There was optimism aplenty at the Indian Aviation show in Hyderabad two years ago. The pall cast by the 2008-2009 economic downturn was lifting, the irrational spree of new aircraft orders by the country's airlines appeared to be ending, two privately owned carriers, Kingfisher Airlines and Jet Airways, said they would create a partnership and former civil aviation minister Praful Patel was predicting the worst was over. He could not have been more wrong.
Fast forward to the recent 2012 show, and it is clear things have only become worse. The venerable Air India is on life support. The government, its owner, keeps pumping in hundreds of millions of dollars into an operation that is run more like a bloated bureaucracy than a 21st century airline. As an example of how badly managed the airline is, it is still ironing out the kinks of a merger with Indian, another state-owned carrier, five years after it was announced.
Kingfisher, which has never made a profit in its six years of existence, is teetering on the edge of collapse after a severe cash crush led to it grounding aircraft (in many instances because unpaid lessors forced the issue), stopping international services and drastically curtailing its domestic network, while trying to find money to pay employees and creditors.
Jet Airways appears to be faring slightly better, even though it is also posting losses, as are low-cost carriers SpiceJet, IndiGo and GoAir. All, however, are still painfully trying to remain afloat - and possibly hoping Kingfisher's demise will improve the situation.
Much of the blame rests with the government, with Patel never really fulfilling his promises to relax the operating environment. Rising fuel costs have been exacerbated by national and state taxes. Airport charges remain high. Rules pertaining to foreign joint ventures in the airline industry remain archaic. And by continuing to pump money into Air India, it allows the flag carrier to continue to keep its fares unnaturally low and everyone else uncompetitive.
"Air India has become the price setter while the other airlines are the price takers. By keeping Air India alive, the government is ensuring that the unsustainable and artificial low-fare environment continues. Airlines simply can't raise fares to a level that allows them to be profitable," says one industry official.
CAUTIOUS ON OUTLOOK
Even the airframers, who are normally optimistic, were sanguine in Hyderabad. Dinesh Keskar, president of Boeing India, said fares must increase if the airlines are to make money, pointing out: "The current average market rate of tickets in India for airlines is $95, while they need $106 a ticket to break even." Kiran Rao, Airbus executive vice-president for global sales and marketing, added: "Revenue doesn't cover cost [in India] and we find the airlines are in trouble."
None of this is denying India's potential. IATA points out that people in India make an average of 0.1 trip per year, compared with 1.8 times in the USA. "If India's 1.17 billion people travelled at the same frequency as in the USA, a market of 2.1 billion travellers would be created. Even one-third of that would be an air travel market of about 700 million, rivalling that of the USA," says IATA director general Tony Tyler.
Airbus and Boeing agree the country is one of their fastest-growing markets, generating demand for more than 1,000 aircraft in the next 20 years. At a joint report released at Hyderabad, industry lobby group FICCI and KPMG point out: "Overall growth in the economy and the resultant rise in disposable incomes, value of time and aspirations are fuelling this growth. India's unique geographic location and demographic dividend provide great hope. India now stands at a crossroad wherein certain fundamental changes can help propel it from a leading aviation market to becoming a global aviation hub."
Both the FICCI-KPMG report and IATA call on the government to enact reforms in four broad areas: taxes, infrastructure, costs and investment policies. These, they say, will help the industry get over its malaise and achieve its potential. Taxes on jet fuel have reduced the competitiveness of Indian airlines, and are "sucking the life blood" from the sector, says IATA. Fuel attracts an 8.24% excise duty, and domestic flights have additional taxes of up to 30% imposed on them by state governments. In addition, there are service taxes on flight tickets and on services airlines purchase.
"The industry is now in crisis and we need a coordinated effort among all ministries - at national and state levels - to restore competitiveness," says Tyler. The FICCI-KPMG report adds: "The long-term benefits in terms of higher economic activity and employment generation would more than compensate for the notional loss of tax revenue in the short run."
New airports have been built in hubs such as New Delhi, Bengaluru, and Hyderabad, while the existing ones at the country's main hub Mumbai have been privatised. Yet plans for new hub airports in cities such as Chennai and, more importantly, Mumbai have stalled because of political impasse, a bugbear in a country often referred to as the world's largest democracy.
COORDINATED EFFORT
"Mumbai is bursting at the seams. The first phase was meant to open in 2014 but construction has not even begun. Land acquisition is not yet complete. We need a coordinated effort across all government ministries to facilitate success without further delay - as was achieved for the opening of Delhi's new terminal," says Tyler.
FICCI and KPMG also want more attention in the tier one and two cities to facilitate direct air services and improve connectivity. They suggest a "no-frills" airport model to keep the costs low, and recommend these projects receive "holistic support" from state governments. "Airports are a part of a holistic infrastructure plan for the city and state as a whole. Airports have a symbiotic relationship with trade and tourism opportunities in the airport's hinterland, as in each feeds the other. The support from the state governments for the airport's success is therefore vital," they state in their paper.
Yet airport charges remain among the highest on the planet. The operators of New Delhi's Indira Gandhi International Airport have, for example, proposed a whopping 340% increase in charges during the next two years, citing the high development costs of a new terminal and third runway. This would, says IATA, make the airport the most expensive in the world and be a "shock to the system".
"The [Civil Aviation] ministry cannot stand by and let this happen. It must intervene with a broader context. This should take into consideration the long-term development of Indian aviation at its hubs and, if need be, the concession contracts, which at Delhi channel 46% of revenues to the Airports Authority of India, need to be rethought with the aim of offsetting aeronautical charges. The solutions are readily available and there is no reason why the 340%, or any increase of this magnitude, should be allowed to go through," says Tyler.
AIRPORT CHARGES
In response to the hike in charges, Delhi airport's chief financial officer Sidharth Kapur tells The Times of India the airport is likely to suffer a loss of Rs10 billion ($194 million) in the current financial year. He claims the airport could even be forced to shut down in a few months unless defaulting airlines such as Air India and Kingfisher start paying the airport what they owe. He says Air India's dues have mounted to Rs4.5 billion, while Kingfisher's has reached Rs750 million.
Civil Aviation minister Ajit Singh said in Hyderabad the government could relax regulations forbidding foreign airlines from investing in Indian carriers. IATA wants this to be pushed through. Tyler says: "This would allow strategic tie-ups with foreign airlines similar to arrangements that have successfully strengthened airline groups in other parts of the world. What is the public policy imperative of denying this possibility to Indian carriers?"
But will that end the problems? In Hyderabad, Air India's new chairman and managing director Rohit Nandan said the airline was waiting for an Rs55 billion cash injection. But Rs25 billion will go towards settling dues with oil companies and Rs12 billion for unpaid airport charges, leaving the airline with little left in the kitty and not solving the bigger issues.
Nandan's predecessor Arvind Jadhav tried in vain to restructure the airline's operations - plans to spin-off the engineering, cargo and ground handling operations have stalled. Plans to reduce the head count have met roadblocks and the Air India and Indian staff still do not work together on many levels. Jadhav was frustrated at the opposition he faced from within the airline and the government itself, despite public statements to the contrary.
"Good luck to Rohit Nandan. He has no idea what he has gotten himself into," says one industry observer. "Restructuring Air India is not a commercial or operational issue - it is a political issue. There are many vested interests. If the government wants to help the airline industry it should shut down Air India and take the short-term political hit for long-term benefits. But will the politicians, whose eyes are constantly on the next elections, do that? No."
DILUTED BRAND
That means the likes of Kingfisher will continue to suffer, but its problems are not only the government's fault. Kingfisher's problems have been worsened by its chairman Vijay Mallya's ill-advised purchase of low-cost carrier Deccan, a move that saddled it with too many aircraft and a hybrid business model that diluted the brand and increased costs. Jet Airways did the same thing with its purchase of Air Sahara, mainly in response to the growing market share of the dedicated low-cost players.
However, Kingfisher is in the worst state. After several rounds of debt-to-equity conversions, which have drastically reduced the value of its shares, institutional investors have little confidence in the airline.
Banks have been calling time on its loans and refusing to extend lines of credit. Meanwhile, Mallya keeps insisting there are foreign investors waiting in the wings if the government would only liberalise the regulations. That may not be the "panacea", as IATA puts it.
"Without addressing the other three pillars - costs, taxes and infrastructure - it may only be a theoretical exercise. Under current conditions, the odds are stacked against any investor making a positive return on investment in the Indian aviation sector. And no one is likely to come forward unless they see themselves making a profit," says Tyler.
In 2006, Mallya told Airline Business that his focus was not on the low-cost business, adding that the airline would keep true to its premium business model. "These low-cost carriers are only creating big hype in order to achieve market capitalisation so that in the initial public offering their owners can make a quick buck.
"We don't need to create a quick buck. Our reputation is more important to us. We are building a sustainable business model in which we cut costs where they can sensibly be cut, but we also offer a premium-class product to the growing-wealthy Indian. That is the model."
Perhaps Mallya's biggest failing has been that he has not followed his own advice. The Indian airline market may hold a lot of potential, but the other Indian carriers - and any potential new entrants - would do well to take note as well.
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Source: Air Transport Intelligence news
