Even though the Indian aviation industry achieved growth of nearly 17 per cent in passenger traffic last year, it had its share of rough landings. This year too has been turbulent so far, what with Air India's woes and Kingfisher's debt issues.
However, policies boosting foreign direct investment (FDI), favourable taxation and the recent Indian budget [2012-13] proposing Rs40 billion (Dh2.87 billion) equity infusion into national carrier Air India next fiscal — are all aimed at leading the country's aviation industry out of the red.
Despite all the pandemonium, the Indian aviation industry will still manage to clock positive growth this year, according to industry experts.
"The Indian domestic aviation market will continue to grow during fiscal year 2012-13, albeit at a slower pace, say at around 10-12 per cent primarily on account of a slowing domestic economy, increasing operational costs and higher fares," Amber Dubey, director — aviation for global consultancy firm KPMG, said.
He added that the government had initiated several "bold corrective measures" such as the recent decision to allow up to 49 per cent stakes by foreign investors, direct imports of jet fuel and opening of bilateral rights. "These are welcome [measures]," Dubey said.
Recent policy decisions and the fundamental drivers of aviation growth remain strong to make India the world's third largest aviation market by 2020, he said.
Orders for more fleet
India is already moving in that direction. French planemaker Airbus said in a recent report that the country's market for new aircraft makes it the "world's fourth largest" in both number and value. It also said that India will require 1,043 new aircraft costing $145 billion (Dh532.61 billion) between now and 2030 to satisfy surging annual demand.
While an increase in jet fuel prices led the turbulence in Indian skies last year, the country's aviation industry has been shaken by other factors. It all started with mounting debts of Air India, resulting in an extended pilots' strike. Then the closure of budget carrier Kingfisher Red following a cash crunch and a fake pilot scam saw the industry plunging further.
And the final blow came as baron Vijay Mallya-owned Kingfisher Airlines was almost grounded for failing to pay back taxes.
So, while the mess resulted in clipped wings for some carriers, it also saw a couple of shake-ups at the Civil Aviation Ministry, where Praful Patel was replaced by Vayalar Ravi, who soon gave up the hot seat to Ajit Singh, the current civil aviation minister. Clearly, the operating environment will continue to be challenging in 2012, with infrastructure posing the biggest hurdle.
As KPMG's Dubey pointed out: "Fuel costs, high taxation and infrastructure woes remain the three key challenges for the Indian aviation industry."
In addition, rupee depreciation, volatile fuel prices and intense competition are likely to continue this year.
To offset the high costs, the government has agreed to allow direct imports of fuel, but the airlines "may not find it prudent to replicate the costly infrastructure" required to transport fuel from the ports to the aircraft, Dubey said.
Hard to find financing
"High jet fuel prices [which are expected to remain expensive with crude above $100 per barrel] compounded by exorbitant state taxes, airport charges, ground handling charges, congested airports, wage pressures and a highly competitive domestic airline sector will continue to put pressure on domestic airlines in 2012-13," he said.
To make matters worse, most of the carriers have struggled to raise funds as lenders are wary of increasing their exposure to the aviation sector.
Frost & Sullivan's Aerospace and Defence Practice also points to similar challenges, saying that infrastructure constraints pose the biggest challenge to the aviation industry's growth in 2012-2013.
"The government has allowed imports of jet fuel directly that require huge storage and logistics infrastructure.
"However, Indian airspace infrastructure will not be sufficient to cater to the increasing passenger requirements," the business research and consulting firm's analyst explained.
Jet fuel in India accounts for almost 50 per cent of the operating cost of an airline, making the carriers cash-strapped, and that further price rises will "ruin the financial health" of the airlines. "Significant investment needs to be made to encourage regional connectivity in far-flung areas that lack infrastructure. "A major policy initiative is also required to monitor predatory pricing and stabilise the airport charges," the analyst said.
"The government has taken some bold policy decisions recently. Many more need to be taken on a priority basis," Dubey added.
It's no secret that 2011 proved to be the worst for the Indian aviation industry with its huge debt burden and major carriers losing market share.
The sector faces a severe cash crunch and is under a massive debt pile of about $20 billion, with two of the six main airlines suffering losses, with state-run Air India on government life-support and Kingfisher headed towards a crash-landing.
While Air India has raked up Rs437.7 billion in debt towards purchase of new aircraft and working capital loans, Kingfisher Airlines' growing debts have pushed it to the brink of bankruptcy, with debts having swelled to Rs760 million. The carrier had 40 bank accounts frozen in February, grounded majority of its fleet, and suspended international operations in mid-March.
FDI a boon
The sector is now busy putting measures in place to tackle the challenges ahead, with a primary focus on FDI and a new civil aviation policy.
"The struggling Indian aviation industry is desperately in need of FDI that will help the cash-strapped Indian carriers to stabilise their position in the market. However, for a few carriers, this policy might act as a hindrance to their own market existence," the analyst at Frost & Sullivan said.
Echoing similar thoughts, KPMG's Dubey said: "Allowing 49 per cent FDI by foreign airlines is definitely a welcome step. More funds, technical know-how and global access can be unlocked by allowing foreign airlines to take equity stakes in Indian carriers."
Asked if Kingfisher Airlines, which is fuming after being refused a bailout, had chances of survival, the Frost & Sullivan analyst said: "It is uncertain to say whether the airline will continue flying or shut down all its operations. "However, both cases involve risks i.e. losing on the carrier's profit margins and losing its slots to other Indian carriers."
However, with the increasing debt levels of Kingfisher and Air India, it is uncertain that these carriers will make profits in the year 2012-2013. "The over 15 per cent growth in passenger traffic has failed to translate into profits for the Indian airline industry, which is primarily due to high operating and financing costs, underpricing of tickets and over-capacity," Dubey said.
Carriers must plan for a smooth landing
Dubai: According to Amber Dubey, director — aviation for global consultancy firm KPMG, to succeed in India, airlines have to focus on key fundamentals like "on-time performance, cost management, smart route-planning and right pricing".
"There are an increasing number of first time flyers and their specific needs have to be catered to. Every cent that can be saved should be, and passed on to the customer. There is greater need for airlines to collaborate [not collude] to ensure that there is a balance between demand and supply on key routes; and that ticket fares are not over-priced or under-priced since that ends up hurting all airlines and ultimately the passenger," he said.
As per Frost & Sullivan's analysis, Air India needs to address its internal issues like "inefficient route network, commercial ineffectiveness, poor staff morale and improper management" in order to maintain a healthy position in the market.
Air India vs Kingfisher
Being a public carrier, Air India enjoys many benefits from the government like a bailout plan and slots preference, the aviation analyst said, adding that Kingfisher Airlines, on the other hand, does not face problems related to workforce and aircraft operations.
"Its only trouble is its huge debts. The airline needs to generate funds urgently to avoid issues pertaining to declining market share, capacity reduction on profitable routes, losing slots and passenger loyalty," the Frost & Sullivan analyst said.
On another note, as per Frost & Sullivan's analysis, with massive ongoing investment towards non-aeronautical activities and the introduction of aerotropolis areas around various airports in India, the revenue contribution from non-aeronautical activities may increase.
Indian carriers flew 55 million domestic passengers between January and November 2011, against 46.8 million in the corresponding period a year earlier.
