Indian civil aviation sector has continued to experience high passenger growth (domestic traffic CAGR is 17% from 2009 to 2011), and if the trend continues it could rank among the top three aviation markets in the world by 2020. According to Indian Aviation: Spreading its wings, a strong market growth rate coupled with infrastructure expansion will help the sector back on its feet as the economy recovers. The FICCI-PwC report also finds that this would be a good time for global players to enter India and explore the potential of a large underserved market.
However, volatility in fuel prices combined with highest tax on aviation turbine fuel and other national policy related issues continue to challenge the sector’s growth. The recent increase of FDI up to 49 per cent in civil aviation might also not result in substantial increase in investment since it has been imposed on the aggregate of FDI and FII. The report also recommends a hike of the 26 per cent cap on FDI in defence as it has failed to attract foreign investment. India has received only 4 million USD in the 10 years since FDI was allowed in the defence sector, while the entire economy has received over 180 billion USD.
Excerpts from the report:
Challenges in the sector
With the exception of Indigo, all major airlines have posted losses on a consistent basis over the last few years. The airline industry is faced with numerous challenges which can be broadly classified into three heads:
Global challenges:
Volatility in fuel prices has been the foremost challenge for airlines. Aviation turbine fuel (ATF) represents the single largest expense for airlines, on an average amounting to about 34% of the operating costs5. IATA estimates that a 1 USD increase in the average price of a barrel requires the industry to recover an additional 1.6 billion USD in revenue.
From an average price of 80 USD a barrel in 2010, oil prices rose by 20 USD per barrel in 2011 and by another 10 to 12 USD by the end of 2012. The airline industry’s fuel bill rose to 177 billion USD in 2011. The situation has been exacerbated by the steep depreciation of the rupee versus the US dollar (~18.7% depreciation in FY11, although partly recovered in FY12) adding further burden on the Indian airlines..
National policy related challenges:
India has among the highest tax on ATF imposed by state governments (3 to 30 per cent). This along with the social obligation to fly uneconomic routes deals a double whammy on airlines. The high interest rate regime has particularly hit airlines with a large debt. Poor infrastructure at the airports resulting in delays in take-off and landing, high airport charges, interference in pricing, imposing a five-year track record requirement for international flying, etc. have all contributed to stifling growth, raising costs and making airlines unviable. As per the IATA estimates, many countries including India earned an increased 2.2 billion USD in tax revenues in 2011 from the aviation sector on account of taxes imposed in various forms. This is ironic considering most domestic airlines made losses that year. The government has in the last six months addressed some of these concerns. Airlines have been allowed direct imports of ATF, FDI by foreign carriers in domestic airlines has been allowed, but this has been clubbed with FII investment, thereby diluting the impact of liberalisation. Airlines have also been allowed to raise working capital through cheaper overseas borrowings.
Company-specific challenges:
Lack of focus, faulty M&A decisions and failed mergers are perhaps the top three reasons for poor performance of Indian carriers. In 2007, Kingfisher acquired Air Deccan at 550 crore INR, Jet acquired Air Sahara at 1,450 crore INR and the national carriers (Air India and Indian Airlines) were forcefully merged. What followed was a sequence of largely unsuccessful attempts to integrate the merged entities. Attempts to run two different kinds of services, full-cost carriers as well as low-cost within the same airline created serious problems as there were differences in costs, the turnaround time of aircraft and the distribution models. In essence, each had a different DNA.
Future outlook
The Indian market is severely underserved with less than 3 per cent of its population utilsing the air route. The growing passenger numbers and a burgeoning middle class indicate the possibility of healthy passenger load factors (PLFs) for all airlines in the future. Experts believe that the strong market growth rate coupled with the expansion of infrastructure will help the Indian civil aviation space in rebounding as the Indian economy recovers. The latest quarterly results indicate that SpiceJet has also made a profit and is the second airlines after Indigo to become profitable. Therefore, this is a good time for global players to enter the Indian market to target not just the busy trunk routes but also explore the potential of the large unserved market through creating a hub-and-spoke model using smaller aircraft. There are media reports of a potential joint venture between Jet Airways and a foreign airline. But it may be premature to say that these are green shoots of recovery.
