What brings Indian Airlines at Forefront of Troubles?

by September 5, 2018 0 comments

Indian Airlines

Boarding a flight nowadays is very difficult as security lines at airports are getting longer — much longer especially with first-time flyers travelling in numbers — and wait times are crossing the levels.

And the average Airbus A320 operating for the low-cost carriers genuinely feels like an ‘AirBus’. Yet, a cursory look at airline industry results right now have sent shivers through the spines of investors, with Jet Airways and SpiceJet declaring losses and IndiGo’s profits collapsing 97 per cent to just 28 crore, the Indian aviation sector is bleeding. Which logically makes no sense whatsoever to the average flyer today, but India’s airlines are expected to post losses of around Rs 15,000 crore this year according to a report by the Centre for Asia-Pacific Aviation (CAPA).

One crucial reason for the losses is of course the rising price of Aviation Turbine Fuel (ATF), and even if a SpiceJet Bombardier Q400 recently flew from Dehradun to Delhi on jathropa-derived biofuel, don’t expect ‘green’ fuel to make a huge dent in fuel costs for another decade or two. And with crude prices shooting up coupled with the fact that the US Dollar has strengthened against the rupee, airlines are having to pay a lot more for aircraft leases and servicing, since the entire industry runs on the greenback.

Usually when costs go up, prices usually follow, but the airlines are finding themselves forced to offer more and more seats on discount sales, with IndiGo starting yet another ‘million seats’ for Rs 999 sale recently. Airlines measure their performance on two key metrics, Costs per Average Seat Kilometer (CASK) and Revenue per Average Seat Kilometer (RASK); and while costs have gone up thanks to fuel prices, the falling rupee and rising wages, revenues have not kept pace at all. Indeed, leading airlines have actually seen yields from passengers drop according to their results. This clearly means that Indians want to fly, but they don’t want to pay more to fly.

This brings in the concept of price elasticity, with more Indians flying and with more flying options, they can look at multiple destinations at the same time on multiple airlines and if the fares do not suit them they can easily cancel their travel plans. The Government and the regulator, the Directorate General of Civil Aviation (DGCA) have also made it difficult for the airlines to make ancillary revenues with passengers calling for caps on cancellation charges and calls for caps on excess baggage and other charges. Airlines will soon be permitted to offer onboard WiFi, but with costs of installing such systems up to a million dollars per aircraft, can they afford to do so, given that some airlines are believed to have less than a month of cash in hand.

One major reason for lower yields, other than during peak festive season is one of overcapacity despite planes being full leaving the airlines no choice but to offer bargain basement fares to get ‘bums on seats’, the costs of flying an empty seat being more than carrying someone who has paid for a super-cheap fare. India’s busiest sector, and one of the busiest in the world, Delhi-Mumbai has over 60 daily, non-stop services. Another sector, to Goa’s Dabolim airport from Delhi, a sector that had around five non-stop flights a day five years ago, today has over 15 non-stop flights. Some suspect that airlines are offering so many flights just to lock up valuable slots in airports like Delhi and Mumbai, where despite expensive renovation and construction over the past decade, almost no slots are available. Delhi’s Indira Gandhi International Airport, whose redesign was supposed to be sufficient till 2030, has already hit peak capacity of 60 million passengers and even with three runways has massive congestion problems, with aircraft holding in the air for upwards of an hour. A Delhi-Mumbai flight which used to take just one hour and forty-five minutes from gate to gate a decade ago, can now take two hours fifteen minutes when counting the amount of time planes have to wait on the ground and in the air.

A combination of too many flights, too many airlines and the subsidised Air India adding to the overall woes of the private airlines, things are not looking good for the airlines. The fact is that Air India’s privatisation might now be impossible given the overall state of the aviation sector in India, things will take a negative turn before they improve. Airlines had a disastrous first quarter, but the second quarter could well be worse and airline stocks which gave huge returns in 2017, will almost certainly be the worst sectoral performers in the stock indices in 2018. Jet Airways stock has collapsed from Rs 870 in early January to Rs 282 on August 31, Spicejet from Rs 148 in early February to Rs 79 and sectoral darling Interglobe from Rs 1498 in April to Rs 944 today.

What is the solution? The obvious one is that the Government cuts taxes on fuel, but a crippling fiscal deficit and the need to promote social spending ahead of an election year will make the government tone-deaf to this, although the need to cut fuel taxes is also one of political expediency for the Narendra Modi Government. The second factor could be one of consolidation, the Tata Group find themselves supporting two airlines right now, Air Asia which has a muddled direction and Vistara which is apparently far from profitable. Jet Airways increasingly looks like it might have a change of management and of strategic direction, especially given that its saviour in its last time of crisis, the Abu Dhabi based Etihad Airlines is itself bleeding and some of the other airline groups could pitch in for Jet, especially Air France – KLM Group are also deep in trouble.

The low-cost carriers have to figure out ways to increase ancillary revenues, for European low-cost giants RyanAir and EasyJet these additional revenues are what drive profitability. But for the likes of GoAir, the possibility of foreign flights could bring in more revenues. Also, the possibility of a couple of industry consolidation exists, if two players came together they could immediately rationalise their route structure, cutting Delhi-Mumbai services for example, adding more international routes and routes on underserved legs. But India’s aviation infrastructure will have to keep up, it isn’t just Delhi and Mumbai that are barely keeping up, Bengaluru, Hyderabad, Goa and Chennai airports are all bursting at the seams, and while at Bengaluru work on the new runway is on and Goa will soon have a new airport despite protest, India needs many more runways.

The fact is that India has little or no choice but to grow the aviation sector. We once said the Indian railways connected the country and they still do when it comes to freight, but for a growing number of travellers air travel is the only option, because time is money and India’s economic progress in the coming decades depends on aviation. Hopefully the Government realises this and does the right things to ensure sectoral growth continues apace so that India’s airlines can thrive going forward.

Writer: Kushan Mitra

Courtesy: The Pioneer

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