Analysis: India's jet fuel demand to emerge from the red as turbulence subsides

After a year of negative growth, India's appetite for jet fuel is set to rebound in 2020 amid expectations that economic recovery will lift air travel, while the industry bounces back from flight disruptions following the closure of a leading private airline.

The grounding of Jet Airways -- once the country's largest commercial airline with a market share of close to 23% -- took a toll on jet fuel demand for the major part of last year as its fleet of more than 100 aircrafts ceased operations following the start of insolvency proceedings.

"We expect India's jet fuel demand to rebound in 2020 as economic growth is expected to recover," said Lim Jit Yang, adviser for Asian oil markets at S&P Global Platts Analytics.

India's jet fuel demand posted an average annual growth of 10.5% between 2016 and 2018, as rising incomes due to robust economic growth and falling airfares on the back of competition between low-cost air carriers boosted air travel.

But in 2019, jet fuel demand contracted by 0.5% year on year to 178,000 b/d, according to data from Petroleum Planning and Analysis Cell as well as Platts Analytics. This came on the back of an economic slowdown and the ground of Jet Airways, which struggled due to competition with budget carriers that prompted it to cut fares, resulting in steep financial losses.

However, according to the latest data from the International Air Transport Association, or IATA, airlines traffic in November returned to double-digit growth for the first time since January 2019, rising 11.3% year on year.

India's overall domestic air passenger traffic was around 144 million in 2019, a year-on-year growth of only about 3.7% in 2019, slowing sharply compared with an over 18% growth in 2018, data from the Directorate General of Civil Aviation showed.

Jet fuel has been witnessing one the highest rates of growth among all oil products in India as the aviation sector expands capacity to keep up with the steep growth in demand for air travel in one of the world's fastest-growing markets.

A more affluent middle-class, intense competition among low-cost airlines, and robust economic growth -- all these factors are contributing to an exponential growth in air travel in the country. Indian government officials have previously said that the country has the potential to become the biggest aviation market by 2030.

MAIN GROWTH POCKETS

Low-cost airlines hold the largest share of the aviation market in India.

"We will witness a rebound in consumption of jet fuel. An anticipated economic recovery will help to aid demand," said Senthil Kumaran, consultant at Facts Global Energy.

Platts Analytics expects India's jet fuel demand to grow by 7% in 2020 as the economy recovers, with growth in gross domestic product expected at 6.1%, up from 5% last year.

"Further ahead for the next five years, jet fuel demand growth should average around 5% per year as more people can afford to fly, and as the government improves aviation infrastructure connectivity to smaller cities," Lim said.

According to Centre for Aviation, or CAPA, an independent provider of market intelligence for the aviation sector, the long-term outlook for India's aviation sector looks promising amid expectations of strong GDP growth, a young population and the expansion of India's middle class sector.

"And if costs can be continually brought down and competition remains strong, low fares should further stimulate new demand and draw millions of passengers away from the extensive rail network to faster and more comfortable air services," it said.

Asia's jet fuel demand is projected to grow by 3.6% this year, up from 1.9% last year, as regional economies improve.

India currently accounts for about 8% of Asia's jet fuel demand, but it is projected to contribute to an average of 12% to overall regional jet fuel demand growth over the 2020-25 period, according to Platts Analytics.

Analysts said that one of the biggest challenges for jet fuel demand growth in 2020 would be the risk of higher crude prices that could push up fuel costs as well as air fares.

In addition, the industry will be keeping a close eye on the government's plan to privatize state-run Air India and the implications it might have on the domestic aviation sector.

FOB Singapore jet fuel prices averaged $77.25/b in 2019, marking a 9% year on year decline from a year ago when the average price was $85.04/b, S&P Global Platts data showed.

Looking ahead to the current year, jet fuel prices might see some upward risk in the first quarter of 2020 on the back of unexpected weather such as cold snaps during the Northern Hemisphere winter season and a possible escalation of tensions in the Middle East, traders said.