On a fading horizon
Caught in a race to occupy market share while being burdened by volatile fuel prices, Indian airline companies are in deep trouble today though statistics paint a pretty future
"Survival of the fittest" – the term coined by biologist Herbert Spencer after reading Charles Darwin's On the Origin of Species, enforces that evolution is pivotal to survival. This undeniable fact is relevant not only for living beings, but also for material objects like infrastructure and business. An establishment which moulds its methods to match the evolving mood, survives. Those who can't are quickly erased. And the world's most crisis-prone industry, Aviation, bears strong testimony.
Latest has been the crash landing of India's oldest private airline – Jet Airways – which cancelled all operations on April 19, 2019, for an indefinite period. No one knows if Jet will ever dot the Indian sky again.
Like every other business that has shut its shop, Jet Airways too left a trail of despair and incomplete dreams, still hopeful against difficult odds. Back in the 1990s, the meteoric rise of Jet Airways and its owner Naresh Goyal was discussed elaborately through the corridors of Indian Aviation. Goyal created it from scratch and soared high with his airline before the sharp descent began. There was a time when he paid hefty packages to pilots; but since 2018, the airline had been struggling to pay salaries and had reportedly failed to make payments for leased aircraft. Moreover, the company made losses across quarters and its total debt accumulated to Rs 8,00 crore, which, according to few reports, may add up to Rs 11,000 crore. It was not even able to pay airport fees to the authorities. As a result, more than 23,000 employees are now jobless.
Trouble did not show up suddenly on Jet Airways' door. It took years of financial mismanagement for it to reach this horrendous fate. Running the company with losses, getting short loans to cover those losses and, despite being a full-service airline, trying to compete with low-cost airlines are a few reasons that led to Jet's nosedive. Banks too are guilty as they condoned early signs. They kept extending loans to the airline despite knowing that the latter would fail to repay. Additionally, it has also been alleged that the profitable routes, which were once given to Jet by UPA government, were allocated back to Air India by the NDA government. Those prime routes, which once made Jet the 'King in Indian sky' and Air India the pauper, has now turned tables.
Jet was piled with many miscalculated steps too. One of those would be the acquisition of Air Sahara in 2007 for Rs 1,450 crore, which according to industry experts was overpriced. Experts blame Chairman Naresh Goyal's management skills too. Until March, he was unable to assign a strategic investor. He has also been accused of making bad investment decisions and failing to address the company's deteriorating financial predicament while borrowing heavily. Later in the same month, he was forced out and lenders took control of Jet. Recently, Naresh Goyal was not allowed to leave the country as the Ministry of Corporate Affairs issued a lookout notice against him.
Despite these hiccups, experts and agencies paint a bright future for the Indian aviation sector. The rise in the working group and middle-class demography has positively affected demand. As per International Air Transport Association (IATA), the Indian aviation sector is poised to become the largest in terms of passengers ferried by 2024. Passenger traffic grew at 16.52 per cent year-on-year to reach 308.75 million in FY18 (financial year 2017-18). During January-March 2019, Indian airlines carried 464.47 lakh passengers, which is 2.53 per cent up from the same period of 2018. Moreover, maintenance, repair and overhaul (MRO) industry, which accounts for 13-15 per cent of total revenue, may grow over $1.5 billion. Indian aviation sector could see Rs 1 lakh crore worth of investment in the coming five years. As of March 2019, India has 103 operational airports. To handle rising air traffic, the Indian government has envisaged increasing the number to 190-200 by 2040. Even the number of aircraft is expected to grow to 1,100 by 2027 from the current 620.
After seeing these data, there remains no doubt that the Indian aviation sector is among the world's most promising and sound in terms of investment. But what about the current picture which is marred with patches. It seems the façade is deceiving. Though demand has increased, Indian airlines are still not able to recover their operating cost. SpiceJet made a meagre Rs 50 crore profit in the third quarter of FY19. Indian aviation market leader Indigo too made a Q3 profit of Rs 191 crore, 75 per cent less than what it made in the same quarter of 2018. However, it has reported a five-fold jump in its Q4 profit, which stands at Rs 589.60 crore, but credit for this surge goes to the grounding of Jet Airways. And then, there is the hopeless case of state-run Air India, which keeps churning taxpayers' money to invisible avail. GoAir, Vistara, and Air Asia are not in good shape either. Most are running in losses and their future looks as gloomy as Air India's and Jet's.
The Indian aviation sector has been plagued by the same issues over years, but for no apparent reason, it has failed to find a concrete solution. They keep blaming fuel prices and rupee depreciation for their own deterioration. It is understood that variables like fuel prices and currency values are beyond any airline's control. As any of these prices shoot up, airlines make losses. But they could have learned from the past (Vijay Mallya's Kingfisher Airline bit the dust in 2012 with debt, fuel prices and rupee depreciation being the primary reasons) and prepared for an unseen situation. For example, most IT companies get 80 per cent of their revenue from the overseas market and have devised plans to protect themselves from volatile currency movements. However, no airline company has put a credible currency plan in process to avoid unseen volatility.
Most importantly, the price war between airlines is a culprit for their pitfall. Each wants to fill 100 per cent of their seats by offering cheap tickets, which do not even cover their operating costs. They still have not learnt the art of balancing volume and value. They are so focussed on capturing market share that they have completely forgotten to ensure profit. They are literally pulling out passengers from buses and trains to fill their seats for throwaway prices.
The government's apathetic attitude towards the sector is also responsible for its stagnation. They are not even addressing fundamental needs of the sector like tax reduction on fuel, for which airlines have been appealing for a decade. Relatively high taxes make jet fuel in India around 40 per cent more expensive than the rest of the world. The government had once decided to place Aviation Turbine Fuel under GST, but the proposal is still in the pipeline. It could have reduced fuel price significantly. When fuel price is low, an airline can make money even with cheap ticket prices.
Experts feel that cumbersome regulation like Route Dispersal Guideline (RDG), which mandate airlines to fly a certain percentage of flights in smaller, unprofitable air routes, drives up costs and introduces inefficiencies. Pilot shortages are also hitting hard on the operational front. According to CAPA Centre for Aviation, there are 7,963 pilots in India. India would need 17,164 additional pilots in the next 10 years. This will lead to wage bill rise, the second biggest cost chunk after fuel.
Aviation is a high-cost industry, but the Indian consumer is extremely price sensitive. Airlines will have to keep their ticket price either equal to operating cost or more to keep flying. The government could also help the sector by reducing taxes on ATF or bringing it under GST. It can also reduce airport lending charges and other taxes. It has already done some favour by allowing FDI in the industry. Now, it can look into high rates of MRO charges which cause airlines to head to China for maintenance.
The government might do its part, but for real solution, airline companies have to work together. They will have to sort their priorities between value and volume. It is evident from data that passengers are here to stay. They now know the perks of air travel and are getting accustomed to it. So, they must not be too conscious on this front. They might lose a few passengers, yes, but they will at least survive.