Posted in Finance Articles, Total Reads: 2975
, Published on 24 January 2013
Despite passenger growth of 13.2 percent in 2011-12 and increase in demand, why are the airliners in India making losses?
Year 1994 saw the mark of globalization in Indian aviation industry by the Air corporation act which marked the entry of private airliners in the civil aviation industry which was previously dominated by government owned carriers Indian Airlines and Air India. This initiated the open skies policies. Private airliners like Jet Airways, Sahara Airways, and Paramount Airlines etc made entry in civil aviation segment. Since starting itself the airliners were making losses which lead to the decline of many airliners. Amongst all airliners, only Jet airways and Sahara airways survived which had monopoly in the market.
Revolution in 2003 marked the entry of new segment i.e. Low cost carrier (LCC) segment by Capt. Gopinath who had replicated the model of Southwest airlines which was dominant in the west. Until 2003, flying which was a dream for many became a reality for common man of India. This brought in steep decline in travel prices with rapid increase in air passenger demand. Development of many Tier-II and Tier-III non metro cities airport started and the airline connected many destinations in these cities. Air Deccan not only challenged the full service carriers (FSC) like Jet airways which also lead to the decline of Sahara airways but, challenged other modes of transport like railways and road. The cheap prices with reduced duration within destinations made flying a easy mode of transport. Kingfisher airlines (KFA) started its operations in 2005 as FSC. From starting of its operations, the airline was making losses. To enter in LCC segment, it acquired loss making Air Deccan and started operations under the name Kingfisher Red apart from its FSC services in domestic market. Jet airways also entered LCC segment with the acquisition of Sahara airways and started operations by JetLite. With increasing debt and high cost of operations, KFA was forced to shut its operations by cancellation of its flying license by DGCA. With development in era of LCC, there saw increase in other airliners like Indigo, Spicejet, GoAir flying in Indian skies which captured 69% market share by 2010-11.
Exhibit 1: Market share of Domestic Airlines in India
Source: ICRA Limited
Despite such increasing demand, the Indian airliners are making losses. Below are few challenges which airliners are facing and the measures which government of India is taking to control it.
Soaring ATF prices:
Fuel costs account to 40-50% of operating costs of the carriers. With fluctuations in crude oil prices in international markets which is imported affects ATF prices. Past few years has seen a rising trajectory in oil prices along with weakening rupee has made the airliners to undergo losses despite maintaining same passenger prices in maintain its market share in competitive market. Also with purchase of ATF, the airliners have to pay sales tax of 24 percent which is being levied on ATF in India which adds to its costs.
However it is being suggested to bring down the sales tax to 4 percent by declaring ATF as a declared good. This move shall save 20-30 percent of the costs. Also, to avoid payment of sales tax and to get benefit to lower ATF prices in international market, government in February 2012 allowed airlines to directly import ATF which is 60 percent cheaper in international market compared to India. However, this seems to be a partial solution since, importing fuel would require adequate storage and logistical infrastructure. So, all the airliners should join hands and develop optimal solution which shall not only reduce their costs but also increase their profitability.
Hike in airport charges:
Mumbai Delhi route is the most expensive air route. This is attributed to levying of user development fee and airport development fee (ADF) by around 300 percent by Delhi international airport limited (DIAL) and Mumbai international airport limited (MIAL) who are airport operators of Delhi and Mumbai respectively. This has led to objection by International air transport association (IATA) as well other airliners which shall lead to decline in passenger demand by 5-8 percent. But, with increasing passenger demand, there is a need to expand capacity requirement at the airports along with developmental activities for aircraft landing and parking, ground safety and handling services and fuel supply services with rise in number of aircrafts.
With 456 current airports and airstrips in India, only 88 are under operation. There is a plan to rise to 225 by 2020 by Airport authority of India with estimated investments of Rs 675 billion. These include many Greenfield and Brownfield projects. With rise in passenger traffic and capacity constraints in several metro airports, need arises to build additional airports in these cities along with development of other airports in nearby Tier-II and III cities in order to reduce dependency. However, there is reduced progress due to hindrances of land acquisition, environmental clearances, political logjams and non transparent policies by the government. With many airport projects approved, they are uncertain in terms of viability. Currently six metro cities handle 77 percent of total traffic. And most of metro airports are facing capacity constraints and would get saturated by 2015. This has lead to increased hovering time and delayed time for landing and takeoff which has increased additional burden of burning fuel on the airliners which is adding up to losses. With estimated rise in urban population to 37 percent by 2035 as per McKinsey, there shall be scarcity of land for acquisition and also increase in cost of acquiring. So, the government should identify land airport development and planning of cities for safety purposes. As of now, Mumbai airport is within city limits posing a threat to passengers and residential places which demands the need for new airport which still on paper.
The total cumulative debt of all airlines till 2011-12 was $20 billion with half of it related to working capital/payments to airport operation and fuel companies. High interest rates prevailing over the past fiscal have also added to the costs.
Though the government has allowed foreign direct investments (FDI) up to 49% in airline segment, there has not been significant developments owing to global economic slowdown, poor demand from US and Europe, rupee depreciation and stringent non transparent policies on airliners.
Development of airports and airliners shall not benefit these companies but also increase economic growth of our country. With government and AAI working on building efficient policies, there is a hope of recovery among Indian airliners.
This article has been authored by Gautam Udupa from School of Petroleum Management, Gandhinagar.
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