Opinion | The Indian aviation sector’s many problems
Despite the market’s breakneck expansion over the past decade and a half, the growth of Indian carriers has often been profitless
The Indian aviation sector is a conundrum. Its brief summer, starting with the civil aviation policy in 2003 and lasting until the financial crisis, has the patina of another era. The periodic rough weather since speaks of fundamental problems that have persisted since the post-crisis bloodbath. Jet Airways’ current troubles are no outlier in this respect. The kicker is that the aviation market has seen a long spell of unprecedented growth. How can the two go together?
According to the Directorate General of Civil Aviation, India’s air passenger traffic has grown by at least 16% annually over the past decade. In 2000-01, it stood at a paltry 14 million passengers. In 2017, Indian airlines flew nearly 140 million passengers, most of them domestic. It is now the third largest aviation market in the world with growth rates that leave the US and China in the dust. There is no slowdown in sight. Airbus forecasts that domestic traffic will grow five and a half times over the next two decades.
Yet, that growth has been largely profitless. 2016 was the first year in a decade that Indian airlines collectively came into the black. That didn’t last long. The Centre for Asia Pacific Aviation predicts consolidated industry losses of between $430-460 million in FY19. Jet Airways has never truly looked healthy after its troubles during the dog days at the end of the last decade. SpiceJet nearly went under in 2013 before government intervention and erstwhile promoter Ajay Singh stepping in again rescued it. Profits at market leader IndiGo are down 97% year-on-year for the quarter ended in June, its worst ever quarterly performance. Air India, of course, is a perennial sink for taxpayer money.
Granted, the airline business is a risky one around the world with high capex and low profit margins. But India is a special case even so. There are a few reasons for this that have been common to the various crises Indian airlines have gone through. Some of them are linked to international factors. First, the rupee’s depreciation is hitting carriers hard as it did a few years ago. About 25-30% of their costs, excluding fuel, are dollar denominated—from aircraft lease rents and maintenance costs to ground handling and parking charges abroad.
Second, and crucially, aviation turbine fuel (ATF) costs remain as big a pain in Indian carriers’ necks now as they were when the financial crisis hit. The Centre charges 14% excise duty on ATF. The states pile on their own sales tax that can go as high as 29%. The 2014-16 oil price plunge briefly masked the full effects of this. Carriers once again lack that luxury. This is particularly so when competing hubs like Dubai and Singapore charge far lower rates. Consequently, ATF charges, vulnerable to currency movements, comprise a large chunk of Indian airlines’ operating expenses—some 40% compared to 20% for foreign carriers. There was speculation earlier this year that the government would bring ATF under the goods and services tax, but the Centre swiftly shut it down. Little wonder; states would howl at the loss of revenue. They must find some way to square the circle regardless. The current structure is unsustainable.
Other reasons are to do with the nature of the Indian market. The breakneck growth sets up competing tensions. On the one hand, the intense competition among domestic carriers, the need to capture a slice of the ever expanding market and passenger price sensitivity mean that airlines find it difficult to raise ticket prices. The new civil aviation policy (NCAP) 2016’s regional connectivity scheme doesn’t help. Its goal is laudable and it may well benefit potential flyers in smaller towns. But the ticket price caps it imposes under the scheme, the fact that the viability gap funding will last only for three years and various operational issues, such as the lack of slots for connecting flights at major airports, mean that carriers are, by and large, left holding the can.
Against this is the need for heavy capex to keep up with market growth. Indian carriers are already operating at near capacity. Boeing estimates a need for over 1,700 planes over the next two decades. Carriers like SpiceJet and IndiGo have done well to clear debt off their books in recent years—a major cause of the aviation sector’s pain during the crisis. But when future capex cycles run afoul of oil price spikes and currency movements, they are bound to feel the pinch again.
These compulsions, the possibility of foreign entities floating airlines in India once the kinks in the NCAP’s liberalization of foreign direct investment in the sector are ironed out, and bilateral treaties for international routes that Indian carriers are unable to take full advantage of mean that things are unlikely to get easier anytime soon. Perhaps more consolidation would help. Full service carriers’ days seem numbered in the domestic market, at any rate, given that they consistently own the bulk of the losses. But until then—and until there is more policy support—Indian carriers will continue to live on the edge.
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