Past four years have been outstanding for the Indian aviation sector in terms of addition of new passengers, the addition of crew, fleet and pilots. This exponential growth has led to India becoming the seventh largest aviation market with 187 million passengers in FY 2017-18.
In-spite of these positives, all is not well with India’s domestic aviation players, passenger growth in the Indian aviation sector was back to a single digit, at 9.1 per cent, in January 2019after four years of double-digit growth. Recently one of the largest private player Jet Airways has been forced to ground its flights and halt operations completely, this is the second instance of a major airline collapse after Kingfisher Airlines.
It is ironical that on one hand there has been an extraordinary expansion in the user base, the industry has not been able to take advantage of this exemplary growth. There are several reasons that can be attributed to the current mess in the aviation sector; the government, the airlines’ operators and certain global factors are the biggest culprits. Excessive costs are the hallmark of the aviation industry, higher taxes, excessive parking and landing charges, coupled with higher fuel costs and the depreciation of the Indian Rupee have all created a deadly cocktail that is stifling the Industry, on top of it, intense competition and regular fare wars to capture market share has led to a significantly depleted pricing power. The distress in the industry is far and a wide almost all major airlines which include, Air India, Jet Airways, IndiGo, SpiceJet, GoAir have all been grappling with some major issue or the other. Some major problems plaguing the sector can be summed up as:
High Cost of Operations: One of the most decisive factors for profit in any industry is the cost structure. The input costs of operation in the aviation industry are significantly high involving a very high working capital outlay in terms of fuel charges, technical staff, maintenance, ground fees etc. The Aviation Turbine Fuel (ATF) is not covered under the GST regime in India; therefore airlines cannot claim the taxes on fuel costs as an input tax credit, making the ATF more expensive. In addition, the central levy, state taxes make it 30% more expensive, apart from fuel, various surcharges, user development fee (UDF) and steep navigational, landing and parking charges at airports make the cost structure of domestic airlines unviable.
Decreasing Demand coupled with Weakening Rupee: A weak rupee necessarily means higher payments for parking charges, international staff and maintenance in other countries. This increased payout cost without any incremental advantages has been severely affecting all airline’s balance sheets, which have International operations. The passenger demand deceleration is another concern grappling the Industry.
Financial Troubles: Most of the Indian aviation companies have leveraged balance sheets with huge outstanding debt; Air India the state carrier and Jet Airways are the prime examples of such a phenomenon. These loans have been taken mostly for mindless fleet expansion when the business environment suffered due to market conditions; these companies got in trouble and at present are unable to even repay the interest on these loans. As a consequence more planes have to be grounded which in turn creates a vicious cycle, which does not end. In addition, due to so much debt, these companies cannot really have a meaningful restructuring nor can they be strategically offloaded to new investors. As more and more airlines go through this similar fate the overall availability of air seats is going down which is pushing the cost of flying higher and thus dampening the demand for air travel.
Can the Aviation Sector Take Off Again?
A fast-growing economy like India has to have a vibrant aviation sector, therefore the revival of the aviation sector is paramount. For the sector to turn around and get onto a path of sustainable growth, there are several factors that have to play out. The current churn in the industry would eventually lead to consolidation with several airlines getting into the hand of stronger promoters who have deeper pockets to sail through the current turbulence would be a good sign for the industry. The government on its part also has to play a constructive role in addressing the concerns of the sector. Recent policy initiatives such as the regional connectivity scheme UDAN will be a positive intervention in the longer term from the point of view of user base expansion. The government also has to effectively step in to ensure that the fuel costs are kept in check; excise duty can be lowered from the existing 11 per cent. The airport charges, parking and other levies need to be brought down to more sustainable levels and the industry has to be relieved somewhat of high operating costs. Moreover, allowing tax inputs on ATF is another big intervention that the government can make.
Apart from the cost reductions, the Indian aviation sector needs to immediately address the mismatch between demand and supply to have healthy growth. Indian airlines are more focused on adding capacity to gain market share without being mindful of the demand-supply outlook. Also, major players should abstain from mindless price wars because these short-term marketing schemes do immense harm in the longer term. Although, we are positive that the aviation sector will see a turn around in coming days but the next few quarters would continue to be stressed, on an aggregate level corporate balance sheets in the aviation sector are stressed and it would take some time for them to get to a healthy level.
This article is contributed by Mr.Rahul Agarwal, Director Wealth Discovery/ EZ Wealth