NEW DELHI: There is a popular saying in the corporate world, “if a billionaire wants to become a millionaire, he should start an airline”. This saying holds very true in Indian market as well. Aviation is not an easy business to crack, especially in a market which is heavily regulated such as India. High jet fuel prices, numerous taxes, cut throat competition and difficulty in availing finance make this business unviable for many.
Despite these challenges, the Indian aviation sector continues to attract new players. Tatas, which is already a key player in the market with Vistara and Air Asia, will now be looking to revive Air India, which it acquired from the government of India. Billionaire investor Rakesh Jhunjhunwala is entering the sector with his Akasa Air, as also Jet Airways is set to restart operations. Would the new (re)entrants change the fate of the sector in the country?
Inherent challenges & Covid
Despite challenges and failure of two major airlines last decade (Kingfisher and Jet Airways), passenger traffic grew at a healthy pace and few players flourished. However, everything changed in March 2020 with the outbreak of Covid.
“Over the last 2 years, the industry has been depressed as a result of covid. We are in the worst situation ever. The biggest worry right now is how on earth we can make this sector work,” says Mark Martin, chief executive at aviation industry consultancy Martin Consulting LLC.
Sumit Singhania, Partner, Deloitte India, says that frequent curbs on travel haven’t really helped the air travel demand. “Losses of airlines are extending and next year too most players are likely to remain in the red,” said Singhania.
According to rating agency Crisil, three Indian airlines (IndiGo, SpiceJet and Air India) are expected to post a record loss of over `20,000 crore in the current financial year because of the third wave (Omicron) and higher aviation turbine fuel (ATF) prices. This is 44% higher than the loss of `13,853 crore last fiscal.
After the devastating second wave, air traffic registered a sequential growth of 27% in Oct 2021, 17% in Nov 2021 and 5-6% in Dec 2021. In Jan 2022, air traffic and flight movement fell sharply as new Covid cases surged at record pace.
Rising jet fuel prices is adding to the woes of the sector. The ATF on Feb 1 was hiked by `6,743.25 per kilolitre or 8.5% to `86,038.16 per kl in the national capital. This is the highest ever price of ATF.
“Jet fuel cost is 40% of overall sales, which is hurting the industry. We believe the fortunes of the industry lies in reduction in tax on fuel and easing of pandemic situation,” said Vinod Nair, head of Research at Geojit financial services.
The industry was hoping the government will announce relief measures in this year’s budget. “India’s Union Budget 2022 had nothing for aviation or tourism. This was highly disappointing and insensitive given the near-broken state of these sectors, although somewhat expected,” said Aviation consultancy firm Centre for Asia Pacific Aviation (CAPA).
Ronojoy Dutta, CEO of IndiGo, also said that they were expecting concessions in the forms of cuts in ATF excise duty and concessional finance to airlines. He had earlier said that the government needs to reduce indirect taxes on the sector (which stands around 21%) and asked the government to cut central excise taxes on fuel from 11% to 5%, bring ATF under GST and eliminate custom duties on repair parts.
Increasing competition
According to analysts, the new private Air India and Akasa Air are very positive signs for the sector.
“Akasa is going to be a very welcoming change for the sector and consumers while Air India will mark the resurgence of the aviation sector in India,” said Martin.
He added that AI will predominantly be an international airline. “It is sitting on bilateral agreements with around 150 countries. It will obviously start flying there. With Tata Group’s excellent record, AI has the potential to take on some of the largest carriers in the world,” Martin.
However, the big challenge for Air India is its ageing fleet, improving customer service and attracting millennial passengers. On Akasa, Martin said that it will give tough competition to IndiGo and it may become difficult for the latter to have a market share of 50-60%.
Nair of Geogit says that privatization of Air India will improve the industry outlook and passenger service but high competition is likely to further impact weak airlines, unless they turnaround their operational and bring down cost.
According to Martin, while IndiGo has the whole world on its doorstep and GoAir has a strong promoter, it is the Gurugram-based SpiceJet which is treading on very thin ice.