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Aviation industry grows but bleeding airlines on the verge of collapse

The combined losses of all carriers over the last seven years add up to more than Rs 60,000 crore. And the future doesn’t look very rosy: analysts estimate that heavy losses will continue.

business Updated: Dec 22, 2014 07:55 IST
Tushar Srivastava

This single stat sums up the state of India’s aviation sector: of the seven domestic airlines operating in this country, only one – Indigo – is profitable.

Worse, two others, Air India and SpiceJet, are in the sick bay – the former kept alive by injecting bucketloads of public money and the latter by a short-term government bailout as it awaits an investor to pump in cash.

The big picture doesn’t make for happy viewing. The Indian aviation industry is expected to end the current financial year with estimated losses of about Rs 8,500 crore, according to aviation consultancy Centre for Asia Pacific Aviation (CAPA). Put differently, this means an airline loses about Rs 1,300 every time a passenger boards an aircraft.

The combined losses of all carriers over the last seven years add up to more than Rs 60,000 crore. And the future doesn’t look very rosy: analysts estimate that heavy losses will continue.

But the industry has some factors that could be extremely positive. It is growing at 9% — making it one of the fastest growing sectors in India — and demand is rising. The number of passengers this year (January-November) has risen to 60.9 million from 55.8 million a year ago.

Then, two new airlines – Air Asia India and Air Costa – have started operations since October 2013 and a third, Vistara (a joint venture between the Tata Group and Singapore Airlines) will begin operations on January 9.

The government is aware of the crisis. A confidential note prepared by the aviation ministry says SpiceJet isn’t the only airline that is in a precarious financial condition. If urgent steps are not taken, other airlines may also go down the same slippery slope.

“Airlines, other than IndiGo will require $1.6 billion (Rs 9,600 crore) of funding this year just to sustain their business models. The prospects for further direct investment in airlines remains very uncertain in the current climate,” said a recent report by aviation consultancy CAPA.

“Indian aviation is in ICU and needs shock therapy,” said Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG.

“It has survived on hope for a very long time. It’s time for the NDA government to finally do some long-term corrections. The time for placebos is, perhaps, over,” said MPMG’s Dubey.

India will become third largest aviation market in the world within five years, according to the aviation ministry. But several factors have pushed the sector on to the back foot.

The primary issue is the high cost of aviation turbine fuel (ATF), which account for more than 40% of an Indian airline’s operating expenses. On average, ATF costs 60% more in India than in other countries.

“ATF prices in India is really hurting Indian aviation and challenging the very viability of several airlines,” SpiceJet COO Sanjiv Kapoor recently wrote the aviation ministry.

Then, airport charges – landing and parking fees – are also among the highest in the world. These put massive pressure on the profitability. “The government can easily step in and sort out these issues. We’ve made representations to the aviation ministry and have been assured that the authorities will take our views into consideration,” said the CEO of airline on condition of anonymity.

“We are running through a lot of turbulent weather... not only the public sector, private sector is also crashing. (With) Kingfisher crashing and, right now, SpiceJet seems to be giving us heart attacks as far as airlines are concerned,” aviation minister Ashok Gajapathi Raju had said recently.

Airlines in India are also expected to double their fleet from about 400 at present to 800 by 2020. Given the high interest rates in the country, this will further burden the industry, which operates on wafer thin margins, and threatens to draw the industry deeper into a debt trap.

“Government policies are such that air travel is still considered a luxury,” said Rajji Rai, chairman, Swift Travels, one of India’s largest travel agencies.

“Lower ATF prices and a reduction in sales tax to 4% (as high as 30% in some states) will give the sector a big boost and could be a game changer,” said Kapil Kaul, South Asia CEO of CAPA.

“Indian aviation needs a 10-year tax holiday, the 5/20 rule (that mandates that only airlines that have been in operation for five years and have a fleet of 20 planes can fly abroad) should be abolished and Air India should to be auctioned off at the earliest. Otherwise, aviation hubs such as Dubai and Singapore, which have populations less than that of South Delhi will continue to cock a snook at us,” Dubey added.

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