Singapore Air Show

Boom And Bust All At Once For Turbulent Indian Air Transport Sector

 - February 13, 2012, 11:00 AM

Even though the year ended with doom and gloom, the Indian air transport sector couldn’t have asked for a better beginning to 2012 with its largest budget carrier, IndiGo, signing a memorandum of understanding for the biggest commercial aviation deal in history valued at approximately $15.6 billion. The deal, which was subsequently firmed up, called for 180 of Airbus’ A320 family narrowbodies. This topped an earlier order by the carrier for 100 aircraft and seemed a clear indication that the Indian market is back on track after suffering severe losses during 2008- 2009.

However, 2011 saw private airlines in India lose an estimated $700 million in the first six months of India’s financial year (April to September 2011), $580 million more than they lost in any previous financial year, according to the Federation of Indian Airlines (FIA).

“Amid an environment of slowing GDP growth, [the challenges] will be to ensure yields and profitability are maintained,” said a recent report by the Centre for Asia Pacific Aviation (CAPA). “At the same time, the nation’s full-service carriers continue to suffer under the burden of approximately $16 billion in debt, ensuring financial recovery will be slow in India’s aviation market.”

Poor infrastructure, taxation and intense domestic competition has resulted in an unsustainable yield-cost imbalance, while a depreciating rupee is leading to increased payments for fuel and aircraft leases, which are generally priced in U.S. dollars.

With many airlines reducing fares, allegations of predatory pricing are being raised. “The issue of predatory pricing has proven notoriously controversial from [the point of view of] competition law,” said Suzanne Rab, a partner at London-based law firm King & Spalding.“It can be difficult to prove that prices fell because of deliberate predatory pricing rather than legitimate price competition. In any case, competitors may be excluded from the market before the case is ever heard or resolved.”

Indian domestic carriers are already hurting with large debts, including outstanding payments to suppliers, including $6- to $7 billion in aircraft-related loans “Recovery, particularly for the full-service carriers, [such as] Air India, Jet Airways and Kingfisher, will be slow. Air India’s debt will increase by a further $4 billion if it proceeds with plans to purchase 27 Boeing 787s, generating an annual interest burden of $1.25- to $1.5 billion,” concluded the CAPA.

The industry still managed to grow 17 percent in 2011, flying more than 60 million domestic passengers. Domestic traffic has increased by 85 percent over the past five years and OEM forecasts maintain that India will need more than 1,000 new aircraft by 2028.

Boeing, which sits on an orders’ backlog including 27 of its 787s for Air India, ten 787s and seventeen 737s for Jet Airways and more than thirty-two 737s for SpiceJet, is not complaining. “We are not changing our growth-rate forecast for India, which is still the highest [in the Asia Pacific region],” said Dinesh Keskar, Boeing’s senior vice president for Asia Pacific sales.

However, Keskar is quick to admit, in the present situation, with fares below costs plus India’s highly taxed fuel (accounting for 40 percent of operating costs) and costs up due to a rising dollar, the short-term outlook will be challenging. This is consistent with the CAPA’s latest report, which estimates that, collectively, Indian carriers will lose $2.5 billion in fiscal year 2012 on total revenues of just under $10 billion.

Foreign direct investment (FDI) could be a potential lifeline for debt-laden Indian carriers. Currently, India allows foreign investment of up to 49 percent in Indian carriers, but foreign airlines are banned from investing directly or indirectly in domestic airlines. This is likely to change, with the Indian government having recently granted approval in-principle to a proposal allowing foreign carriers to invest.

“I am an avid supporter of FDI,” liquor tycoon and Kingfisher Airlines chairman Vijay Mallya commented last year. “I don’t see any reason why FDI from strategic partners like airlines should be banned or not permitted. Who would understand an airline better than another airline?”

However, Kingfisher alone has an accumulated debt burden of around $1.5 billion and matters seem to be going from bad to worse. It once was India’s second largest carrier by passengers, but it fell to fifth with a market share of 14 percent last November, ahead only of budget carrier GoAir.

The carrier’s attempts at returning to profitability by restructuring operations and debt last year did not yield results. Knock-on effects include Oneworld deferring from the original February 10 date set for Kingfisher’s entry into the alliance, with no new date being given.

This follows closely Kingfisher’s being suspended by IATA’s clearinghouse, which, in effect, means that Kingfisher can no longer sell joint tickets with any IATA carrier. It is not confirmed, but this could also mean blacklisting by IATA unless the money is paid in the required time. According to Suzanne Rab, partner at King & Spalding, “Kingfisher has suffered multiple problems recently,ranging from payment defaults, unpaid taxes and salaries, and concerns over safety to rising debts. If a private investor does not inject the necessary liquidity, fears have been voiced that creditor bankscould step in.

“It may be difficult to see whether there is a credible trade buyer since many of Indian’s own airlines are themselves in a difficult–even if not perilous–position,” Rab said. “The situation puts into sharp relief the proposals of the finance minister to allow foreign airlines to own up to 49 percent in domestic airlines. However, such proposals are far from agreed and implemented, and so would appear to provide little comfort for thebeleaguered carrier.” Kingfisher is now looking at reducing its fleet, exiting unprofitable routes and relying on the higher-yielding business segment to improve profits.

Barring, perhaps, IndiGo, which has not shown losses, other domestic carriers also are experiencing them. For example, India’s largest domestic airline, Jet Airways, which operates a fleet of 101 aircraft and has implemented cost-cutting measures, is leasing equipment to raise capital in the short term. By April it is set to have consolidated its budget subsidiary JetLite with its present all-economy Jet Airways Konnect. Meanwhile, budget operator SpiceJet, is facing an exodus of employees to carriers in the Arabian Gulf. The airline has closed cabin-crew bases in some cities.

But the worst hit of all is government-owned Air India, which has a debt of more than $10 billion. It is likely to get a fresh injection of funds through a mix of equity and debt transfer of around $5.5 billion. Nonetheless, consulting firm Booz and Co. recently said that the airline is slipping into a “slow and silent decline” and, in its view, unless drastic steps are taken, it could slide into a “point of no return.”

“Despite the preoccupation with Air India, the airline has no turnaround plan. Its sole strategy is to spend up to $1 billion annually in government subsidy throughout the coming decade,” according to the CAPA. “Air India is pursuing a suicidal taxpayer-funded commercial policy,” it said.

Overall, the paradoxical position of India’s airlines is set to continue throughout 2012. No one doubts that the strong market fundamentals in terms of the country’s economic potential and the robust growth in demand for air transport is set to continue. But, at the same time, to survive in the face of mounting costs and squeezed margins, carriers will have to battle to raise fresh equity and take on yet more debt, further eroding their viability.


this is what happens when unplanned and short sightedness of opening up the indian skies to private domestic and rst by the NDA govt and then subsequent UPA GOVTS... a serious ground study was not done and open sky policy hurriedly implemented to benefit the then NETAS ,BABULOG OF THE CIVIL AVIATION INDUSTRY who are still having the last laugh ..having made a quick buck from the goose that laid the golden keskar should fight to get a decent compensation for indian air companies from boeing for delay in delivery of aircraft orders for over 3 years

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