Although spiraling jet fuel costs, plummeting profits and high debt levels are threatening the survival of its domestic carriers, India's burgeoning demand is expected to pull the beleaguered aviation sector through the current turbulence.
Among the country's six major airlines—, Kingfisher Airlines, SpiceJet, Indigo Airlines, GoAir and national carrier —only discount carrier Indigo is making a profit. Kingfisher Airlines, which calls itself “King of Good Times,” lost its scepter and throne to high fuel costs and the price war among airlines. Its shortage of cash hinders its ability to buy fuel and pay salaries, airport charges and interest to its lenders.
In November, Kingfisher was forced to cut several unprofitable flights from its network in an attempt to reduce losses, given high fuel costs. The airline, owned by billionaire liquor baron Vijay Mallya, has been talking with lenders to raise capital and trim $1.2 billion in debt. It posted a second-quarter net loss of 4.69 billion rupees ($90 million), compared with a net loss of $44.5 million a year earlier.
The airline's debt hit rock bottom in October and state-run oil refiner Hindustan Petroleum Corp. Ltd. temporarily suspended fuel deliveries to Kingfisher Airlines for the second time in four months. To add to its woes, the New Delhi and Hyderabad airports threatened to deny the airline credit and demand upfront cash payments for using their facilities.
The heavy losses also forced Kingfisher to shut its no-frills segment, Kingfisher Red, in September.
Similar problems have befallen other Indian carriers. Jet Airways, India's top airline by market share, posted a net loss of $138 million for the quarter ended Sept. 30, compared with $2.4 million a year ago. Budget airline SpiceJet also reported a net loss of $46 million. State-run Air India, which has a cumulative debt of $7.7 billion from aircraft acquisitions and short-term loans to maintain its operations, has been asking for a total of $3.2 billion.
The Center for Asia Pacific Aviation (CAPA) predicts a $2.5-3 billion loss for Indian airlines in the fiscal year ending in March. According to CAPA estimates, the cumulative debt burden of the three big Indian carriers—Kingfisher, Air India and Jet Airways—was a whopping $16 billion. “Indian banks have an exposure of $6 billion related to working capital and term loans. They will have an additional exposure on the aircraft-related financing,” says Kapil Kaul, South Asia chief executive of CAPA.
There are several reasons why India's aviation industry, once the symbol of economic growth, is in turmoil. While India is among the countries with the fastest-growing passenger traffic, high fuel costs and the inability to raise fares have resulted in huge losses over the past three quarters. The steep increase in global oil prices hits Indian carriers particularly hard because they must pay government fuel taxes at rates up to 30%. Airlines complain that fuel prices are almost double global rates and account for 40-45% of operational expenses, compared to 18-20% abroad.
The increasing sales tax on air tickets also negatively affects the country's civil aviation industry. Despite campaigns stating that the tax flouts International Civil Aviation Organization (ICAO) policies, the Indian finance ministry extended the sales tax to all classes of domestic and international airline tickets. Previously, the tax was only levied on international premium-class tickets.
High salaries for pilots and crewmembers also drive up carriers' costs, even though there was no rapid hike in salaries after the recession in 2009.
While costs have increased, revenue has decreased for many of the Indian airlines. They boosted capacity by leasing more aircraft and opening new routes, which caused per-seat profits to nose-dive. The carriers also added expensive aircraft to their fleets too quickly without putting their balance sheets in order for tough times.
On top of this, the depreciation of the Indian rupee has resulted in bulging costs.
To stay afloat, Kingfisher Airlines and Jet Airways both need infusions of capital, according to their respective auditors. B.K. Ramadhyani & Co., which audits Kingfisher, says the carrier's ability to meet its financial obligations is “dependent on the company's ability to infuse the requisite funds.” Similarly, auditors Deloitte Haskins & Sells and Chaturvedi & Shah say raising funds is essential if Jet Airways' accounts are to be prepared on a “going-concern” basis in the future.
Jet Airways plans to give $9.6 million of interest-free loans to its JetLite unit by the end of March as an immediate measure to enable the unprofitable subsidiary to continue operating.
Even Kingfisher tried to stem worries about its future by listing a few options that could help it through the turbulent times. Mallya says the airline's net worth has eroded, but it has not asked for a bailout from either the government or banks. Rather, it wants lenders to inject working capital of $154 million as short-term relief. The airline restructured its debt earlier this year by converting one-third of its loans into shares and issuing them to lenders and founder companies.
Mallya says the airline has initiated a large-scale aircraft reconfiguration and transition to a full-service model, along with network rationalization, to reduce interest costs and streamline existing fleet orders.
Rationalizing their operations is something the airlines can control, but another major challenge—outdated infrastructure including shoddy runways and air traffic management systems that desperately need upgrading—is beyond their control.
India's government could provide relief for its domestic airlines if it reduced the high jet fuel tax and opened the aviation sector to investment by foreign airlines, which could not only bring in funds but also help improve management practices.
There is hope of government support for the struggling carriers. “The private-sector airlines have to be managed efficiently but if they do get into difficulties, we have to find ways to help them,” Prime Minister Manmohan Singh says.
India's commerce and industry minister, Anand Sharma, says a civil aviation ministry proposal to assist the strapped airlines is “receiving government's active consideration.” Some analysts think it is highly likely to approve it soon.
“The Indian government will have to eventually open up the sector, but to what extent is not yet clear,” Dhiraj Mathur, aerospace executive director at PricewaterhouseCoopers, tells Aviation Week.
Currently, Indian law permits up to 49% foreign investment in airlines and more in airport infrastructure. However, foreign airlines are not allowed to invest in the sector, something Kingfisher's Mallya is calling for the government to change.
Not everyone agrees with Singh's support of the carriers, though. Among them is Ajay Lele, a formerwing commander who works with the New Delhi-based Institute for Defense Studies and Analyses. “The airlines are responsible for their own mismanagement and need to deal with it themselves,” Lele tells Aviation Week.
He says Indigo is generating profit and growing rapidly because of efficient management and prudent fund-raising.
“The private industry cannot have an extravagant life and rely on the government to take care of their losses. It already has Air India to take care of,” Lele says.
The government is considering a variety of plans to restructure Air India—a relic of state ownership that is threatened by losses, bloated costs and severe competition from the private domestic airlines. India's central bank is expected to submit a report this month recommending a fresh turnaround plan for the national carrier, which incurs monthly losses of more than $115 million in addition to its deep debt from aircraft acquisitions and short-term loans to maintain operations.
In the past two years, the government has pumped $482 million into Air India, and the ministerial panel is looking at injecting another $1.2 billion over the next 10 years.
The silver lining if the dark cloud hanging over India's civil aviation sector is that government figures show an increase in domestic air passengers to 51.6 million in 2010 from 11.7 million in 2003. The Airport Authority of India (AAI) estimates that India will become the third-largest aviation market in the world after the U.S. and China, rising from its current ranking as ninth.
According to the AAI, India will have 150 airports and a fleet of 2,000 aircraft by 2030. The country's fleet now stands a 735 aircraft owned and leased by public and private aviation companies.
And, with thealso forecasting that the Indian civil aviation market will record a compound annual growth rate of more than 16% in 2010-13, it is clear that the once booming industry is not crash-landing.