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Has Indian aviation hit an air pocket?

All the symptoms point to one thing: India’s booming civil aviation sector is hurting, reports Lalatendu Mishra.

india Updated: Dec 11, 2007 02:39 IST
Lalatendu Mishra

Except for Jet Airways, all other operators are deep in the red, with estimated losses of around Rs 2,000 crore in 2006-07 alone. The cumulative loss was double this figure.

This fiscal, things are looking even more bleak. The continuous rise in airfares has started to become a barrier for low-cost fliers. Mounting congestion at airports is pushing up operating costs and pushing away passengers. And high manpower costs, driven by an acute shortage of personnel, are throwing all budgets out of whack.

While yields have slid, operation costs have mounted. According to airline CFOs, more than 80 per cent of the cost has become "uncontrollable". These include wage and fuel costs (60 percent of all expenses) and higher depreciation and interest charges. “This is taking a toll on the financial health of all airlines. There could be a repeat of 1978, when deregulation in the US caused havoc in civil aviation,” said an airline CFO, who did not wish to be identified.

As fuel surcharges of Rs 1,650 have crossed the actual fares in several sectors, several leisure travelers and relatively new flyers have started shifting to the railways and long distance buses. Airlines can’t ignore them, as this is the segment that had fueled rapid growth in the sector, which made airlines add capacity. Analysts, however differ on whether such price-sensitive passengers would still fly at higher fares.

The ticket cancellation policy of several carriers, which causes substantial loss to passengers, is also another factor that could retard projected growth. The ongoing consolidation is expected to yield results after few years.

That may prove too expensive for investors. The three big airline groups -- Air India (including Indian), Jet Airways-JetLite and Kingfisher-Deccan are still pulling along due to the deep pockets of their owners, as profitability is still a distant dream. Nobody ever thought that crude oil would hit $100 a barrel jeopardizing the projections.

Augmenting funding from international banks now has become difficult as most major lenders are grappling with the sub prime crisis gripping the US market. They are all expected to reduce exposure towards funding airlines and there could be a plateau in growth.

As civil aviation has become more capital intensive with a gestation period of 6 to 7 years as compared to 2 to three years for other industries many investors are averse to stay invested in a regime of mounting losses.

But there are several optimists who expect a turnaround in few years. “I am still bullish. The volume potential in India is very big. When prices of petrol started increasing, everyone thought that the passenger car industry would be finished. But in fact car sales have gone up. The same trend is expected in the airline industry too,” said Mohan Kumar, former CFO of Air Deccan. According to Kumar the current fares are less than those prevailing three years ago.

“Flyers need to change their mindset. It is better to have a few profitable airlines rather than no airline.”