The air fare between Delhi and Mumbai, the country’s busiest route which has maximum number of daily flights, jumped by almost 50 percent during the first week of April. Fares on some non-metro routes increased by an even greater margin. For some journeys, the Delhi-Mumbai ticket was upwards of Rs 30,000 this month.
As India’s second largest airline by passengers, Naresh Goyal-promoted Jet Airways reduced seats drastically before getting completely grounded, air fares rose alarmingly. Passengers, who had been booked on Jet on its domestic or international routes, were left to fend for themselves as the airline suspended operations. And Jet’s nearly 16,000 employees are also left jobless as the airline, often described as “too big to fail”, stopped operations on April 17.
A PR executive from Mumbai and her friend, an executive at an MNC, were booked on a return journey on Jet Airways well in advance. The journey was from Mumbai to Paris on April 4 and then on Jet’s partner airline, Air France, from Paris to Naples on the same day. Their return flights were booked for April 21. Not only did the luggage go missing when they landed in Naples, but their return flights were also subsequently cancelled. “Neither Makemytrip (MMT) nor Jet made any alternative arrangements and we had to rebook ourselves on Turkish Airlines. This cost us around `34,000 each. Now, MMT has been saying it will process a refund for cancelled flights but that is only about `19,000. Our refund is stuck and our holiday was ruined,” one of the passengers said.
Jet’s employees are also facing tough times. A customer service executive in Mumbai, who has been at the forefront of the campaign to save Jet Airways since that fateful Wednesday, said this is his first ever job and he has been with the airline for eight years. “There has been no salary for a month and a half, even for loaders whose monthly paycheck is just Rs 7,000-8,000. Some service providers have paid these people from their pockets… Captains haven’t been paid for three months. We are facing insurmountable difficulties.”
Last week, the National Aviator’s Guild (NAG), a representative body for Jet pilots, appealed to Prime Minister Narendra Modi to direct SBI, to release at least a month’s salary. “We don’t want to see a repeat of the human tragedy which unfolded post the Kingfisher Airlines’ demise,” NAG president Karan Chopra wrote to Modi.
Some estimates suggest the amount of money stuck due to cancelled flights with Jet Airways and travel agents could be anywhere between Rs 2,500-3,000 crore. Now as Jet has been grounded and other airlines scramble to lease its aircraft to put some capacity back in the market, fares may stabilise somewhat. But Jet’s debacle raises several questions, not just about the series of events which led to its shutdown but also over the precarious state of India’s airlines in general and their bleak finances in particular.
India is among the world’s fastest-growing aviation markets, regularly clocking double-digit passenger growth, month on month. The country’s air passenger traffic is expected to grow six-fold to 1.1 billion and the number of operational airports rise to around 200 in 2040, according to Ministry of Civil Aviation’s vision document released in January. India also routinely witnesses stress on its airline balance sheets.
The last high profile airline to go belly up was Vijay Mallya’s Kingfisher Airlines in 2012, in conditions which seem eerily similar to Jet’s. Mallya went on to become the poster boy of fugitive economic offenders, who allegedly skimmed the system and also siphoned off money before leaving Indian shores. Kingfisher suffered from its promoter’s unrealistic sense of the cost-revenue equation, the disastrous purchase of Deccan and the inability of Mallya to let an aviation professional steer the business.
Then in 2014, SpiceJet was also in a precarious state with a brief grounding due to severe cash crunch, till its own former promoter, Ajay Singh, stepped in with emergency funds. And state-owned Air India has been on the block for more than a year with no takers as it continues to pile up losses and seeks even more funds to repay debts. Even market leader IndiGo was facing headwinds during much of 2018-19 and posted its higher ever loss in one quarter.
So is the Indian aviation case study an example of mismanagement by promoters, worsened by policy inadequacies and flawed business models? Why are Indian airlines
Jet Lag
The first hint of trouble emerges after the airline declares results for 2017-18. It shows an unexpected loss of `1,036 crore in the fourth quarter. This comes on the back of `602 crore net profit in the comparable quarter of the previous year, and is the first quarterly loss in more than 10 quarters.
By August 2018, Jet’s troubles mount as auditors refuse to approve its Q1 FY2019 results and then it subsequently posts `1,323 crore net loss.
Around the same time, Jet refutes media reports that it cannot remain operational beyond 60 days as well as reports of a stake sale.
From September beginning, the airline starts delaying staff salaries.
In early October, ICRA downgrades the airline’s long-term borrowings
programme.
By November, there are reports of the Tatas conducting due-diligence of Jet after a nudge from the government.
Around the same time. there are reports of another round of negotiations between promoter Naresh Goyal and Etihad Airways for the latter to increase its stake beyond 24 percent.
By January 2019, after Jet has delayed repayments to lending banks, SBI hints at a resolution plan involving all lenders.
The Bank-led Resolution Plan is cleared by the lenders in February, which involves the conversion of debt into equity at Re 1.
As the airline keeps grounding aircraft due to non-payment of lease rentals in late February and March, bankers promise emergency funding of `1,500 crore but the promise is never fulfilled.
Reports emerge of potential investors (including Etihad) setting Goyal’s exit as a precondition to further talks. Goyal and his wife finally step down in March-end.
By March 31, Jet’s pilot union gives a 15-day ultimatum on salary dues and threatens to stop work. Aircraft continue to get grounded.
By April first week, it becomes clear that majority of Jet’s aircraft are grounded, lenders are dithering over fund infusion and the airline is in dire straits.
Jet halts operations on April 17 as it is unable to pay even for fuel to operate flights even as banks continue to talk of a resolution plan involving four interested bidders.
floundering despite unprecedented traffic growth? To answer these questions, one will have to examine different aspects of the airline business: cost and revenue dynamics, policy support and taxation, opportunities for global investors to come into the market and whether the airline businesses are being run ethically. Suffice it to say that India’s record on all these aspects is patchy at best.
Let us first look at what happened to Jet. Till January, it was the second largest airline by passengers on domestic routes and a market leader on international sectors. And by April 17, it had to shut shop.
CEO Vinay Dube said in a statement that day, “Since no emergency funding from the lenders or any other source is forthcoming, the airline will not be able to pay for fuel or other critical services to keep the operations going. Consequently, with immediate effect, Jet Airways is compelled to cancel all its international and domestic flights... Over the last several weeks and months, the company has tried every means possible to seek both interim and long-term funding... the airline is simply unable to conduct flight operations in a manner that delivers to the very reasonable expectations of its guests, employees, partners and service providers.”
Jet had been tottering for months, crushed under a debt pile of over `8,000 crore, defaulting on several financial commitments, unable to pay lease rentals to its aircraft lessors and even salaries to staff. A consortium of lenders, led by the State Bank of India (SBI), which was tasked with working on a revival plan for Jet, did not infuse the promised emergency funds despite repeated assurances to the contrary, forcing the airline to stop operations.
Though gradual, the snipping of Jet’s operations means hundreds of aircraft are now sitting on the ground, squeezing capacity in a market where passenger numbers continue to surge. And coming just before the peak summer season, this chain of events has led to an unprecedented spike in air fares.
But weren’t India’s big airlines—Indigo, SpiceJet, Air India—supposed to be rewriting aviation history, giving ‘UDAN’ (Ude Desh Ka Aam Nagrik) to the common man’s dreams? What happened to that happy idyll of a market where everyone gets to fly at reasonable fares? Was the government’s promise of enabling “anyone in a hawai chappal to fly in a hawai jahaj”, the slogan for the UDAN scheme, a mere pipe dream? But six airlines, which had bid under the scheme, have shut down operations.
Jitender Bhargava, former executive director at Air India, says, “UDAN is a different concept, to get the hitherto unconnected cities connected. People from that region get to travel at a fixed fare and viability gap funding (VGF) exists for airlines to cover losses. But the government cannot be expected to provide VGF for commercial operations. In the case of commercial operations, market dynamics of supply-demand determine the fare… Yields in India, measured in terms of revenue earned per kilometre of passenger flown, are amongst the lowest.”
Not only have air fares been rock bottom in India for years (till the Jet episode), messing up airline financials, policy flaws have also pushed the Indian aviation scenario to the brink. G Sudhakara Reddy, President of the Air Passengers Association of India (APAI), says there are “instances when policy makers driven by exalted expectations tweak the policy guidelines to allow entry of all and sundry operators, who are guided more by the glamour and less by business acumen and professionalism.
Does it need some of the policies to be rolled back or steamrolled? More than the rolling back of the policies, which should be based on close scrutiny and objective analysis of the impact, among that includes the much-touted UDAN scheme, it is important to enforce the rules for the entry and exit of the players.”
Reddy goes on to say that “some reports suggest that they (promoters) had sucked the money out of the airlines and parked the assets, made from the ill-gotten money, outside India to begin a new life or a business there. It may be a sheer allegation. But at the same time should be closely examined… Any laxity will prove to be grave, costly, against public interest and importantly will adversely affect the democratisation of the aviation sector.”
Myriad policy lapses have hurt the aviation industry. For one, the Aviation Turbine Fuel (ATF) is heavily taxed; this single component accounts for up to 40 percent of an airline’s expenses, making the airline business an unsustainable one in India. Plus, airlines have to follow Route Dispersal Guidelines, which mandate certain percentage of flights on unprofitable routes, further hurting their margins. In addition, the Foreign Direct Investment (FDI) norms bar foreign airlines from investing more than 49 percent in Indian carriers, clogging up some potential investments in this heavily capital-intensive sector.
That Indian airlines are not exactly in the pink of health is also evident from their latest financials. In the fourth quarter (January-March 2019) alone, the three big listed airlines are expected to post a combined net loss. Gagan Dixit and Rachael Alva at brokerage Elara Securities say they expect IndiGo, SpiceJet and Jet Airways to report a cumulative net loss of about Rs 508 crore in Q4, even though Indigo and SpiceJet would each report a net profit.
This is lower than the Rs 880 crore net loss the same three airlines posted cumulatively in the immediate previous quarter but the continued losses show the precarious health of the sector. And the figures do not include Air India’s financials, which posted Rs 5,349 crore net loss in 2017-18 alone. Australian aviation consultancy CAPA forecasts that Indian carriers will collectively lose between $550 million and $700 million in the financial year 2020 as against an estimated $1.7 billion loss for FY 2019. In January, ratings agency ICRA too had predicted a turbulent year for the aviation sector.
Also, India is a crowded market with seven scheduled airlines when the market can probably only sustain three or four strong players. So consolidation is the way forward.
Then, we have two business models: 1) Full Service, where hot meals and frequent flyer programmes are offered, 2) Low Cost, where every ancillary service like meals, choice of seat needs to be paid for, over and above the ticket price. The trouble is, airlines following either model offer similar fares because of intense competition and end up making losses.
So the aviation market remains a contradiction—precarious financial health of Indian airlines despite double-digit growth in passengers month on month, for years. This contradiction is easily explained though: passenger growth is a function of very low levels of penetration of air travel and the market may well continue to post double-digit growth for many more months.
At the same time, flyers thronging to the skies do not make most airlines profitable because these airlines continue to operate in a high-cost and highly competitive environment while offering cheap seats.
While this peculiar aviation math has been applicable to the Indian market for years, the situation worsened in recent months. Jet was grounded. Other airlines are also facing issues such as the global grounding of Boeing 737 MAX 8 aircraft, which leaves SpiceJet with the less-than-expected fleet for flights. Air India’s fleet is already down by almost 20 per cent.
IndiGo is also facing turbulence since its rapid expansion —it adds one new aircraft every week—has meant a crippling shortage of cockpit and cabin crew, translating into cutback on the number of daily flights. So right now far lesser number of aircraft is in the skies than the last summer schedule, pushing up air fares.
One big reason for airlines’ financial woes has been their inability to price seats sensibly due to intense competition. The COO of a low-cost airline said typically, 50 per cent or every second domestic seat is sold below cost. If airlines are losing money on at least every second seat, they cannot run profitable businesses. Then, three airlines—Air India, Vistara and Jet—follow the full-service model, further worsening profitability.
In the case of Jet, the government tried all possible interventions to save it. Worried over implications of a large airline with thousands of employees getting grounded just before Lok Sabha polls, it pushed lenders to stitch together a rescue plan. And SBI first promised emergency funds but then couldn’t seem to get other lenders to agree to this.
SBI is now hopeful of some investors, including a Middle Eastern airline, investing in Jet and a stake sale plan is supposedly ongoing. But it is rather hard to get a grounded airline back up in the air, since its airport slots (a premium commodity since airports are almost always slot-constrained) have already been farmed out to competing airlines, most of Jet’s aircraft are now in the possession of lessors and some of its prized cockpit and cabin crew has been employed by competitors.
Besides, the involvement of various arms of the government to rescue a commercial airline raises uncomfortable questions. Should government be propping up a private enterprise? It has already done enough disservice to the industry by supporting Air India, through constant infusion of funds derived from taxpayers.
Most of the promised Rs 30,000 crore equity has already been infused into Air India, never mind accumulated losses, which were Rs 53,583.92 crore till March 31, 2018. The carrier hasn’t made a net profit since 2007 and net loss for 2017-18 was Rs 5,348.7 crore. By keeping Air India alive—an attempt to disinvest bombed last year—the government is only aggravating the financial condition of other airlines.
But here’s a silver lining: Jet’s competitors have already begun benefitting from its demise. Analysts tracking the sector now expect IndiGo to become profitable for 2018-19 versus an earlier estimate of a full year loss. Jai Irani and Vijayant Gupta at brokerage Edelweiss have said that despite Q4 being seasonally weak, they expect increased profits for IndiGo and SpiceJet.
For Q4, these analysts have predicted over 40 percent jump in revenues, more than doubled margins and six-fold jump in profits for IndiGo. For SpiceJet, highest domestic growth in Q4, revenue growth similar to IndiGo’s at around 40 percent and profit surge too mirroring IndiGo’s. Anshuman Deb at ICICI Securities says he now expects IndiGo to make profits for 2018-19 as a whole.
But airlines are unlikely to remain healthy for the long run if they depend only on competition getting wiped out. APAI’s Reddy says there was a need to take a close look at the operations of India’s airlines.
“Admittedly, it is a highly capital-intensive sector. The operators should have deep pockets, good public standing, professionalism and knowledge about the exigencies and challenges of the sector. Players in the sector should conform to these strict parameters and should not come with a mindset that ‘first we will enter and later see what it is’. Not that India lacks such entry criteria. But tardy implementation and manipulative skills of the operators to overcome such carefully crafted benchmarks for entry are the casualties.”