High costs and low yields. Implosion of the country’s second largest airline. Persistent technical issues plaguing two of the most popular passenger aircraft models flown by India’s airlines. Together, these factors have now plunged India’s aviation industry to its most precarious phase in the last five years or so.
Santosh Hiredesai of SBI Capital Markets summed up the situation in a recent note, characterising FY19 as a “year of sharp U-turns” for India’s aviation industry — from record profit in FY18 to mega losses, resulting in dire need of recapitalisation. The most visible event was the temporary suspension of operations by Jet AirwaysNSE -31.46 %, once India’s biggest airline by passengers and for many years the second largest.
Jet, which cancelled all flights, has at least Rs 15,000 crore in dues and leaves more than 15,000 unpaid staff in the lurch. Jet is the most critical case in the industry but by no means its only one. Air India has debt repayments worth Rs 9,000 crore lined up this financial year and limited means to service them.
GoAir has grounded at least 10 of its 48 planes for want of a network to fly them. More than 15 top executives have quit the airline in the last few months. Almost every top position in the airline, including that of the CEO, is empty.
IndiGo, the country’s biggest airline, and its rival low-fare carrier SpiceJet have both ordered aircraft that have been facing severe technical glitches. The Pratt & Whitney (P&W) geared turbo fan engines that power IndiGo’s Airbus A320neo (new engine option) planes have developed constant issues since they were pressed into services, leading to several groundings last year and this year. The country’s aviation regulator, the Directorate General of Civil Aviation (DGCA), last week served notices to the airline on the engine issues and will be conducting a safety audit on its fleet soon.
SpiceJet fleet’s Boeing 737 Max aircraft have been grounded by aviation authorities across the world after two recent plane crashes of Ethiopian Airlines and Lion Air.
“At present, IndigoNSE -1.74 % and GoAir have 33% (72 aircraft) and 61% (30 aircraft), respectively, of their fleet comprising the A320neo family aircraft with the P&W engines. The grounding of these aircraft will thus impact an additional 15% of the industry capacity,” said a recent report from ICRA, an investment information and credit rating agency.
“Of the pending order book of 850 aircraft for the domestic airlines, 64% comprises A320neo family with the P&W engine (78 aircraft for Indigo and 114 aircraft for Go Air) and Boeing 737 Max (220 aircraft for Jet Airways and 129 aircraft for Spice-Jet). Delays in resolution of these technical issues would thus result in delays in deliveries/cancellation of orders by the airlines, further impacting the industry capacity,” it added in the report.
To be sure, some see the capacity cut as a much needed rationalisation. Many see it as a development that will benefit other airlines. Hiredesai of SBI Caps estimated that domestic flight departures in the six months starting March — collectively known in airline and DGCA parlance as the summer schedule — will only grow 4% this year compared with the typical rate of 15-20% in previous years. What’s more, close to 250 slots in the congested airports of Mumbai and Delhi, unused by Jet, are now being given to its peers.
SpiceJet is leasing at least 16 planes that Jet was forced to deregister from its fleet. In the medium term, this has led to an at least 30% increase in pricing, which means an end to the bonanza that air travellers in India usually enjoy — India offers one of the lowest local airfares in the world — and an increase in yields for airlines. But this is temporary.
“While some near-term capacity rationalisation is boosting yields, there are still many more aircraft on order than our airports can absorb in the coming years, even after planned airport capacity expansion,” said a senior airline executive. He didn’t want to be named.
Meanwhile, bigger, historical issues continue to plague the aviation industry.
High Costs, Low Yields
Jet fuel prices constitute about 40% of costs for an Indian carrier and are taxed higher here than anywhere else in the world. A recent analysis by ET of the correlation between fuel prices and airline profitability in the last 10 years showed at least three points — a rise in the December quarter of 2013 and significant dents in April-March 2015 and January-March 2016 — that plunged airlines into deep losses or catapulted them to significant profitability.
Aviation turbine fuel (ATF) prices have risen 9% between January and March-end, shows data from the fuel’s biggest supplier, the state-run Indian Oil Corporation. That, combined with typical low-ticket pricing in India’s price-sensitive market, will continue to hamper airline margins.
Not that Indians don’t spend on air travel. A recent report by Google and Bain & Co said Indian travellers took approximately 2 billion domestic and international trips in 2018, spending nearly $94 billion on transportation, lodging and consumption during their travels. Of that, they spent $36 billion on transport in 2018, up from $25 billion in 2015. About 51% of transport expenditure in 2018 was on airline tickets, compared with 38% in 2015. But still the yields are lower than the expenditure.
Hiredesai, in his note, gave a comparison between revenue per kilometre flown by an airline compared to levels of crude prices. The report says that when crude is $60 to a barrel, for instance, even a 5% drop in yields can net Rs 611 crore in annual profit for IndiGo. But as it crosses $70, the yield has to increase by 5% to garner profitability for the airline. But that isn’t happening.
IndiGo’s per flight seat per kilometre revenue for the October-December quarter fell 3% year-on-year. Its net profit fell 75% to Rs 190 crore. Brent crude is currently trading at $72. Yields will rise due to the Jet shutdown, but if they aren’t kept at that level, IndiGo and all other airlines are staring at an abyss of losses.
Airlines in India have been appealing, in vain, to the government for a decade for a reduction in taxes on fuel. Jet fuel is 35-40% more expensive in India than in the rest of the world, because of relatively high tax rates.
“The fundamental of the business has not been addressed by the government. India is a price-sensitive market. If the fuel price is low, airlines can make money even at current revenue levels,” said a senior executive of an airline, asking not to be named.
The Civil Aviation Ministry and the regulator have been allegedly slow in addressing issues. For example, India was one of the last nations to ground the beleaguered 737 Max planes. Executives speak of archaic rules called the route dispersal guidelines (RDG) that mandate airlines to fly a certain percentage of flights in smaller, unprofitable air routes.
“The government can also reduce cumbersome regulation like RDG that results in overcapacity in certain markets with a more comprehensive demand-supply and auction-driven regional connectivity scheme. The current form of RDG drives up costs and introduces inefficiencies,” said a second airline executive, who also asked not to be named.
To be sure, the government has in the past one year opened smaller airports across the country and have auctioned smaller routes for airlines to fly. SpiceJet has been the biggest beneficiary of the scheme, with 21% of its 1,10,220 flights operating on monopoly routes in the ongoing summer schedule, making it the biggest chunk of such routes for a pan-Indian carrier.
The much bigger IndiGo has 16% of its 2,27,201 flights on monopoly routes. Lack of competition on these routes mean higher volume and yields for airlines, a dual benefit they can never enjoy in a fiercely competitive sector such as Mumbai-Delhi.
“There is also a need to professionalise regulators like DGCA to ensure that officials have an understanding of the sector. That will ensure bringing in better systems by airlines, leading to reforms in the way they are run,” said a third airline executive.
CAPA Centre for Aviation, a Sydney-based consultant, estimates the current number of pilots in India at 7,963. In 10 years, airlines will have to hire 17,164 more. The projected growth in capacity, because of plane orders, will lead to a 14% shortfall in commander pilots, a part of which will have to be fulfilled by more expensive expatriates, leading to a rise in the wage bill, the second biggest cost chunk after fuel.
In a nutshell, the gap between crew and fleet will widen in the coming years, leading to higher dependence on expats, which still may not be able to plug the gap entirely.
IndiGo in February announced it would cut 30 daily flights from its schedule due to a shortage of crew to man its planes. It is hiring at least 100 expatriate commanders.
India’s carriers, plagued by long-standing issues and new problems, are looking at difficult times. Losses are estimated to grow and debt will continue to pile up. With the death of one airline, setbacks to the expansion of others and expense revenue gap poised to widen, it will be sometime before last year’s honeymoon period returns to the industry.