Posted on

High-Flying Growth Prospects In India’s Domestic Travel Market

Bar chart showing domestic and foreign visits to Indian states, 2006-2016 (in millions of visits). Domestic visits to Indian states grew from 462.4 million in 2006 to 1,613.6 million in 2016 while foreign visits grew from 11.7 million in 2006 to 24.7 million in 2016.

Tourism is booming in India, and the industry is emerging as a key growth driver in India’s service sector. Much of the growth stems from India’s domestic tourism sector which has seen a steady increase in visits from domestic travelers over the past decade; domestic tourist visits (DTVs)  increased 12.7% to 1.613 billion in FY 2016, (the latest year for which data is available) according to statistics from India’s Ministry of Tourism.

Domestic tourist visits have consistently registered positive growth rates over the past decade; during 2006-2016 domestic tourist visits grew at double digit rates every year except in years 2008 and 2013 when growth was at single digits. This compares with foreign tourist visits which mostly saw single-digit growth and sometimes zero or negative growth. In 2012 for instance, foreign tourist visits registered negative 6% growth while domestic tourist visits jumped 20%.

The rise of India’s domestic visitor numbers has been a long term trend; during the period 1991-2016, domestic visits to all Indian states grew at a CAGR of 13.03%, far outpacing foreign visits which grew at a CAGR of 8.25% during the same period according to data from India’s Ministry of Tourism.

Bar chart showing domestic and foreign visits to Indian states, 2006-2016 (in millions of visits). Domestic visits to Indian states grew from 462.4 million in 2006 to 1,613.6 million in 2016 while foreign visits grew from 11.7 million in 2006 to 24.7 million in 2016.

Domestic travelers also account for the lion’s share of tourism earnings; India’s tourism industry contributes about 7% to India’s GDP, and domestic travelers accounted for 88% of the sector’s contribution to GDP in 2016.

India’s rising numbers of domestic tourists have largely been driven by an expanding middle class with rapidly increasing purchasing power (currently estimated at 250 million Indians and counting), infrastructure development, a growing fleet of low cost airlines, and initiatives such as the UDAN Regional Connectivity Scheme.

Yet, there is considerable potential for further growth as a result of demographic, regulatory and economic factors. The number of middle class Indians is small compared to China and their purchasing power is considerably lower than their Chinese counterparts. However, India continues to be the fastest growing major economy in the world and this is likely to remain so in the foreseeable future; the International Monetary Fund (IMF) predicts India’s Gross domestic Product (GDP) will grow at an average of more than 8% every year over the next five years and this should drive income growth. According to Global Insight Inc, some 150 million additional Indian households are due to achieve real PPP incomes of more than US$ 20,000 by 2026, almost triple the amount in 2016 and according to Steelcase Growth Market Research, India’s middle class population is expected to grow to around 475 million people by 2030.

India’s expanding middle class citizens are expected to drive India’s consumption expenditures to reach US$ 4 trillion by 2025, helping India emerge as the world’s third biggest consumer market by 2025 according to consultancy firm Boston Consulting Group.

India’s domestic tourism sector is also benefiting from an encouraging regulatory environment; the Indian government is planning to turbocharge the tourism sector with tax cuts, incentives, infrastructure development and more. The Union Budget 2018 focuses on expansion of airport infrastructure (a key constraint limiting air traffic growth in the country) and there are expectations of a reduction in hotel tariffs and tax exemptions on investments in new hotels.

Thus, with several growth drivers in place from favorable demographics to a supportive policy environment, India’s domestic tourism sector is poised for greater expansion in the future. Domestic tourism is expected to maintain its dominance in India’s tourism industry through 2021. A report by Google India and Boston Consulting Group projects India’s domestic travel market to grow at a five-year CAGR of 11.2% to US$ 48 billion by 2020 from US$ 27 billion in 2015 opening numerous opportunities for businesses and investors.

 

Airlines

India’s domestic air traffic crossed the 100 million mark for the first time with 117 million passengers flying in 2017, up 18% from 99.88 million passengers in 2016 according to data from India’s Directorate General of Civil Aviation (DGCA) making India the world’s fastest growing domestic aviation market for the third consecutive year according to IATA. India was followed by China and Russia where domestic air passenger numbers increased 13.3% and 10.1% respectively in 2017.

Bar chart showing India’s domestic air traffic, 2013-2017 (in millions of passengers). India’s domestic air traffic grew from 61,426 million passengers in 2013 to 117,176 passengers in 2017, representing a CAGR of 17.5% between 2013 and 2017.

The boom in domestic air travel was a boon to local airlines such as Indigo (NSE:INDIGO), Jet Airways (NSE:JETAIRWAYS), Spice Jet (BOM:500285) and Vistara (a joint venture between Tata Group and Singapore Airlines) which enjoyed higher passenger load factors.

In 2017, market leader Indigo commanded a market share of 39.6%, Jet Airways had 17.8%, Air India 13.3%, Spice Jet 13.2%, Go Air 8.5%, Air Asia 3.7%, and Vistara 3.5%.

Yet the growth potential is still enormous; less than 10% of Indians take to flying and at around 0.08 annual domestic seats per capita, India’s penetration rate is relatively low compared to other developing markets such as Brazil (0.6) and China (0.4) according to data from flight information and data company OAG. By comparison, the United States has around 2.8 annual domestic seats per capita.

Rising incomes particularly among India’s tech-savvy millennial generation (those born between 1981 and 1996) which have a greater affinity to travel could propel India’s domestic aviation sector in the years to come. India has about 400 million millenials which account for about a third of the country’s one billion plus population and India is expected to be the youngest nation in the world by 2020 with a median age of 29. A survey by Phocuswright and ixigo revealed that Indian millenials take more trips per year compared to seniors and they also spend more.

The Indian government is also taking encouraging measures to boost efficiency and reduce flying costs. For instance, India is mulling the prospect of breaking the monopoly held by public sector oil companies in the supply of Aviation Turbine Fuel (ATF) at the Mumbai airport by allowing private refiners to enter the market, thereby improving operating costs and increasing efficiency. Mumbai airport, India’s busiest airport, accounts for about 20% of India’s ATF consumption. With ATF costs making up about 40% of the operating costs of airlines, the move could be a boon for India’s aviation industry, benefiting airlines as well as private refiners such as Reliance Industries (NSE:RELIANCE).

The International Air Transport Association expects India to overtake the United Kingdom to emerge as the third largest aviation market by 2025 (China will be the biggest market followed by the United States).

Morgan Stanley forecasts India to witness a CAGR of 13% in domestic air traffic during 2016-2026.

According to a report by Google India and Boston Consulting Group, air travel is expected to be the biggest contributor to the India’s travel market, registering a CAGR of 15% reaching a market value of US$ 30 billion by 2020, making up over 50% of the projected value of India’s domestic travel market which is forecast to reach US$ 48 billion by 2020.

Hotels

Overinvestment, cost overruns and high interest rates have hampered the financial performance of India’s hotel industry with stressed loans jumping 63% over the past three years.

Much of the industry’s woes appear to be concentrated on branded, full-service hotels in the luxury and upscale segment in Tier I and Tier II cities.

On the other hand, India’s mid-market hotel segment (i.e., two, three and four star hotels) is booming, driven by both domestic and overseas tourists, encouraging brands such as Lemon Tree Hotels (NSE:LEMONTREE), and Royal Orchid Hotels (NSE:ROHLTD) to expand into the sector pushing up the supply of mid-market hotel rooms over the past several years; in 2002, some 6,000 of the 26,000 branded hotel rooms in India – less than 25% percent – were mid-market hotel rooms. By 2017, mid-market hotel rooms jumped nine-fold to 53,200, accounting for 43% of the total branded hotel rooms in the country which increased five-fold to 125,000 according to data from hospitality consulting firm Horwath HTL.

However, there are signs of recovery in India’s hotel industry with occupancy rates rising to 66% in 2017 – the highest in nine years according to a report by Horwath HTL – and average room rates growing by 8% since 2008 according to hotel consultant firm Hotelivate.

Bar chart showing all-India hotel occupancy rates, FY 2013 - FY 2017 (E). Occupancy rates have been rising in India; during FY 2013, FY 2014, FY 2015, FY 2016 and FY 2017 (E) hotel occupancy rates were 58%, 59%, 61%, 64% and 66% respectively.

The momentum is expected to continue going forward driven by a muted hotel room supply pipeline, an increasingly travel-hungry Indian middle class population, and favorable policies such as the Indian government’s UDAN scheme Phase-II which is expected to open new opportunities benefiting domestic mid-tier hotels in particular. Horwath HTL anticipates all-India occupancy rates to be more than 70% next year and mid-market segment occupancy rates will hit 82%.

The annual average leisure hotel spend per household is expected to grow 7% to US$ 18 by 2020 compared with US$ 13 in 2015.

A report by Google India and Boston Consulting Group expects hotels to grow at CAGR of 13% to US$ 13 billion by 2020, making up slightly more than a quarter of the overall domestic travel industry which is expected to be valued at US$ 48 billion. Much of the demand will be fueled by domestic travelers who are expected to account for over 60% of hotel spend in India. The mid-scale segment is expected to retain its dominant share, accounting for about 44% of India’s branded hotel rooms in 2020.

Bar chart showing India hotel spend by domestic and foreign tourists in 2010, 2015 and 2020 (forecast) (in US$ billions). India’s hotel market was valued at US$ 4 billion in 2010, US$ 7 billion in 2015 and is expected to grow to US$ 13 billion by 2020. At about US$ 9 billion - US$ 10 billion, domestic travelers will account for more than 60% of hotel spend in India by 2020.

Online travel portals

According to consulting firm Praxis, India’s online travel market was valued at US$ 5.71 billion at the end of 2015, and is expected to more than double to US$ 13.6 billion by 2021, representing a CAGR of over about 16% driven by increasing penetration of international hotel and flight bookings from travel portals such as MakeMyTrip (NASDAQ:MMYT) (India’s largest online travel agency), Yatra (NASDAQ:YTRA), and Cleartrip to name a few.

Increasing internet penetration and rising incomes among India’s tech savvy millenials as they increasingly climb up the income ladder are some of the tailwinds that are expected to drive India’s online hotel market. The country’s internet user base stood at 481 million in December 2017, up 11.34% from a year earlier, representing an internet penetration rate of less than 40% indicating ample potential for growth. Much of India’s offline population resides in rural India. However, even in urban India where incomes are higher and residents generally have a higher propensity to travel, there is potential for higher internet penetration; about 295 million (equal to about 64%) of India’s 455 million urban population are connected to the internet leaving a potential market of about 160 million internet users in urban India alone. This is equal to nearly one half of the entire population of the United States.

Indian millenials are expected to be a key driving force in India’s online travel market going forward. According to booking data from India’s largest online travel company MakeMyTrip which is often touted as India’s answer to Ctrip  (NASDAQ:CTRP) and Expedia (NASDAQ:EXPE), the majority of the platform’s customers were millenials; over half of travelers who made bookings through MakemyTrip were under 35 years of age.

India has the world’s largest millenial population and as their disposable incomes grow, they are likely to travel more and thereby drive the country’s online travel market as they plan their itineraries online, presenting a major growth opportunity for online travel companies.

Online hotel bookings in particular presents a major growth opportunity in India’s online travel market. According to a report by Morgan Stanley, Indian millenials have shifted a large part of their activities online, for instance through the adoption of digital entertainment channels (to the detriment of traditional channels such as radio) and online shopping. However, online travel booking is an exception to the trend with 63% of all hotel bookings being reportedly made by walking into hotels. Less than 20% of hotels were booked online, and only one third of those were booked using travel agencies indicating tremendous potential for growth.

One third of all hotels are expected to be booked online helping the sector grow at a CAGR of 25% to be worth US$ 4 billion by 2020 according to a report by BCG and Google India.