If majority of the firms in any given industry are facing operational hurdles, the stakeholders have the tendency to tag the issue as sectoral problems surrounding the broader industry. At first this incident happened with the ailing telecom sector, and now the domestic airline carriers. However, this perception might not hold true in all crisis situations.
While the prospect of the telecom industry is marred by too many mobile operators crowding the sector with intense price competition – thus a fundamental sectoral issue; the ailing domestic airline carriers are to blame themselves to spell the death knell for their respective businesses.
Of course, that does not mean to convey that the airline carriers should have had a smooth ride amidst cloudy atmosphere plagued by volatile fuel overheads. But, for sure, the struggling Indian carriers need to blame themselves for the story scripted so far, in their bid to fly high without much fuel for the flight.
What deteriorated the prospects for Indian Airline firms?
- High taxes on fuel
- Huge debt burden
- Rising operational costs
- Workers’ standoff
- Ordering fleet beyond affordability
- Leveraged M&A activity
- Weaker Rupee
Each of the Indian airlines is suffering from one or the multiple problems listed above. While Kingfisher Airlines is hit by price war among low cost airlines and high debt, Air India woes date back to its hasty decision to merge with erstwhile Indian Airlines into the flagship carrier and the ageing fleet of the merged entity. Air India is rightly touted as the living dead PSU of India.
On the other hand, Jet Airways, India’s largest carrier by passengers, posted net loss for the fiscal second quarter to the tune of Rs.714 crore; hit by high ATF costs, depreciating rupee and low fares scenario induced by demand supply imbalance and pay rentals on aircraft it has bought on lease.
Moreover, even the operators in the budget carrier segment are in no sombre mood of the prevailing rough weather in the Indian aviation industry. Low fare carrier SpiceJet reported a net loss of Rs.240 crore for the September quarter, putting blame on higher aircraft fuel expenses, forex losses and irrational pricing environment.
However, traditionally, most airlines companies have been shifting the burden of higher ATF costs to the passengers by imposing fuel surcharges – but still most airlines carrier stress on the excess volatility in fuel prices as the devil in the detail. Speaking about forex losses, we are aware as to how IT companies manage the volatility in the currency markets by appropriately hedging their risks.
On basic operational front, even the passenger traffic is rising for Indian airlines to the extent of about 19% in the first eight months of the year. Passenger traffic numbers arrived at 14.2 crore in 2010-11. The cargo traffic is also doing well too. So, the demand side of the equation is already ticking for the industry.
Coming back to Air India, the state carrier has already been criticized by the CAG of its acquisition plans as risky and lack of observing due-diligence in terms of pricing for its new fleet of aircrafts. In fact, the auditor slammed Air India for its acquisition of aircrafts through unsustainable high debts.
In 2005, Air India, including erstwhile Indian Airlines, had ordered 111 planes worth Rs.44000 crore. Speaking industry wide, about $50 billion worth of order backlog is pending with the multinational giants such as Boeing and Airbus for aircraft deliveries over the next decade.
While cash-strapped Kingfisher Airlines has accumulated debt of about $1.3 billion, India’s largest carrier Jet Airways had a total debt of Rs.13700 crore as on Sept 30.
The country’s three biggest carriers – Jet Airways, Kingfisher and Air India – hold a combined debt of little over Rs.63000 crore.
In a nutshell, the problems in the Indian aviation sector sounds like a disease rooted from severe food poisoning case; but while diagnosing individual carriers separately, it seems NOT to be a case of food poisoning but bad eating habits.
I think the whole problem is that the sector is still in nascent stage. it has not metured. Initially every one with 2 rupees in his pocket jumped into airlines when the gates are opened. When the whole bunch of these guys are testing the ground, now they are establishing the traffic amount. Slowly they will see which cities / towns require airports and which cities need to be shut down. Then they will learn how to control costs how to price a sector. Then they will learn who will survive, who will sell out.
After all in US it took almost 50 years for things to settle down. We can not expect the same in India in a decade.
Parties involved can sit down and work out some way out of this mess.
For e.g. private sector management can convert some loans to equity thereby reducing int costs, cancelling buy orders for planes based on fancy projections, reduce costs by M&A activity etc.
Govt on its part can work out a formula to reduce taxes on ATF. In fact the entire Indian airline industry is depending on ATF based on petroleum based product. In India there is a Sugar Plant in Andhra which 20 years back produced ATF from Molasses. Such initiatives should be encouraged. Instead of diverting molasses to produce brew for local consumption, govt can encourage industry to produce ATF. Who knows, this might even have export potential.
Govt can have a exclusive University covering all courses that Airline Industyr need, all under one roof. It will give some brand value. Air traffic control staff, pilots, air hostesses, ground crew and every subject to be covered. This move will not only produce a professionally trained staff, but also an increased capable manpower will make the arrogant staff to calm down (or else they get kicked out and new guys brought in)
The same holds true for Naval jobs. One University is required to train all positions a Navy (I mean not only military but commercial naval fleet). At the moment Philippinos are dominating in International shipping lines. We are by nature better than them. It gives India a new work front for people to take up, gives a Brand image, brings in forgin exchange.
An interesting fact about weaker rupee : I remember 15 years back when Russia broke up and all countries in CIS fold are in shambles, they started promoting tourism by showing their falling currency. e.g. One week in Mascow in 5 star hotel with sight seeing for about 1000 dollars (If I remember correctly) When rupee is falling down, why airlines are not pulling in more tourists from abroad?
Just my two paisa :)
Thanks a lot, Arun :)
Thanks a lot, Arun :)
Thanks a lot, Arun :)
Thanks a lot, Arun :)
Thanks a lot, Arun :)
Thanks a lot, Arun :)
It is time India comes up with a sustainable model for low cost airlines and this can only be done when government and private players come together for this.
True, and also clear FDI route completely to allow foreign airliners to invest in Indian carriers :)
Good Article Viral….agree with your PoV.
Thanks a lot, Arun :)