The Economy : The Tide’s Turning

Caught in the quagmire of a financial drought, airlines in India buffet the storm even as the infrastructure and manufacturing sectors, and the training institutes put up a brave face and ride the wave of potential growth

Acknowledging that Global meltdown would affect the Indian economy, the government has toned down predictions of economic growth to about 7 per cent. Reasons ascribed are surge in the price of oil that doubled in a span of less than two years and a slew of counter inflation measures taken by the Reserve Bank of India. Civil aviation is a capital intensive industry, be it acquisition of aircraft, operation of airlines and development of aviation infrastructure, like airfields, manufacturing capability, MRO facilities and training establishments. Hence, an economic slowdown would affect this industry as much if not more than any other.

The media is awash with reports of airlines accumulating huge losses, steep rise in airfares, inability to clear fuel bills and airport charges, cancellation or deferment of orders for new aircraft, trimming of excess capacity and withdrawal from unprofitable routes. Airlines have merged or are forging alliances that could lead to cartelization. With a view to cut costs, airlines are laying off staff. Some training establishments have downed shutters and airline barons have been knocking on the doors of the government for bailout.

Magnitude Of The Problem
An article in Financial Express dated October 11 estimated collective losses in the aviation sector in the period July-September 2008 at Rs 500 crore. Losses for individual airlines in the corresponding period last year were Rs 37.8 crore for SpiceJet and Rs 253 crore for Simplifly Deccan. Jet Airways posted a profit of Rs 28 crore. Air India suffered a loss of over Rs 2,000 crore for the 2007-08 fiscal. It is estimated that the sector will collectively post losses of Rs 4,000 crore in the 2008-09 fiscal. Caught in a financial quagmire, the National Aviation Company of India Ltd had approached the Ministry of Civil Aviation (MoCA) with a proposal for equity infusion of Rs 1,350 crore and another Rs 1,000 crore as soft loan. The MoCA has approached the Prime Minister of India for a bailout package of Rs 2,350 crore for Air India.

Aircraft movement at all metro airports, including Mumbai and Delhi, has reduced. Jet Airways announced withdrawal of its Mumbai-Shanghai-San Francisco service from mid-January 2009. Kingfisher is likely to restructure its international operations. Delhi-based MDLR Airlines is in trouble as British Aerospace Systems, the lessor for MDLR’s three-aircraft fleet, has sent a notice to the Directorate General of Civil Aviation for de-registration of the aircraft over nonpayment of dues. Kingfisher has confirmed deferring collection of 29 narrow-bodied aircraft and disposal of three wide-bodied A340 aircraft. Huge cumulative losses and a merger that is yet to be effective have forced Air India to defer plans for a hub in Europe.

The aviation industry is downsizing to cut cost. Expatriate pilots in Kingfisher employed since March for international operations are likely to be laid off. Barely a fortnight after launching international operations, Kingfisher plans to retrench at least 300 employees. JetLite, a subsidiary of Jet Airways, is shedding around 750 employees. There were reports that 5,000 employees at Delhi and Mumbai airports may be offered Voluntary Retirement Schemes. Against a 60 per cent workforce absorption private sector companies were to complete within three years of taking over the airports, currently, only about 8 per cent of the total AAI workforce in Delhi and 6 per cent in Mumbai have been employed by the private companies running the airports.

Developers of Greenfield airports in Bangalore and Hyderabad have been caught in an impossible situation with domestic carriers canceling more than 1,300 flights a week, less than six months after commissioning of these facilities. An estimated 15 per cent drop in traffic at the country’s top six airports is expected to lower revenues and erode their capability to generate resources for expansion or upgrade. Owing to sharp decline in the number of flights, Delhi International Airport Ltd has pushed the deadline for completion of the new domestic terminal 1D to the first quarter of 2009. The deadline for the terminal, which is to house private carriers, had earlier been postponed from August to the end of this year.

Cause & Catalyst
Saddled with over ambitious plans bereft of logic, the airline industry was headed for trouble right from the start. The DGCA, on its part, failed to perform its regulatory obligations. Permits for new airlines were issued without considering availability of pilots and infrastructure. In response to high demand growth, airlines placed bulk orders for aircraft extracting favourable terms from OEMs who were also competing among themselves for the Indian market. Promoters then sold the aircraft at a premium to leasing companies and leased them back. What further tightened the financial squeeze are the somewhat outlandish plans drawn by airlines to enlarge fleets at an investment of Rs 4,400 crore with an equity base of only Rs 145 crore. Purportedly, growth figures were deliberately inflated to enable grandiose plans to be drawn up for airports and airlines; even the value of the airline shares may have been artificially inflated.

To attract passengers, tickets were sold at throwaway prices. Yield was not the criterion. Ego-driven target load factor was the overriding consideration. When oil prices hit $145 (Rs 7,000) a barrel, airlines increased the fuel surcharge. Oil prices have since dropped to around $36 (Rs 1800) per barrel, but the benefit has not yet been passed on to passengers. Captain Gopinath of Deccan Cargo reasons that hike in fares led to reduced occupancy, triggering a fresh wave of competition. Further, as scheduled airlines are not permitted to cancel flights for reasons of inadequate passenger load, they combined flights under the garb of rescheduling for better load factor. Ultimately, passengers suffer. Management by foreign entities, with little understanding of Indian conditions, is also cited as part of the problem.

National carriers have for long been in the vice-like grip of bureaucracy that dictates policy. Afflicted with political interference and manipulation over the years, two state-owned airlines remain afloat only with government help. Another blow to the finances of airlines was dealt by the depreciation of the rupee against the dollar which partially blunted the advantage they had gained due to the recent decline in the price of crude oil. Airlines pay lease charges, expatiate salaries and maintenance expenditure in foreign currency. Nearly 35 per cent of the expenditure airlines are incurred in foreign currency. Depreciation of the rupee vis-à-vis the US$ has pushed up this component by 4 per cent.