Optimism amidst Crisis

Year 2011 was indeed a bad year for the Indian economy. While there is optimism that the airline industry in India should see a reversal of fortunes in 2012, the New Year could well bring with it a new set of challenges perhaps more daunting than those in the year gone by.

Year 2011, the centenary of Indian civil aviation, was a turbulent year for the airline industry. Despite a fairly respectable rate of growth in passenger traffic hovering in the region of 17 per cent per annum, on account of steady escalation in the cost of aviation turbine fuel (ATF), air fares remaining depressed in the face of fierce competition and high taxes/airport charges, rising administrative costs and heavy interest burden on borrowings, most of the airlines sank deeper into the red with mounting cumulative losses acquiring staggering proportions. Quite understandably, there was no help forthcoming from the government for the struggling private carriers either by way of funding, respite from high tax rates or move towards industry friendly policies. While there is optimism that the airline industry in India should see a reversal of fortunes in 2012, the New Year could well bring with it a new set of challenges perhaps more daunting than those in the year gone by.

The Indian Economy

The economy of a nation and its aviation industry are inexorably linked and serve as drivers for each other. As per the Planning Commission, “India is expected to be the world’s third major economy in the next 20 years after China and the US.” While 2011 was indeed a bad year for the Indian economy, the optimistic long-term projections by the Planning Commission are undoubtedly encouraging for the airline industry. But there are difficulties in the short-term. On account of the economic slowdown in the recent past, growth rate in the current fiscal year is expected to be closer to seven per cent as against 8.5 per cent forecast earlier. The uncertainties in the Indian economy last year did impinge on the fortunes of the airline industry due to the falling demand for domestic air travel. Besides, the Indian economy could not remain immune to the economic turmoil in Europe and the US that did adversely affect international travel. However, with some of the economic indicators turning favourable for the Indian economy, it appears that the worst is over. Overall, there may be an upturn in the economy in the next fiscal albeit with a slightly lower growth rate.

Shocker in the New Year

Instead of cheer, the dawn of the New Year delivered a shocker not only for the airlines but also for the travelling public, by way of a somewhat disconcerting report on the comprehensive audit of airlines carried out by the Directorate General of Civil Aviation (DGCA).

Altogether, the airlines have a collective debt of Rs. 1,06,000 crore and the cumulative losses exceed Rs. 30,000 crore. Some of the airlines have been frequently defaulting payment of airport charges and fuel bills. Salaries of employees are frequently delayed and commitments in respect of timely repayment of loans or instalments for leased aircraft are also somewhat uncertain.

The audit report clearly indicates that the financial position of most of the airlines is undoubtedly in a precarious state and that this, in turn, affects maintenance standards which has serious implications for air safety. In the opinion of the auditors, the malaise is serious enough to warrant cancellation of licence in respect of two airlines, Air India Express and Kingfisher Airlines, where there is evidence that air safety could have been compromised. In the case of the latter, nearly 30 per cent of the fleet is grounded. The two airlines will, in all likelihood, refute the observations or contest any action initiated by the DGCA in this regard. While the affected airlines may ultimately get relief from the government, given the environment and the financial paradigms airlines in India are required to operate in, it is only a matter of time before the other carriers are afflicted with similar problems if radical steps are not taken by both the government and the industry to set the airlines back on track to make the industry viable. What is more important is that the DGCA should first address safety concerns, a factor that impacts the travelling public more than any other.

Role of the Government

While the portents for the airlines appear ominous, there seems to be a silver lining in the dark clouds appearing on the horizon. Ajit Singh, who assumed charge in December 2011, as the Minister of Civil Aviation taking over from Vayalar Ravi, has indicated that “The government would not allow any airline to close down for financial reasons.” This position, if reported accurately, reflects a radical change in the position of the government towards the airline industry. While this approach certainly augurs well especially for the private carriers wallowing in deep financial crisis, the rhetoric would have to be followed by concrete steps by the government as also by the airlines. If the struggling carriers are to have any chance of becoming profitable, to begin with, the government would have to reduce taxes on ATF and rationalise the burden of airport levies. There are encouraging signs that the government would soon permit foreign airlines to pick up stake in Indian carriers up to a limit of 49 per cent as recommended by the Ministry of Civil Aviation and endorsed by a Group of Ministers. The proposal is yet to be finally cleared by the Union Cabinet. On their part, airlines would have to restructure business models to trim operating costs without compromising on air safety.

In the coming months, the government is likely to review the policy of allotting bilateral air traffic rights to Indian carriers visà-vis foreign carriers and remove the existing anomalies. Dispute between the private carriers and the government relating to the ground handling policy, currently under litigation, may also be resolved in the course of this year. The proposal by some airlines to import ATF directly for their aircraft is under consideration by the government. If approved, this will provide considerable relief to the airline though with corresponding losses to the exchequer.

The Low-Cost Model

Closing down the low-cost arm of Kingfisher Airlines, Kingfisher Red last year, was inclined to be interpreted by some as an indication of the demise of the low-cost concept. Nothing could be further from truth. By the end of last year, the low-cost carriers (LCC) had captured nearly 50 per cent of the market share. Penetration by the LCC is significantly higher in the Indian market than in the global market. The trend will not only be sustained in the current year, its market share will also grow as it is this model that offers better chances of profitability for airlines looking for ways to cut costs to make their business models viable.