Flying into the red

The Indian aviation sector is beset by problems of cut-throat competition, high operational costs, and huge losses.

A commercial plane flies across the red sun covered with haze near Sepang, Malaysia, Tuesday, June 25, 2013. Each year, forest fires on Sumatra and Borneo islands smother parts of nearby Singapore and Malaysia in haze. The Indonesian government usually blames plantation owners and traditional farmers for illegally setting fires as a cheap way to clear land. (AP Photo/Daniel Chan)

Sir Richard Branson, founder of the Virgin Group, jokes on how to become a millionaire: “Start out as a billionaire and then go into the airline business.” Ironically, this became true in the case of UB group chairman Vijay Mallya, who launched Kingfisher Airlines in 2005.

The airline reported losses in each year of its operation. The fiercely competitive environment, the high cost of operations, a weak rupee, high interest payments and bad management decisions saw Kingfisher flounder, after buying out the low-cost carrier (LCC) Air Deccan in 2007. Kingfisher was forced to quit the LCC segment in 2011.

By early 2012, it had accumulated losses of over Rs.7,000 crore. In October 2012, the airline ceased operations and by February 2013, its licence was revoked. In July 2014, Kingfisher was declared as the country’s biggest non-performing asset by a consortium of public sector banks.

Tricky business

Calculations based on the losses incurred by airlines operating in India indicate that every time a passenger boards a domestic flight in India, the airline loses $22. While the combined losses of the Indian carriers in the past seven years amounted to Rs.59,400 crore ($9.8 billion), the accumulated debt and liabilities jumped to $16 billion, estimates the Centre for Asia Pacific Aviation (CAPA) India. In 2014, the losses are expected to add up to $1.5 billion.

Price war

But this has not affected the ability of the Indian carriers to offer discounts. Air India, Jet Airways, IndiGo, GoAir, SpiceJet, and AirAsia India have all joined the fray in a bid to jack up market share.

Part of the reason for the new price war is AirAsia India, which commenced operations in a jiffy on June 12. Six more firms have received licences to commence operations, and the price war will consume at least a few in the competition.

High costs

Analysts say that it is high time the government intervened and helped the sector that contributes 1.5 per cent of the country’s gross domestic product and 1.8 per cent of the jobs. The average sales tax on aviation turbine fuel (ATF) in India is the second highest in the world at 24 per cent (in Bangladesh it is 27 per cent). Of the total operation cost of an airline, fuel costs account for close to 50 per cent.

While IndiGo and GoAir are in the black, Air India, SpiceJet and Jet Airways are in the red. Jet targets a return to profts by 2017. SpiceJet officials have stated that it is not yet time to write the airline off. Air India received a Rs.30,000-crore capital infusion from the government.

Giovanni Bisignani, Director General and CEO of the International Air Transport Association (IATA), identified three priority areas—reducing costs, improving infrastructure and adopting global standards—in an address to the Confederation of Indian Industry.

India is currently the ninth largest market and is poised to become the third largest by 2021.