Mounting losses fail to deter aviation entrepreneurs in India
Despite the example of existing airlines, which have combined losses of $1.4 bn, six more carriers are set to take off
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Mumbai: Aviation has always beckoned adventurers and entrepreneurs,” says G.R. Gopinath , who founded India’s first low fare airline Air Deccan, which started off by selling air tickets at Rs. 1.
The original low-cost airline man is responding to the government’s decision to approve six more airlines.
Add Tata Sons Ltd’s low-cost joint venture (JV) with Air Asia Berhad that has already started flights and its joint venture with Singapore Airlines Ltd (SIA) for a premium airline, expected to launch operations in October, and the number rises to eight.
On Tuesday, Mint reported that three of the new approvals are for national airlines, a move likely to stoke competition, leading to lower fares for consumers, and at the same time improve connectivity across the country.
The six airlines are Air One Aviation Pvt. Ltd, Zexus Air and Premier Air, that are seeking to become national airlines; and Turbo Megha, Air Carnival and Zav Airways that want to take to the skies as regional airlines that operate with restrictions on where they can fly to.
“Connectivity is key to growth. Aviation is the backbone of the modern economy and the Indian market is still a virgin market. Less than 3% of Indians are taking to air travel. So the potential to tap that is immense,” Gopinath says.
Yet, the aviation gold rush comes at a time when the combined losses of existing airlines in India are expected to touch $1.4 billion in the current fiscal year, according to a June report by consultancy firm Centre for Asia Pacific Aviation (Capa). Combined losses for Indian airlines were $1.77 billion in the last fiscal year, while accumulated losses of the last seven years have reached $10.6 billion, Capa said.
In 2012, Paramount Airways Pvt. Ltd suspended operations after the aviation regulator cancelled its operating licence when it fell short of the minimum requirement of five aircraft that airlines need to possess.
And at least six private airlines, Damania Airways, Skyline NEPC, Modiluft, East West, Gujarat Airways and Span Air that started operations after 1992 when the airline business was opened up to private companies, closed shop in the first five years of that brave new world.
So, why does the business continue to attract new entrants?
Adventurers and entrepreneurs indeed.
“Aviation has tended to be a glamourous business... Richard Branson of Virgin Atlantic; Tony Fernandes of AirAsia; even Vijay Mallya of Kingfisher Airlines (though he failed),” says Girish Shirodkar, who leads the infrastructure and resources practices at consulting firm Strategic Decisions Group International LLC.
The revival of interest in the business is because airlines sense the coming of a new growth phase with metro airports being renovated, tier-II/III airports being planned, more tourism, economic growth and direct connectivity to international destinations (Dubai, Abu Dhabi) from small towns, he adds.
And some of it is also because of global firms expanding into the Indian market, Shirodkar adds—Air Asia, Singapore Airlines, and Etihad Airways PJSC (which bought a 24% stake in Jet).
But will all of them make money?
Mittu Chandilya, chief executive officer of AirAsia India, believes so.
The entry of new airlines is good for country’s aviation landscape and won’t impact AirAsia India’s profitability, he said.
Not everyone agrees.
“Three national and three regional airlines means lot of capacity coming into the system by next year subject to the airlines’ ability to raise adequate capital to start operations,” said Kapil Kaul, chief executive officer (South Asia) at Capa.
Kaul said under-capitalization is one of the key reasons for the failure of Indian airlines.
Kaul is happy the government approved the new airlines, “not holding them hostage to any industry politics or any strategic issue that usually govern clearing such projects”.
“Now, the government’s top priority should be on removing all structural issues that impact viability. Otherwise, we will see further financial deterioration which will have serious consequences. Industry remains severely challenged and don’t see this changing in the near term,” he said.
In India, only IndiGo, run by InterGlobe Aviation Ltd, is profitable—an achivement that is all the more significant given the challenges airlines face in India.
Fuel, some 70% more expensive in India for airlines on domestic routes, constitute around 50% of the operating costs of an Indian airline. Indian airport charges, especially at the metro airports, are among the highest in the world.
Then, the aviation sector is over-regulated.
The government’s support to loss-making state-owned airline Air India is “delaying the natural process of weeding out the weakest player”, says Shirodkar. Air India has debt of nearly Rs.40,000 crore on its books and is in the midst of a Rs.30,000 crore government bailout programme.
To succeed, an airline should have a common aircraft platform, good route planning and ontime performance which together result in “high load factors”, adds Shirodkar.
The load factor refers to the proportion of an airline’s seats that are filled.
Even then, making money will be difficult.
Not too many global airlines are profitable. And almost all bleed during an economic slowdown.
This year international airlines are expected to achieve a collective global profit of $18 billion, according to the International Air Transport Association (IATA), the trade association for the world’s airlines, representing some 240 airlines or 84% of total air traffic. That sounds impressive. “But the brutal economic reality is that on revenues of $746 billion we will earn an average net margin of just 2.4%. That’s less than $6 per passenger,” IATA director general and chief executive officer Tony Tyler said at the body’s annual general meeting last month.
The good news is that airline profits are improving. The average return on invested capital today is 5.4%—up from 1.4% in 2008, according to IATA. “But we are still far from earning the 7-8% cost of capital that investors would expect. Airlines are, however, working towards solutions that deliver value to both customers and investors,” Tyler said.
“..the most efficient and focussed players do make money—AirAsia, RyanAir, IndiGo, Singapore Airlines,” Shirodkar of Strategic Decisions adds.
The new entrants are hoping to emulate these airlines even as they pray for a change in the overall business and economic environment.
“I am hopeful that the landscape will change from next year,” says Alok Sharma, who is the promoter of Air One.
“New players starting without red balance sheet will benefit (from this) while established players will try to recover lost money,” adds Sharma, who was with Air Sahara previously.
Indeed, the “good times are ahead”, says Gopinath. “Fortune favours the brave!”
Sure enough, Gopinath has applied for a national airline licence.