Alton Aviation Consultancy’s Directors, Joshua Ng and Alan Lim, explore the low-fare carrier (LFC) landscape in APAC regions, India and China as ‘twin engines of growth’ – with optimistic aviation forecasts for the rest of 2024.
This article was published in the June/July 2024 edition of LARA’s magazine. To access more articles like these, apply for your complimentary subscription to LARA.
APAC’s impact: Air travel recovery and growth demand
The Asia-Pacific (APAC) region has historically served as a key pillar of the global aviation sector, significantly contributing to the sector’s growth over recent decades.
Despite a slower recovery compared to other regions due to a cautious approach to reopening, the overhang of the pandemic is now over for the APAC region as it looks to surpass its 2019 levels of air traffic demand in 2024.
APAC airlines are forecast to achieve positive margins for the first time in 2024 following four consecutive loss-making years. Net profit margin for APAC airlines in the region is expected to increase from -0.1 per cent in 2023 to 0.5 per cent in 2024.
APAC’s forecasted long-term GDP growth rate of over three per cent to 2043 is expected to continue driving air traffic growth. This will drive a similar growth in aircraft demand which will see APAC contributing up to circa 45 per cent of future aircraft demand.
By 2050, China and India are expected to be the second and third largest economies by GDP globally, with an increased propensity to travel from their growing middle-class population.
To support this growth in demand, additional aviation infrastructure, aircraft and manpower are required to sustain the larger operations.
Twin engines of growth: India and China
China remains the largest domestic market in the APAC region, contributing circa 63 per cent of the total domestic available seat kilometres (ASKs). This is compared to India which contributes circa 10 per cent of total APAC domestic ASKs.
Over the next 20 years, while air traffic demand is forecast to grow at circa eight per cent for India and circa five per cent for China, India’s lower spending power means its air travel market will remain smaller than China’s for the foreseeable future.
As a result, China’s fleet demand is expected to be double that of India’s, with more than 10,000 aircraft by 2043.
India claimed the title of the world’s most populous country from China in 2023, with its population projected to reach 1.7 billion by 2050.
The country’s GDP per capita grew at 6.5 per cent in 2022 and is expected to trend within the five per cent range in the medium term, underscoring its economic dynamism.
These macroeconomic and demographic indicators portend the potential of India’s aviation market for sustained expansion and investment opportunities.
China’s growth will be driven by domestic travel, fuelled by the emerging middle class outside of Tier 1 and 2 cities. China’s air passenger count is expected to grow to more than three billion by the 2040s, with more than two-thirds contributed by domestic passengers.
India, given its lower starting point in terms of income per capita and propensity to travel, will see growth across both the domestic and international markets, supported by a high penetration of low-cost carriers.
China: domestic growth and international potential in international air travel
China’s recovery in demand for international air travel has lagged behind that of domestic demand. This has been a result of its delayed relaxation of border restrictions and a tendency towards domestic travel amid a gloomier economic outlook and a weaker currency. In 2023, China’s international air traffic demand remained 55 per cent below 2019 levels.
However, overall air traffic demand has since recovered to 76 per cent of pre-pandemic levels in 2023, helped by a strong domestic air travel market.
To attract international travellers amid this lagging recovery, China expanded its visa-free transit policies at specific Chinese points of entry and introduced a visa-free policy to citizens of several European and Asian countries in 2023. These not only helped diversify, albeit in a small way, its drivers of growth away from domestic demand but also sought to be a catalyst for attracting international business and trade to support its growth story moving forward and make it a leading aviation market globally.
China domestic and international air traffic demand (versus same month 2019 Revenue Passenger Kilometres)
The ‘Made in China’ and COMAC opportunity
China’s desire to be a leading aviation player globally has led to its focus on efforts to build up a strong domestic aerospace industry. This is essential to support the large base fleet in the country needed to carry the growth in air passengers expected over the next 20 years.
The Chinese aerospace sector has seen significant investment in time and resources into ‘Made in China’ aircraft programmes, namely the ARJ21 regional jet, the C919 narrowbody jet, and the C929 widebody jet. While these aircraft programmes currently still depend heavily on Western suppliers for their components, there is a push to progressively reduce the reliance on foreign manufacturers.
With delays in aircraft deliveries leading to multi-year backlogs for popular aircraft at Airbus and Boeing, Chinese OEMs (mainly COMAC) have seen a potential opportunity to enter the market and challenge the duopoly. For the C919, COMAC has plans to ramp up production to 150 aircraft per year over the next few years, increasing the rate of fulfilment of its order book. The shorter wait for the C919 could enable Chinese carriers to carry out their expansion plans, and not have them curtailed by a lack of aircraft similar to what many other operators around the world are experiencing today.
Given that it has already been approved to fly within China, the C919 would allow Chinese carriers to utilise them to fulfil the strong growth in domestic air travel demand. The pursuit of EASA certification is next on the cards for the C919, which will significantly expand its addressable market of potential international operators.
India’s low-cost revolution: Focus on affordable air travel
India’s LCC segment, offering affordable air travel for the growing middle class, has become a vital part of the country’s aviation sector. LCC penetration by seats in India has increased to 70 per cent in 2023, up from 51 per cent in 2013. Comparatively, LCC penetration in the US was 31 per cent in 2023.
To meet the expected domestic and international air travel traffic growth, LCCs in India have placed orders for over 1,000 aircraft. These include orders for widebody aircraft to expand their international networks – such as IndiGo’s recent order for 30 A350 aircraft.
Policy support needed: Government-led air travel support
Airfares, though heavily subsidised on some routes, remain high for most of India’s population at present. Additional government efforts are needed to stimulate further trade and economic growth in developing areas, thus translating to higher population income levels and an increased willingness to travel by air. With more initiatives in place, non-tier 1 cities are expected to grow economically, contributing to India’s overall growth in air travel demand in the longer term.
The government-led UDAN initiative is one example that aims to make air travel affordable for the Indian population by providing initial funding to develop new regional airports and regional flight routes with capped airfares subsidised by tax levied on flights to popular routes. Additionally, the National Industrial Corridor Initiative aims to develop five industrial corridors spanning six states throughout the country. This would drive increased trade, employment, and industrial output throughout the regions served by the corridors, including a large number of non-tier 1 cities.
Driving future growth: IT technologies and energy efficient systems
Further aviation infrastructure developments are required to cope with the projected growth in demand in China and India over the next two decades.
Compared to mature aviation markets like the US, there is a significantly lower number of commercial airports in China and India relative to population size and traffic growth rates. As a result, many smaller towns remain underserved or inaccessible by air.
However, as part of its 14th Five-Year Plan, China intends to increase the number of civil airports from 241 in 2020 to more than 270 by 2025, with the majority being regional airports, to tap into the emerging demand from non-Tier 1 and 2 cities.
In India, the Modi Government has also placed great emphasis on airport infrastructure developments to make flying available to the mass market and enhance the competitiveness of Indian aviation. However, given the size and scale of the investments needed, private sector involvement is required.
With the right private sector partner, the developments can benefit from an input of expertise, tools, and systems that will often lead to better and more efficiently developed infrastructure. More importantly, the credibility of the operating partner can also attract the financing required to support the capital investment plan.
Through the efforts of the Indian government and private companies, 75 new airports have been built in the past decade, bringing the total number of airports in India to 149. The government envisions expanding the number of airports to 220 by the end of the decade to support the growth in air passengers.
Decarbonisation and digitalisation need to be integrated with infrastructure investments. Given the focus on sustainability among investors and the public, decarbonisation technologies should be included in the planning for future infrastructure developments. Airports, both new and existing, have begun to implement such technologies, including infrastructure for charging electric ground support equipment (GSE) and energy-efficient systems.
Separately, modern airports need to embrace digitalisation and adopt IT infrastructure to enable effective resource management and deliver a better customer experience. This not only includes infrastructure like self-boarding gates, check-in counters, and bag drops but should also extend to the airside operational domain, such as resource management systems and advanced disruption management tools.
And the challenges: The future of Indian and Chinese aviation
Macroeconomic and industry-specific challenges will continue to weigh on the sector, including the potential economic slowdown, a shortage of manpower throughout the aviation value chain, and continued supply chain disruptions.
Despite these challenges, APAC is expected to remain a key pillar of the global aviation sector. With strong GDP growth projections and a growing middle-class population, China and India are the region’s ‘twin engines of growth’. Buoyed by large domestic markets and high LCC penetration, the region’s aviation market has the potential for sustained expansion and investment opportunities.
China and India will continuously face challenges in maintaining this growth trajectory. The key to addressing these challenges will be to enact policies and invest in new aviation infrastructure to not only grow air travel demand but also have the aircraft, airports, people, and tools to accommodate this rapid growth.
LCC penetration in India (percentage of total seats)
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