Mumbai: The domestic aviation industry is set to grow at 11 percent in the medium-term as some of the cyclical variables become less spiteful, ratings agency Icra said in a report.
The industry witnessed a sub-10 percent compounded annual growth rate in the past five years, it said.
However, pressures in the near-term remains, the report said, adding that the rising disposable incomes and the willingness to spend on air travel is likely to drive demand going forward.
The higher cost of travel and the impact of economic slowdown have affected passenger traffic growth during the current year, which, over the past five years has grown at a CAGR of 9.2 percent, the report said.
According to the agency, after years of steady increase in capacities, the capacity addition declined 3.2 percent during the current fiscal largely due to the grounding of Kingfisher Airlines and route rationalisation by other carriers.
The overall operating environment for the domestic carriers is now showing an improving trend on the back of government allowing foreign airlines to invest up to 49 percent in private domestic carriers, the industry's effort to maintain pricing discipline and attempts to rationalise cost structure by both full-service as well as budget carriers, besides enhancing ancillary revenues.
With multiple headwinds, sharp increase in operating losses and accompanying weakness in their balance sheets, the carriers have adjusted their business models and they have also implemented rigorous cost rationalisation measures right from phasing out loss-making routes to renegotiation of maintenance contracts to ride over the turbulent phase, the report said.
These initiatives are likely to help domestic carriers in overcoming the adverse impacts of high oil prices and currency depreciation, the report stated.
According to the report, allowing 49 percent FDI in domestic carriers could address their funding issues, which have long been facing difficulties.
"While expected deliveries of new aircraft are significant, we believe a majority of these will either replace less-fuel efficient models, expiring leases and aid in improving expansion plans of airlines on regional routes," the report said.
A sizeable share of these aircraft may also get deployed on international routes, especially the short haul ones, as the no-frills carriers expand their overseas operations further, the report added.
Having recognised the need to maintain pricing discipline, Icra expects airlines to maintain capacity discipline in the near-to-medium term, the report said.
The current fiscal has so far been characterised by decline in industry-wide capacity and resultant improvement in pricing discipline, which have collectively supported improvement in the operating performance of airlines even as growth in passenger traffic has been muted and cost-based headwinds have remained formidable, it added.