Troubled skies

Print edition : December 16, 2011

AT THE INDIRA Gandhi International Airport in New Delhi. - V.V. KRISHNAN

India records the fastest growth in the domestic aviation sector in 2011, but all airlines report heavy losses.

THE numbers are awesome. From 500 weekly departures in 1994 before deregulation to nearly 15,000 departures every day a 30-fold leap with the last decade witnessing a quadruple jump in domestic air traffic (from 13 million to 52 million) and a tripling of international traffic to 38 million.

India, according to the International Air Transport Association (IATA), witnessed the fastest growth in the domestic aviation market in the world in September 2011 with an 18.4 per cent year-on-year growth. Traffic exceeded the growth rates seen in China (9.7 per cent) and Brazil (7.5 per cent) during the month, and was better than the global average of 3.8 per cent. Besides, India is already the ninth largest and the fastest-growing aviation market in the world with a compounded annual growth rate, according to the Ministry of Civil Aviation's (MoCA) Vision 2020 statement, of around 15 per cent during the next five years and is expected to be the third largest domestic market after the United States and China in 2020.

But are these figures specious? On the ground the picture is one of gloom and doom. While the government-owned carrier Air India is in an abysmal state with mounting losses and is at the mercy of government largesse, the private domestic carriers (Jet Airways, Kingfisher Airlines, SpiceJet, Jet Lite and GoAir) with the exception of the low-cost carrier (LCC) IndiGo, as per figures ending September 2011, have all reported heavy losses and are flying on very low fuel. Reports indicate that the daily losses range from Rs.1 crore for IndiGo to Rs.7 crore for Kingfisher.

Even IndiGo's profitable performance is clouded by the fact that unlike Kingfisher, SpiceJet and Jet it is an unlisted company, and some of its profits also include receipts from sale and lease back of aircraft. (It is a practice in which airlines with large aircraft orders get discounts on the list price. On delivery of the aircraft they sell them at a profit only to lease them back for their own use. Sale and lease back of aircraft earn them profits, which are used to improve the company's bottom line.) Incidentally, Paramount Airways, which was grounded in 2010 following contractual hassles, is expected to fly again in December/early January, having leased out two Airbus A320s.

The Centre for Asia Pacific Aviation (CAPA) has forecast a record $2.5 billion (Rs.12,500 crore) to $3 billion (Rs.15,000 crore) loss for Indian airlines for the year ending March 2012, with Air India accounting for more than half of it. It also estimates that Indian carriers need an immediate injection of $2.5 billion to keep their operations from collapsing.

According to Capt. A. Ranganathan, a Chennai-based pilot and aviation analyst who is also a member of the Civil Aviation Safety Advisory Council, all the players involved in the Indian aviation sector the MoCA, the airport authorities, the airlines and, of course, the promoters have over the past five years been screaming big numbers and inflating growth figures. He said this hype was not just to make the books look good and raise capital and loans but also to show the government that they (airlines) have created air connectivity to places that hitherto did not have it.

Said Ranganathan: All the airlines want to show themselves off as bigger than their competitors. The problem is they want to fly before they can walk. It is prestige and ego more than real commercial sense and prudence that are driving Indian airlines. Each owner is waiting for the other to fall. At the Singapore Air show in 2009, a Boeing representative in India said that there was room only for three operators in India. In the light of the current financial distress airlines are going through, I think we may end up with that number.

But Ranganathan acknowledged that besides inflated figures there were serious issues plaguing Indian airlines. While Air India has its own set of unique problems chiefly undue governmental interference, inefficiency and inept planning the bottom line among private carriers is that they grew too fast for their own good increasing capacity by adding airplanes when neither the paying public nor the requisite infrastructure was ready to absorb this huge expansion. They also indulged in wasteful expenditure (more splash than substance in a bid to attract passengers, such as giving freebies and exotic food), did not pay enough heed to optimisation of routes and other operations, continued to hire foreign pilots who cost much more than their Indian counterparts, and indulged in predatory, unrealistic pricing in order to capture the market.

Today, the airlines are paying the price for these. Given the abnormally high cost of jet fuel; the weakened rupee; lack of maintenance, repair and overhaul facilities; substantial state tax on aviation turbine fuel; higher interest costs and operating losses; and a growing inability to service interest and debt obligations, matters could not be worse. Airlines are also unable to raise fares thanks to the fiercely competitive nature of the Indian market. The Federation of Indian Airlines claims that ticket pricing is 30 per cent below cost and blames Air India for this.

But analysts pointed out that it was the first LCC Air Deccan that started the bloodbath by selling tickets at Re.1. Airlines are looking to sell tickets cheap to improve the load factor, but this lowers the yield. Explained Ranganathan: Airlines should realise that they are going to carry 100 kg of fuel for every 10 passengers. Selling tickets below the cost and paying for the additional fuel is not the answer to remaining in the red. Instead, airlines need to optimise operations, hire wisely no point in recruiting an expatriate who is clueless about Indian conditions and be more prudent when leasing aircraft. Air Asia and Air Arabia always seem to strike better deals when leasing aircraft than the Indian carriers.

Every airline has called on the government to address urgently the issue of jet fuel pricing. Industry experts point out that on an average fuel accounts for 30 per cent of an airline's operating costs. For Indian carriers thanks to the state's sales tax and customs duty, which hover around 20 to 30 per cent fuel costs account for 45 per cent of the operations.

Said a pilot from SpiceJet: Fuel costs are hurting us. During the last quarter [June to September 2011] 62.3 per cent [up from 41 per cent for the same period 12 months ago] of the airline's income or 48 per cent of the airline's expenses went towards fuel costs. During the same last quarter, SpiceJet's income was Rs.766.5 crore, while its expenses amounted to Rs.998.3 crore.

While tax on aviation fuel varies from State to State, airlines have designated certain sectors as tankering' sectors. Pilots flying sectors such as Hyderabad-Kolkata or Panaji-Madurai take more fuel than necessary for the immediate trip. This is because fuel taxes in Panaji, Jaipur and Hyderabad are the lowest, while they are the heaviest in Chennai, Madurai, Bangalore and Kolkata.

For the domestic airlines, poor infrastructure has come as a double whammy: increased downtime or circling in the air since landing slots are not available, and parking woes. With no slots to park in the metro airports, airlines are forced to take their aircraft to smaller airfields in tier 2 and tier 3 towns. This means filling seats by selling tickets below the cost to avoid flying an empty aircraft.

Safety concerns

According to Ranganathan, in a bid to improve their bottom line, Indian airlines are jeopardising safety when they operate without the qualified manpower. He cites the example of some airlines reducing the number of flying hours required for a pilot to be qualified as a captain on Boeing 777s just because they have the aircraft but do not have the crew.

Said Ranganathan: It all starts at the door of the DGCA [Directorate General of Civil Aviation] and the archaic rules that we still follow. Our CAR [Civil Aviation Requirements] are of 1970s vintage and mandate that three sets of crew are required for every aircraft. World over, given factors such as Duty Time Limitations, the practice is for five and a half sets of crew per aircraft. So we start with the wrong assumptions. Owners receive the aircraft but almost immediately face crew shortages, leading to either utilising inadequately experienced crew or keeping the aircraft on the ground. The more the downtime, the more the costs.

Minister for Civil Aviation Vayalar Ravi is concerned with aspects of safety. At the Safety Advisory Council meeting on November 21, he mentioned that he had received numerous complaints from passengers on aspects of safety and directed both the Secretary, MoCA, and the Director-General, DGCA, to even cancel the licences of airlines if they were found to be transgressing rules.

Airline industry watchers also point out that during the first 50 years after Independence, the policies of the MoCA were designed with only Air India in mind. After that the policies began to be framed with only Jet Airways in mind. Policies would have to be made with the entire aviation sector in mind. An official working for an LCC said: The government wants to protect Air India, but the national carrier is not geared or motivated to reap the benefits. It is confident that the Government of India will bail it out. Unfortunately, it is the foreign airlines that reap the benefits.

Captain G.R. Gopinath, who launched the first LCC, Air Deccan in 2003, said low-cost airlines internationally had been making profits consistently. He pointed out that Southwest Airlines in the United States, with a fleet of 600 Boeing aircraft, had been making profits for 38 years without a break. Ryanair and Easyjet in Europe, Goal in Brazil, and Air Asia had also been making profits for more than a decade, he said.

Said Gopinath: Despite India's billion-plus population, only 50 million of the population have access to air travel. In comparison, 680 million people travelled on U.S. flights last year despite the country's population being just 311 million, and 25 million people flew in Ireland, which has a population of five million. Ninety-seven per cent of the Indian population is still travelling by train. They are potential customers for the LCCs.

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