Commercial Aviation in India:

Who is facing the Bane?

AIR travel has always been a luxury in India and continues to be so. A booming economy can result in an increase in the number of end users and thereby create a demand to incorporate world class aviation services. Creation of these aviation services brings under its gamut various aspects such as infrastructure, aircraft, leasing/ buying, pilots, cabin crew members, ground handling, logistics, and so on. The establishment of the operations encompassing several of the mentioned parameters and hidden devils (such as loans, debts, interests, and mortgages) add up to an enormous investment. This investment usually starts paying off in the long term, given the nature of investments made. So when the industry faces recession, a situation similar to the one that the world is witnessing today, it suffers incorrigible damage. In India, the aviation industry is too young to survive huge blows.

While facing the reality, it would be essential for us to recall how the snowball started rolling in the first place. The economy started growing rapidly at 8-9 per cent (around 2003-04) aided by the growth of several industries with imports and exports and several projects across many sectors, thereby resulting in the increased demand in air transportation. The then existing carriers started expanding and new private airlines were also encouraged to start operations.

India’s first ever Low Cost Carrier (LCC), Air Deccan, with its modest operation portfolio, inspired several other investors to come up with either a LCC model or a Full Service Carrier (FSC) model. In both cases, the airlines were all set to have a good start, especially with the domestic routes, seeing almost 100 per cent load factors on key routes.

In order to accommodate for the rapidly changing environment, many of the airlines had to adopt several growth-inducing steps such as leasing or buying aircraft. This, in turn, was through equity infusion by the investor or on loans. Several aircraft started flying in the country. Also, airlines that had completed five years of domestic operations were entitled to go international. This again broadened the scope for expansions and created an even bigger vision that propelled the airlines to be assertive of their business models, operating points, and network connectivity. So, the airlines started functioning, some with a mix of Indian/ foreign pilots/ crew and others with only foreign crew, depending on the routes.

In the wake of the downturn, the airlines have started to face the heat, which has been the cascading effect of several initial steps that were adopted by the industry as a whole.

Airlines need to pay interests to lenders or pay the leasing companies which own the multi-million dollars metallic birds; apart from paying the landing, parking, navigation, and airport charges to the airports.

Around 80 per cent of the air traffic in the country is handled by Delhi and Mumbai airports. During the traffic boom, the Government could not upgrade the airports due to infrastructure cash crunch and hence decided to privatize these airports. Privatization brought in operating efficiency and transparency, but airlines had to pay either to privatized airports or Greenfield airports (Greenfield Airports were again a measure to bring in private players and also reflected financial helplessness of the Government). The Aviation Turbine Fuel (ATF) prices started soaring and this started bleeding the airlines. In addition to this, the maintenance of aircraft contributed to the overheads as the country does not have its own Maintenance Repair and Overhaul (MRO) system in place, though the Government-run entity, namely Air India, could have capitalized on this market, given the fact that the national airlines was established as early as 1932. However, the management of national airline seems to have ignored this opportunity and many players (international/domestic) are now trying to address this market, though it’s a little late. So, now with ATF prices having burnt a hole in the airlines’ pocket, global downturn, and operating costs increasing day by day, the airlines have started bleeding.

Spike or a Trend

The rule of thumb in air transport is that airline passenger traffic would normally grow at twice the rate of GDP growth. GDP growth of around 9 per cent would thus imply an air traffic growth of 18-20 per cent. Most forecasts generated at that time, by consultants and the Government, were close to this figure. However, in the period between 2005 and 2007, the average annual domestic air traffic growth was about 30-32 per cent. Another aspect to note is that, between 2005 and 2007, the number of private airlines in the country grew from three to eight.

In 2006, India’s airlines had an outstanding order book of close to 400 aircraft in total. Overall airline seat capacity grew at around 40-45 per cent between 2005 and 2007, with most of those additions on the metro-metro routes. The only exception was Air Deccan, which opened up new routes to cater to Tier I, II, and III destinations in the country, and in effect, not competing head on with the other carriers, at least in a part of its route network. This excess competition and excess capacity in the market resulted in falling load factors, which in turn initiated a price war between airlines, further eroding the profitability of the airline industry, under the umbrella of recession.

The problem was compounded by the high cost environment, particularly airport charges, ATF rates, etc. Since the net taxes on aviation turbine fuel in India was and is about 30-40 per cent (period 2005-08), and crude oil prices were hitting the US$ 140 per barrel mark, this resulted in windfall losses for the airline companies. Adding to this problem was infrastructure constraints and congestion at the airports. Airport development was being planned, envisaging an 18-20per cent air traffic growth. The execution of the development projects were further delayed due to numerous bureaucratic difficulties that generally afflict infrastructure projects in India. The market nature is definitely a trend and not just a one-off spike; it is just a dent in the trend line, which is expected to recover gradually, provided the Government in association with key people in the industry takes the right steps by being more responsible and transparent.

Burdens

Several of the key issues that the industry is facing have been long gestated due to reasons such as bureaucracy, lethargic approach, and absence of a level playing field. Issues such as taxes on components and systems, taxes on fuel, incongruity between the DGCA and FAA or EASA rules, and standards and regulations have stalled several key initiatives that could have helped the country set up a vibrant and robust aerospace industry. The Airports Economic Regulatory Authority of India (AERA), which is yet to see its complete implementation, is expected to do the industry good. There is clearly a need for more collaborative effort in the industry to smoothen and rectify the current situation. If the economy experiences a positive spark in the 2-3 years, the aviation landscape in India can be expected to improve again.

However, it might face several bottlenecks on various fronts. Several top management personnel from various private airlines and other aviation industry related entities have very clearly mentioned the factors and parameters that need attention, to make sure that the industry does see positive results. Besides airlines, manufacturing, training, cargo, tools, and many other segments have the potential to be nurtured, given the fact that India has huge manpower base.

The so called Indian Maharaja, Air India, was started way back in 1932, with a vision that JRD Tata had for the national carrier. Given the fact that Air India was one of the first to start operations, today we should ideally be seeing the Maharaja tapping millions of end users across the globe with an enormous network reach. However, the sad story goes that the Indian Maharaja is in a situation where an epitaph might be written, though everyone including politicians, management, and the people wish to see the airlines operate, portraying the pride of the nation. A logical approach would have enabled the Maharaja to capture many markets by now, with good network, strong fleet size, and most importantly, effective route planning and operations. In reality, the Maharaja exhibited a weak performance, and is operating in only a mere 25 destinations across the globe.

The fleet strength is also an indication that the vision was very poor, though 146 aircraft currently (which is encompassing all the other domestic carriers) and the ordered 111 was only a step taken towards expansion in the past 2-3 years. One can also argue that the economy started to improve only in the last decade and hence the plans of buying aircraft came up in the last five years; if we have to buy this argument even then starting from 1996 we have seen economy growing except for the current downturn. Leaving out the recent economic downturn, the economy has grown steadily since 1996, so the plans of buying aircraft and expansion could have been more planned and methodical. So the situation of Maharaja that we witness cannot be blamed on the lack of growth of the economy; rather, it has been brought about either due to lack luster management practice or a lethargic and complacent ideology. Politicians have also shown a much skewed interest in the national carrier all these years, and it’s only now that they are trying to question the management. Governments change from time to time that’s totally agreeable but no one stops them from having a tab on the performance on a constant basis, the concerned ministry is the care taker without any doubt.

Some of the incidents, route planning methodologies, and capacity utilization techniques have also revealed a very hollow approach in terms of operating the flagship carrier. As we all know, the aircraft on ground (AOG) situation in New York airport would generate questions as to why we were parking the aircraft idle for long durations losing money and, moreover, paying to park the aircraft, over a considerable period of time.

On many of the several key routes, as pointed out by an NRI in Canada, who traveled frequently to India by Air India, “the aircraft had less than 60 per cent load factor and I was pretty shocked to see the tax payers’ money being used in such an inefficient manner.” This was much before the recession seeped in. We, as tax payers, are the ones who should be questioning the management for inefficient operations.

If the Government had been slightly proactive, it could have created a revenue generating stream in the form of MRO. Currently, the private airlines in the country send aircrafts outside the country for heavy maintenance and engine checks, and in the process lose money in the form of maintenance costs, resources downtime, and duties. This market could have been easily tapped by our national carrier; this would have aided the private airlines and the national carrier would have made revenues, improved its expertise, and created a total standalone facility in the country. But instead, we learn from sources that the maintenance team is keen towards working overtime not because they need to but due to the sops that could be earned by working beyond scheduled hours. In such a framework, the seeds of the current situation must have been sowed years back, being aggravated by recession. In this scenario, in each airline company, everybody, including all the employees, should share the burden equally, whether be it in the form of salary cuts or sacrificing hikes.

Desired Navigational Course

Clearly, there is an inherent unsustainability in the airline industry, which needs to be addressed through regulatory changes and market restructuring. Three mega-merger deals in the airline industry were announced, Air India – Indian Airlines, Jet Airways – Air Sahara, and Kingfisher – Air Deccan. Although the mergers did not solve the excess capacity problem, they gave the airlines greater pricing power, which pushed up the fares slightly. However, this had a negative effect on the falling demand. The airlines continued to face the problems of excess capacity and loss. The high cost environment continued with the Government unwilling to reduce taxes on aviation fuel. The economic recession posed another major blow for airlines with passenger traffic falling rapidly. Although the oil price fell, this did not solve the woes of the industry and the airlines were forced to cut capacity and restructure their operations.

Overall customer experience deteriorated steadily with delays and cancellations of flights. The airline industry continues to face huge losses to the tune of US$ 1 billion.

The coming together of not only the representatives from airlines but also the

Government is expected to enable a proper framework that can help the country and its airline industry grow on the right path. Airlines and other aerospace related entities have a bright future in India; our end user base is only 1 per cent of our population and an increment of even 1 per cent will make a huge difference. The reformatory path should include in its agenda not only ways to revive the airlines, but also factors such as infrastructure, training, industry, and manufacturing. This is expected to set the ball rolling for a concrete future for a country like India where the potential is waiting to be tapped. It’s a critical moment that has to be addressed for the simple reason that we have a long way to go as our country is in that phase of the economic growth cycle, where it needs responsible and formidable assistance.

Attributed By: Chethan Kambi, Senior Research Analyst, Aerospace and Defense

Practice,Frost & Sullivan, Bangalore