Where is the Indian aviation sector headed?

The low-cost, budget carriers have been able to do better than their full-service counterparts, who face mounting losses thanks to the deadly cocktail of rising overheads and heavy discounting.

Feb 14, 2019 07:02 IST India Infoline News Service

As per the latest DGCA report, passengers carried by domestic airlines during Jan-Dec 2018 were 13.9cr as against 11.7cr during the corresponding period of previous year, reflecting a growth of 18.6% yoy. However, Indian airline companies have increasingly been under strain. Jet Airways has been under a liquidity crisis for a long time and is grappling with its own issues. Indigo Airlines, with the largest market share of 41.5%, is also feeling the squeeze, reporting a 75% decline in its Q3FY19 profits.

What explains this dismal state of the aviation sector? First, with heightened competition among the players, fares are getting beaten down, denting profitability. Second, the costs of fuel were considerably up in for the second half of 2018. Third, aviation firms such as Jet Airways and Air India are reeling under mountains of debt.

Ironically, Indian aviation companies are bleeding at a time when global airlines are expected to make net profits of $33bn, according to IATA. Cost pressures are the bigger monster haunting these firms. There are 4 principal reasons for this. First, most airlines end up flying less popular routes which does not make economic sense. Second, global fuel prices, as mentioned earlier, are denominated in USD and a strong dollar has posed to be a problem. Third, Indian aviation companies do not hedge fuel and dollar risk effectively the way global companies do. Finally, the government’s policy of keeping oil out of GST and skimming away most of the price fall through higher excise duty has also hurt airlines.

So, where are aviation firms headed?

Jet, Set, Grounded

Jet Airways is in what can be said the most miserable state currently. The cash-strapped airline owes $1.12bn or Rs8,000cr of debt as of Sep 2018 and has been losing market share steadily. From salary delays to deferment of results to the grounding of flights, Jet has been in the news for all the bad things for a long time.

After speculations of various parties expressing their interest in buying stake to rescue the debt-laden airline, what has come to fore is Founder & Chairman Goyal’s proclivity for control. However, reports stated that Goyal has finally decided to step down from the position, and the board has agreed with Etihad’s plan to purchase the company’s shares at a 49% to immediately release $35mn.

Until this and the debt resolution plan currently underway with SBI come through, Jet is expected to lie in suspended animation.

Keeping the Maharaja afloat

Behemoth Air India has a humungous debt burden of ~Rs55,000cr. Large fleet acquisitions are to blame for the pileup of debt. Add to that the fares of a budget airline and the services of a full-service carrier.

Various initiatives of the government to sell it to private entities have not come to fruition. For now, Air India remains at the mercy of the government which has somehow managed to keep it afloat. Air India needs to hold on tight to its market share and work on its well-known delays and service issues.

Indigo cancelling flights; GoAir faces unstable management

Indigo reels under operational inefficiencies, pilot shortage being on top of the list of reasons for the same. This has led to a significant number of flights being cancelled. In its pursuit of expanding routes and aggressive growth, the company has not been able to induct enough pilots in line with the expansion.

GoAir’s new CEO Vrieswijk resigned on 13th Feb serving just nine months in the position and the firm is now left with finding a successor immediately.

Putting things in perspective, the low-cost, budget carriers have been able to do better than their full-service counterparts, who face mounting losses thanks to the deadly cocktail of rising costs and heavy discounting.

Then again, domestic airline demand grew 18.65% yoy in 2018, while capacity grew 15.05%. In this scenario, it appears that the appetite for air travel for the Indian traveller is rising, but the times of offering freebies and luxury on air to woo more travellers are long gone.

The need of the hour is better operational and cost efficiencies as well as an asset-light and no-frills model to keep the Indian aviation industry afloat.

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