Bleak Future for Indian Aviation with little signs of recovery

Aviation
Overview.

There are 638 large passenger airplanes in India. 18 Boeing 737 Max aircraft have recently been grounded following recent air tragedies which is an unfortunate news indeed. The 737 MAX grounding is viewed as the most tragic incident to have happened to the aviation world. Despite 737 MAX, there are a number of other turbulent conditions that India’s aviation sector is facing now.  The precarious situation is now clearly visible in such  conditions around the airline industry :

  • Jet’s operating fleet has nearly reduced to half, lessors have repossessed its airplanes, lenders see no respite, investors’ confidence has hit new lows,
  • Air India’s fleet is reduced by nearly 20 per cent
  • Six airlines that had bid under the UDAN scheme have withdrawn

Observers forward some reasons – man made and others – for such ills in Indian aviation sector:

  • High aviation fuel prices due to unusually high government excise and taxes: something which could have been avoided to a great extent
  • Unusually high overheads: something which could have been avoided to a great extent,
  • Total neglect of non-aeronautical revenue sources,
  • Rupee depreciation,
  • Excessive parking and landing charges,
  • Inefficient operations
  • Fare wars,
  • Airlines – Jet Airways, IndiGo, SpiceJet, GoAir and Air India – are deeply distressed financially, and
  • Insurmountable debt: the worse of all. Recovery unlikely. It renders the whole business of aviation a non-feasible, non viable activity.

In view of all these developments, the passengers will surely be adversely affected. There will be less number of services, lesser number of flights and higher fares. The distress is not yet over. No respite or its sign is seen on the horizon.

Case Study.

Consider the case of Mumbai-based full-service carrier Jet Airways. It is on the verge of bankruptcy. Its liabilities arising due to debt, lease, salaries has become so huge that its earnings  are hopelessly inadequate.  The company will continue to battle its so-called biggest financial crisis in its 25-year history because it didn’t make full use of its strength and available resources. A day arrived when the Company  started defaulting on its lease and loan repayments citing one excuse or the other. This obviously didn’t go well with the overseas lessors. They chose to act, and act fast instead of watching the lessee’s dillydallying tactics.

Jet Airways’ ostrich like attitude, its promoter’s reluctance and subsequent delay in relinquishing control did not help Jet. Today, it is staring at a fault of $109 million which has to be paid by all means by March 28, 2019 to the HSBC Bank Middle East.

Jet’s lenders have already taken more than two months time to prepare a resolution plan which includes Goyal’s shareholding coming down to about 20 per cent from the present 51 per cent. After two months of a useless exercise, lenders realise that they can not control a Jet like airline as they lack the expertise. Not surprisingly, the plan is still stuck in the approval stage. Jet’s partner Etihad, too, is stressed. It cancelled its orders it had placed with the plane maker Airbus. The European giant plane maker, too, is shocked as it saw 99 airplane orders cancelled in Feb 2019.

The issues with IndiGo are not as complicated as Jet but are not rosy either. IndiGo, which has 42.5 per cent market share, registered a 75 per cent drop in net profits in the last quarter.

SpiceJet, which has been affected the worst by the recent groundings of Boeing 737 MAX 8, reported 77 per cent drop in net profits to Rs 55.1 crore for the same quarter.

Only the number of willing air travelers has improved, the overall outlook for the domestic Indian Aviation sector looks very weak. Australian aviation consultancy Center for Asia Pacific Aviation (CAPA) forecasts that Indian carriers will lose a collective $550 million to $700 million in the financial year 2020 as compared to an estimated $1.7 billion loss for the 2019 year-ending in March. The ratings agency ICRA had  also predicted a hopeless times for the aviation sector.

Globally, the profitability of the aviation industry is very likely to be hit. This has been aptly reflected recently when one airline after another cancelled buy orders with Airbus.

Viable Solution

Experts believe that external factors – fuel prices and rupee-dollar exchange rates – are beyond control, and the current situation can be only improved by generous government intervention. In one stroke, 90% of the above mentioned ills can be eliminated if the government lowers the excise duty to its pre-2014 level- the year when the present leadership took charge.

The government has nothing to lose and a huge value to gain if it agrees to this suggestion. The government can lower the excise duty even for the sake of experiment, it is free to raise the excise duty anytime later if it does not see the magical results.