Beyond the data: The changing nature of India’s air travel demand

With the vaccine distribution underway in India, air travel demand in India has been trending upwards. Notwithstanding travel bubble arrangements, the international skies continue to be closed and the rise in demand has mostly been in the domestic market. The Indian government regularly publishes the latest aviation figures and these reflect more passengers taking to the skies. The government imposed restrictions on flight capacity have been gradually eased. Airlines have been adding flights and frequencies.

Domestic air passenger numbers doubled in the period from June 2020 to August 2020 and then doubled again three months later. But there is a strong bias to the base effect. When taken in the context of the previous years, demand while rising is at 60 percent of previous levels. By the end of the year, the numbers are likely to hit pre-COVID-19 levels. Even so the numbers don’t quite tell the whole story.

The rising traveller numbers only speak of volumes. What is more concerning is the quality of revenue emanating from the demand. The quality of revenue has definitely declined and is attributed to the decimation of business travel. This poses challenges in several areas as business demand has been the Holy Grail for airlines. Mostly because of the spending profiles and non-cyclical nature of business travellers and also the fact that India has two clear peaks and troughs which coincide with the first and third quarter of the financial year. However, with business travel demand at 15 percent—20 percent of previous levels and with a failure to stimulate demand challenges will continue.

Travel providers confirm that corporate discounts notwithstanding, travel volume commitments are hard to come by. And proxies such as airline lounge occupancy which is at 5 percent of previous levels only confirm the same. For the corporate groups that are still booking travel, an increasing number of junior employees are being deputed to travel—a perk once reserved for and coveted by the seasoned and senior professionals.

The challenge of the changing nature of demand is also showing up in fares and segments. Take for example the Premium Economy cabin which was initially planned as a segment where folks would upgrade from economy and was reflected in the pricing patterns. The economy to premium economy spread was between 20 percent—30 percent while the premium economy to business spread was 200 percent or more. However, the premium economy is now seeing traffic that is downgrading from the business cabin. The rationale —the services that were once valued are now standardised and thus the willingness to pay has declined significantly. And because of the pricing differential—this translates to the same passenger delivering far less revenue for the airline. It is a challenge with no simple solutions.

The problem is exacerbated due to extensive discounting that was the pre-pandemic norm as the Indian consumer became anchored to a price point that made viability a tough sell for many airlines. Even prior to the pandemic, signs of significant strain had started to reveal with the six major airlines collectively posting losses in excess of $1 billion. Some of the airlines had cash-on-hand that did not even cover five days of continuing operations. But airlines continued their discounting policy, aided by non-operational income streams and a promise of perpetual growth. But post-pandemic whether discounting will work is anybody’s guess and the non-operational streams have collapsed— especially the much-cherished sale and leaseback income.

Concurrently, India’s airlines find themselves sitting on committed orders in excess of nine hundred next-generation aircraft and in the near term the ability to induct these remains contingent on returning two hundred-odd older generation aircraft. Without that, the deployment of new aircraft will be forced on routes where even the variable costs cannot be recovered. Financing these orders is fraught with challenges given the sentiment in the banking sector and weak balance sheets. And in the background, there is a new airline already speaking to manufacturers while the sale of the national carrier is also likely to gain traction—which translates to additional capacity entering the market and chasing a lower quality of demand.

Air travel in India has also witnessed segmentation into an essential travel and non-essential travel. Considering all the risks, perceived or otherwise, the safest mode of transport in the context of passenger preference is not discernible. Some are taking to rail, some sticking to air-travel and many to one’s own vehicle. Indeed holiday destinations like Goa, Dehradun, Udaipur and Srinagar that had very high hotel occupancy in November and December also found themselves challenged on parking infrastructure—because for the first time a large percentage of travellers came via their own vehicles. Offbeat destinations that are within driving distance of the metropolitan cities are gaining ground.

The changing nature of demand poses a challenge as airline planners are now forced to look at a broad set of parameters that do not necessarily correlate. The trends include quantitative and qualitative factors. And the qualitative factors cannot be gleamed at sitting at a desk. One has to be in the market, experience the market, understand the market and look at other factors that are completely unrelated to understand what is happening.

The old management mantra of quantifying all things and “what cannot be managed cannot be measured” simply does not work in the current context. Because quantitative data does not account for behavioral changes. More than anything else the pandemic has impacted how India thinks about travel. Which then informs how India travels.

In time, the travel volumes will no doubt return. But this will not translate into the same level of profitability. Because beyond the data, the nature of India’s air travel demand has changed. Permanently.