in non-fuel costs could hurt airlines, if oil climbs

Over the past few months, Indians have taken to the skies like never before. The growth in domestic air traffic was 24 per cent during the first three months of 2016 (calendar year).

This happy situation - more fliers, increased demand by existing fliers, new routes, and low oil prices - translates into a rare happening in the Indian aviation space. For a change, many airlines might actually have some black ink on their financials.

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CAPA estimates that low-cost carriers (LCCs) could earn a profit of $340-375 million for the year; Jet Airways alone could be in the $90-100 million range. For most of the low fare airlines, barring IndiGo, this will be virtually a novel experience. While many of them have earned money in some quarters, it has been a while since any of them made any serious money and that too for an entire year.

Even as the good news piles up, analysts and observers say there is always scope for improvement. Barring Jet Airways (which has shown a marginal reduction), all the airlines have shown an increase in the non-fuel cost per available seat kilometre if one looks at the first nine months of 2016 over the last year.

Almost all the LCCs showed a higher non-fuel cost (cost per available seat-kilometre or cask) with the star performer IndiGo leading the pack. IndiGo's non-fuel cost increase in the first nine months of 2016 was 10.2 per cent above its full-year non-fuel cask. GoAir has been close on its heels with a nine per cent rise.

This upturn in non-fuel costs can be condoned when fuel prices are as low as they currently are, but can airlines afford to get complacent on non-fuel costs at any time? Most analysts don't think so.

The present spate of good days began almost coinciding with the fall in global oil prices. Oil prices started falling in February 2015 and the traffic rise - which had begun to show a rise in January 2015 - started going up more sharply by April 2015.

The lower oil prices allowed airlines to offer tickets at cheap rates. One look at the chart (data by Cleartrip) shows that in general, fares in 2016 have been lower than fares in 2015 (barring a few exceptions). In fact, fares have been almost 10-20 per cent cheaper on most routes.

But, the doubting Thomases refuse to back down. A question that senior managements at airlines continue to ask in private - if not in public - is: How real is the increased demand? Will it sustain even if the market turns?

While it would be fair to say that a large proportion of the higher demand can be attributed to the sharp fall in oil prices and the additional capacity put in by the players, there is some amount of traction on account of other factors as well, say experts.

"There is definitely a genuine increase in demand driven by both additional capacity and lower fares," says Samyukth Sridharan, CEO of Cleatrip.

Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG adds: "The overall economic growth, fleet expansion by airlines and increasing propensity for domestic tourism are all factors that have helped."

New routes and additional flights on some routes - Dehradun (IndiGo has added flights), Dharamshala, Madurai, Pondicherry - have brought in many 'first-time fliers', points out Sridharan.

The new routes will definitely lead to a sustained increase in demand. First-time fliers "who have tasted blood so to speak" usually help sustain the demand even if the market turns. The Indian market saw this happen when Deccan took to the skies and first-time fliers were added to the existing base.

Dubey - in typical consultant-speak - is gung-ho on the future although many other insiders are more skeptical. "The awareness about the importance of tourism for the economy and job creation is growing. The e-visa facility is picking up traction and should boost traffic. The government is focusing on promoting Brand India in global markets," he says cheerfully.

According to Dubey, the worst is behind the aviation sector in India. In his view, the government, if it so decides, can do wonders.

"The growth is despite the fact that the ATF price of Rs 42.8 per litre (as on May 1, 2016 at Delhi Airport) is still a whopping 70 per cent costlier than the Rs 23-25 per litre in global markets.

The government can kick off an aviation revolution if it decides to sell ATF at the global rate for an experimental five-year period.

So, while the overall news is good, the winners will be those who keep a close eye on non-fuel costs. The moment oil prices start to rise, the happy story can change in a flash. No one knows this better than the airlines in India.