Why new airline hopefuls are taxiing up despite the risks

In a recent communication to shareholders, Jet Airways promoter Naresh Goyal highlighted a Centre for Asia Pacific Aviation (CAPA) report, which estimates that Indian airlines posted a combined loss of $1.65 billion (over Rs 10,700 crore) in fiscal year 2012-13.

Goyal attributes these losses to declining domestic traffic, a sharp depreciation of the rupee, high aviation fuel prices, higher landing and parking charges at major airports, and the fact that airlines were unable to pass these incremental costs to passengers.

Goyal’s observations reflect the grim reality confronting the aviation sector today. According to the Directorate General of Civil Aviation (DGCA), during the last 12 months, demand for seats outpaced the capacity increase only in March and July (see table). In March, the capacity increase was 5.1 per cent while demand was 8.8 per cent, and in July, demand increased 6.6 per cent while capacity increased by 1.6 per cent. .

Systemic problems

Giorgio De Roni, CEO of GoAir, reckons that the industry also has to deal with systemic problems that are hindering growth.

“India is deemed to become the third-largest aviation market globally. But to get there, we need some structural changes. FDI regulations are a good step but there are other issues, such as taxation. There are also some bottlenecks in terms of infrastructure that constrain growth. With the devaluation of the rupee and turmoil in the geopolitical situation, airlines need an in-depth revision of the environment,” he said.

Everyone agrees that short-term solutions, such as the 10-lakh ticket bonanza launched by SpiceJet in January, which was followed by Jet coming up with a similar scheme, are not the answer. “An occasional limited-period, limited-seat discount is a different matter. It stimulates demand, brings in non-flyers and fills up seats in non-peak hour flights. Pumping up demand artificially by giving discounts and suffering losses is not a sustainable strategy,” says Amber Dubey, Partner and Head, Aerospace and Defence, KPMG.

Long-term solutions

What the industry needs now is more long-term solutions since many are spelling doom for the second quarter this year. CAPA estimates that Q2 losses for the domestic airline industry will be in the range of $400 million to $450 million (between Rs 2,600 crore and Rs 2,900 crore at today’s exchange rate). “Going forth, with the free fall of the rupee, we expect the next two quarters to be bad. Most airlines may decide to pass on the increased cost of operations to passengers. That may bring down traffic. But that would be a reflection of the real demand backed by purchasing power,” adds Dubey. The long-term solutions include Jet looking at leasing out some of the bigger aircraft, such as the Boeing 777, in its fleet. With flat growth of about one per cent during the first quarter of FY 2014, the airline has moved aircraft and capacity from its domestic to international routes.

Others, including SpiceJet, have opened virgin routes, connecting Rajamundhry or Puducherry, for instance. Air India, on the other hand, is betting on deploying more all-economy aircraft on domestic routes to shore up its bottomline. The flag carrier is also now operating the Boeing 787, which burns less fuel, both on domestic and international routes. It is too early to say how effective these steps are going to be.

A ray of hope is being provided by aircraft makers, such as Bombardier, which are keen to emphasise that the growth of every aviation market follows a similar curve.

It starts with Government airlines flying international routes. Then, a domestic market is created that is opened to competition. This leads to robust international travel and robust domestic capacity.

As you go through that mature domestic curve, you need to connect secondary cities. “That is the point at which India is today. It is well on its way to the point where regional aircraft will be necessary to connect secondary cities,” says Chris Fuller, Senior Vice-President, Commercial, Bombardier Commercial Aircraft.

Huge potential

Conceding that the dynamics of the aviation business are tough, Fuller adds that if anyone could connect every city in the country to the major metros, then the new aviation markets that will open will be in “thousands and not hundreds”. It is this optimism that makes Bombardier say that it can easily sell 100-150 aircraft in the next five years to Indian carriers. Airbus and Boeing are also bullish on aircraft sales to India with both estimating that the market will require over 1,000 aircraft over the next 15-20 years.

Bolstering this optimism is a recent Planning Commission study, which indicates that in terms of air-travel penetration, India at 0.04 air-trips per capita annually, is far behind developed countries, such as the US and Australia, with two air-trips per capita a year. The study points out that China’s domestic traffic is five times the size of India’s despite having a population that is just 10 per cent more.

Clearly, the domestic market has potential. And that perhaps explains why despite the rising costs and mounting losses of existing airlines, other contenders are keen to enter the sector.

>ashwini.phadnis@thehindu.co.in