Aviation Industry: Concerns Abound as Competition Heats Up in India

June 20--NEW DELHI -- The entry of two new airlines is expected to unleash intense competition in India's aviation sector, but it has also raised fears about the industry's financial health, reviving memories of the way Kingfisher Airlines Ltd went under in 2012.

Air Asia India Pvt. Ltd, a joint venture between India's Tata group and Malaysia's AirAsia Bhd, started its low-budget operations on 12 June. Tata's other joint venture, with Singapore Airlines Ltd (SIA) for a full-service airline, is expected to start flying in October.

Both are entering a space plagued by rising costs, high jet fuel taxes, poor traffic growth and a weak rupee that has made imports costlier. Jet Airways (India) Ltd posted losses worth Rs.3,667 crore in the year ended 31 March while SpiceJet Ltd had losses of Rs.1,003 crore. Financial data for other airlines, which are unlisted, are not publicly available.

"Airlines are at the core of the aviation value chain. As a result, the situation across the industry is dismal," consultancy Capa Centre for Aviation said in its outlook for the new government. "Conditions have been deteriorating for some time and have reached threatening proportions."

When G.R. Gopinath's low-budget airline Air Deccan secured a licence to fly in 2003, aviation was still a sunrise industry. In the decade that followed, domestic airline traffic grew at a compounded annual growth rate of 14.3%, as Kingfisher Airlines, IndiGo, GoAir, SpiceJet, Paramount Airways and MDLR Airlines took to the skies, joining the club of Air India Ltd, Jet Airways and Air Sahara. International traffic growth too expanded at 10.8%.

The number of passengers annually handled by Indian airports more than trebled during this period from 49 million to 169 million. And cargo volumes grew at around 8% per annum, Capa said.

These boom years saw investments of nearly $30 billion (around Rs.1.8 trillion today) in aircraft equipment, airport modernization and development of ancillary sectors like ground handling, maintenance and general aviation. The industry created approximately 40,000-50,000 new jobs, besides indirectly generating about 250,000 jobs in hotels, tourism and related businesses.

The scorching rate of growth, however, came at a price. As the economy lost steam, airlines built up losses of $10 billion and accumulated debt close to $20 billion. With an annual revenue of nearly $10 billion, they have a combined cash on hand of a mere $500 million.

With no new airlines offering competition and fuel prices staying high, cut-rate fares vanished from the market. Meanwhile, air traffic growth slowed.

Traffic grew at 20-40% for six years from 2003. In 2013, it was a mere 4.43%. In the previous year, Vijay Mallya's Kingfisher Airlines, then India's second largest airline, had suspended flights under deep losses and heavy debt.

The two new airlines will fight aggressively to carve out their market share, an analyst said.

"There is a mix of pride, opportunity and desire to succeed where others have failed. Except today's Air India, all other airlines have been the work of individual entrepreneurs: Goyal (of Jet Airways), Mallya, Wadia (of GoAir), Tata, Sahara (Subrata Roy)...the list goes on. The decision-making process at these 'un-democratically' run airlines is much different from say, a British Airways, Lufthansa or Air France, where the multitude of investors indirectly guide their path," said Steve Forte, a former chief executive officer of Jet Airways.

"The opportunity exists for any newcomer, because they enter a market at a lower cost structure than their competitors and with personnel highly motivated to succeed. The advantages of a newcomer vary from country to country, but generally, they span five years. After that, there is a predictable decline because the cost structure has increased and there are newcomers attacking the network," he said.

"On the basis of such patterns, there are strategies called 'exit strategies' where some airlines are created with the sole purpose of selling after they reach peak results -- usually three to five years. Passengers generally react favourably to a newcomer due to curiosity and boredom with other carriers. This interest wanes once it becomes just another airline. In the Tata-SIA venture, I believe, the ultimate goal is to take over Air India by forcing the government to sell," said Forte.

The ruling Bharatiya Janata Party's (BJP's) election manifesto was silent on aviation. The government, too, has not made public its views on the sector.

According to Jitender Bhargava, former executive director at Air India, promoters must take a hard look at their balance sheets. "At the current costs of operations and Air Asia India and Tata-SIA launching flights soon, I won't be surprised if one existing airline sinks. Like Vijay Mallya, many promoters have not understood the gravity of the crisis," he said.

Copyright 2014 - Mint, New Delhi

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