Loss making Indian aviation industry

By Priya Chetty on September 23, 2015

India’s aviation industry has consistently been in the news for huge losses. During the financial year 2012-13, the whole industry reported a loss of over Rs. 5,800 crores (Business Standard, 2014). In 2014-15 Air India alone posted net loss of Rs. 5,547 crores, indicating a deteriorating state of the industry (Financial Express, 2015). New airlines are being launched in India ever year, but the story remains the same. India has a large and growing middle class population, favourable demographics, rapid economic growth, higher disposable incomes and overall low penetration levels, which promises huge growth potential for the Indian  aviation industry. The condition of the Indian civil aviation industry is nowhere as good as its global counterparts.

Reasons in focus for the aviation industry’s deep losses

Overly regulated industry

Indian aviation industry is believed to be over regulated and highly taxed, which is reflected in the industry’s lack of competitiveness at the global level (KPMG, 2014). There are rules and regulations which create bottlenecks and delays, ultimately adding inefficiency to the system. Acts like Aircraft Act (1934) along with Indian Aircraft Rules (1937) which govern the industry are outdated and fail to take into account the changes in the industry.

High operational costs

Airlines in India operate in a high cost environment- huge taxes on ATF, congestion in airports, shortage of licensed pilots and inflexible labour laws. Overall the cost of capital is substantially high (Ray et al. 2012). Airport congestion is created by excess flights and limited runway capacity. The traffic at Indian airports increased exponentially due to development of low cost airlines but the airport infrastructure was not equipped to welcome this addition. Often flights are delayed after take-off because of “congestion at the airport.” During peak hours, planes hover overhead awaiting a landing slot or, wait for their turn to take off, adding to the fuel and maintenance cost of airlines.

High fuel costs

Along with numerous regulations Indian air carriers bear some of the highest fuel cost in the world. India imports a huge percentage of ATF (aviation turbine fuel) which is priced by government-owned companies excluding competition from private sources. Further, different states in India levy surcharge on fuel varying between 4 and 30 percent, adding to the high operation costs of the airlines (Metzger 2014). ATF cost in India is up to 50 percent more than in any other Asian or European countries. Even when foreign airlines refill their fuel tanks in India they have to pay 16 percent more than the global average (Business Standard, 2011).  ATF accounts for nearly half of operating costs of airlines in India compared to 20-25 percent globally.

The debt trap

Airlines require more funds in the race to capture maximum market share and to manage their working capital requirements. In India, their financing needs for operations and expansion gradually outgrew their current market cap and hence they are turning more and more towards loans. Recently Air India in order to expand its long haul operations was in need of more funds. But it already has unpaid debts falling between Rs 4,000 and Rs 6,000 crores as of 2014 (Nambiar & Kundu 2015). Kingfisher and SpiceJet faced similar struggles with meeting day to day operating costs. These airlines have been making losses for a decade or so and further additions on the loans have made them fall into a debt trap. With higher interest payment burden on their shoulders banks are unwilling to extend and recast loans. Airlines need significant equity infusion for long term sustainability and improving their financial position (Mishra 2015).

High taxes on fuel added to the worries of the low cost airlines

The increasing number of airlines create intense fare wars, forcing them to slash prices in a bid to attract customers. Initially Deccan Airlines came in India with the low cost carrier (LCC) model in 2003. LCC model stands out by not providing in-flight services, operating from secondary airports, higher number of seats, selling of tickets through internet, use of similar aircrafts and reduced number of employees per plane, etc. Following the success of Deccan, airlines like SpiceJet, Go Air, and Indigo came into existence. Further, Kingfisher and Jet Airways which initially only operated on full services model, started extending LCC services as well. But the viability of this model became questionable because airlines faced higher taxes on fuel and infrastructure for relying on secondary airports was lacking. This model further added to the plight of the airlines as many airlines jumped into the business but could not sustain its challenges or reap any extraordinary benefits, thus only adding competition to make the matters worse (Ray et al. 2012). Air travel costs dipped, domestic passenger traffic grew. Growth of the aviation sector was not planned and therefore, appropriate regulatory policies were not made at that time to facilitate the growth. Hence, there is an urgent need to develop, expand and modernise the airports for the smooth functioning of the aviation industry.

Amidst these difficulties, the only airline which has risen above all, registering profits  consistently from 2009 to 2015 is Indigo Airlines (Raja & Prabhakar 2013). Indigo is a no-frill airline like many others, but what differentiated it from others was that it maintained discipline and showed superior management. The flights are generally on time, earning them a reputation of punctuality. Apart from that the airlines charged higher than many competitors like Jet airways and Air India on many routes.

Another interesting strategy that helped the airline make money is the sale and lease-back strategy. In this the airline buys an aircraft of its choice and sells it off to a leasing company. Also it takes the same aircraft on lease. The advantage of doing this is the cost selling and taking it on lease is lower than purchasing it for full time from aircraft makers like Boeing or Airbus (Raja & Prabhakar 2013). Following Indigo, debt-laden airlines Air India and Jet Airways also made use of this strategy to increase their cash inflows and repay some of their debt. But they are still not half as successful as the former.

Past, present & future of Indian aviation industry

With many of the private players like SpiceJet, Jet Aiirways and Kingfisher making huge losses and the Government of India requiring to spend a huge amount to bail out Air India, it is evident that there is a need for strategic changes in the policies and a requirement of substantial infusion of equity to make the sector viable in the long run. The government is encouraging foreign aircraft companies to invest strategically in domestic airlines to help them stay in business in difficult times. Also this can help bring global practices into the Indian aviation industry.

Up-to 49 percent FDI was allowed in Indian civil aviation industry since 2012 (Zee News, 2012). As a result  foreign investors planned strategic investments in domestic airlines.  In 2013 the Jet Airways-Etihad Airways deal was signed in which Etihad purchased 24 percent stake in Jet Airways (Lalatendu 2013). Also, the Ministry of Civil Aviation in India has thus far been unfocussed without a clear policy vision. But, now the government is keen on making some positive changes to make the industry sustainable. It is trying to reduce the regulations and taxes, and quickly issuing No-Objection Certificates for long pending airline license applications. The Central Government has been pressuring different states to reduce sales tax on fuel (CAPA Aviation experts 2015). Such structural changes, if implemented on time, are expected to bring about a much-needed relief to India’s choked aviation industry.