It’s been a winter of discontent for the Indian aviation industry. InterGlobe Aviation, owner of IndiGo Airlines, posted a loss of Rs 652 crore for the July-September quarter, as compared to a profit of Rs 552 crore in the corresponding quarter last year. Jet Airways reported losses for a third straight quarter with Q2 suffering net standalone losses of Rs 1,297 crore. Hammered with losses of Rs 1,323 crore and Rs 1,036 crore respectively in the previous two quarters, the airline lost 70 per cent of its listed market value this fiscal.
SpiceJet, which had bucked the trend last year with a small Rs 105 crore profit for Q2, also went into the red with a `389 crore loss for this July-September quarter. IndiGo, the poster boy of Indian aviation that has steadily reported profits, has seen its stocks wilt over 35 per cent this year after a Bloomberg analyst poll had predicted a much lower loss of Rs 391 crore.
By the end of the financial year, the industry is expected to post a combined loss of Rs 13,000 crore, and the panic is palpable. It’s not that market demand is poor. India, with a growth rate of 16 per cent in passenger traffic, is among the fastest-growing aviation markets. IndiGo grew nearly 17 per cent to a revenue of Rs 6,185 crore in Q2 this year. SpiceJet’s revenue too went up nearly 4 per cent.
UNFORSEEN HEADWINDS
Unfortunately, much like Bollywood, there is a sexy lure to aviation from the outside, which is dangerously deceptive. People have got into it without factoring in unexpected headwinds and long gestation periods. The short history of private aviation in India is littered with corpses —East-West Airlines shut in 1996, Damania Airways in 1997, Paramount folded up in 2010 and Kingfisher Air in 2012.
After seeing some profits in 2016 and 2017 on reducing fuel costs, this and other unpredictable factors are plaguing the industry again. Aviation Turbine Fuel (ATF) is out of Goods and Services Tax, and Central and state excises pile up to over 40 per cent in taxes. Fuel accounts for as much as 34 per cent of the operating costs of airlines in India, compared to a global average of around 24 per cent. Depreciation of the rupee too has been hitting aviation big time, since nearly 30 per cent of the non-fuel costs — spare parts, aircraft leasing, ground handling and maintenance — are paid in dollars. So, while airlines reported an increase in revenue, they were simultaneously crippled by spiraling operational costs.
In SpiceJet’s case, Q2 expenses rose 32 per cent to `2,300 crore, compared to an increase in revenue of just 3.7 per cent. And capping it all is the inflexibility to increase ticket prices! The break-neck growth, new destinations and searing competition between the airlines has kept prices down, while the new 2016 aviation policy opening up regional routes has put severe restrictions on how much airlines can charge.
CONSOLIDATION AHOY!
Spokespersons for the airlines have been putting up a brave face, explaining that an increase in end-of-the-year seat sales and steady easing in fuel prices herald better days ahead. However, the malaise is deeper. Revenues are not able to keep pace with fleet expansion and growth costs, and the repeated need of capital infusion is taking most of these airlines into irrecoverable positions of debt. Jet Airways, the oldest and one of the largest fleets with 124 aircrafts, is a case in point. Offloading equity to Etihad Airways gave it breathing room for a while. But now, the airline is stuck with over `8,000 crore in debt. The tightening noose of default and delayed salaries has left it with few options.
A consolidation process, the only way out, has begun. Tatas, always keen on the airline business and having been stumped politically in the past by Jet, are back on the batting track. Ironically, it is the Tatas who will now call the shots with either a complete buyout or a merger with their Singapore JV, Vistara Airlines.
Air India has a more difficult problem. Though the government has been pushing for its privatisation, its bloated debt of `48,000 crore and 22,000 employees make it a near impossible business proposition.
It is not only a question of deep pockets. The experience of Jet and others shows airlines, as a standalone business even by the astute and politically connected Naresh Goyals and Ajay Singhs, are difficult to sustain. Larger, storied conglomerates with more sustainable reserves are probably the face of Indian airlines in the future.
What necessitates consolidation
■ Spokespersons for the airlines have been putting up a brave face, explaining that an increase in end-of-the-year seat sales and steady easing in fuel prices herald better days ahead
■ However, revenues are not able to keep pace with fleet expansion and growth costs, and the repeated need of capital infusion is taking most of these airlines into irrecoverable positions of debt