The anticipated shakeout in the Indian aviation industry seems to be underway. High debt levels, large accumulated losses, costly fuel, and inability to raise fares adequately have contributed to the pain in the sector.
Palliative measures such as allowing foreign airlines to invest in Indian carriers are still work-in-progress and may come too late for those which need it urgently.
The most visible casualty could be Kingfisher Airlines. Its shrunken operations have relegated it from being the second largest player to the smallest airline in the domestic skies.
Lenders are tightening the screws and the company has resorted to some asset sales to ease the pressure. But many expect the airline to shut shop sooner than later.
Trouble across the board
Most other players too are not doing well. Like Kingfisher, the other two listed airlines — Jet Airways and SpiceJet — posted record losses in FY-12. Jet’s consolidated debt-to-equity ratio is at more than 80 times while SpiceJet’s net worth has been eroded.
Air India’s financial situation is also precarious but it keeps the show running, thanks to government (taxpayer) handouts.
But recovery is a long way off.
The recent prolonged strike by a section of its pilots has further dented the Air India’s brand and added to its losses. Low-cost carrier, GoAir, is also reported to have made losses last fiscal.
IndiGo is the only airline said to be in profits. But while it has got good press regarding its efficient operations, sceptics attribute IndiGo’s profitability to sale-and-leaseback transactions.
Market share gain marginal
How will Kingfisher’s possible exit affect other airlines? For one, the rest of the players will benefit from redistribution of the beleaguered airline’s market share. But this will be marginal, given that much of the share has already been re-distributed over the past 12 months.
As Kingfisher’s domestic market share fell from 20.2 per cent in May 2011 to 5.2 per cent in May 2012, other airlines, including Air India, improved their share of the pie.
Low-cost carriers benefitted the most. For instance, IndiGo increased its market share from 20.1 per cent in May 2011 to 24.9 per cent in May 2012, and SpiceJet grew its share from 14.4 per cent to 18.5 per cent.
Pricing discipline important
The industry could also benefit from a decrease in the instances of predatory pricing. In the past, there have been allegations that Kingfisher Airlines and Air India priced their tickets too low in an attempt to recoup market share.
Sane pricing practices which recover costs and provide for profit margins are imperative if the industry needs to sustain itself in the long run. It is important that all other players, including Air India, maintain pricing discipline.
But oversupply along with decline in passenger traffic growth could tie down airlines. Even with Kingfisher and Air India curtailing operations, the growth in capacity (measured in available seat kilometres) of the Indian aviation sector exceeded growth in demand (measured in revenue passenger kilometres) in 11 of the past 13 months.
In some months, the gap was as wide as 6 percentage points. Much of the new supply was added by the relatively better-off low cost carriers.
They have also placed large orders for new aircraft in anticipation of strong growth. Overcapacities may cause load factors to dip and lead to pricing pressure, similar to the situation in 2008 and 2009.
Complicating the picture could be the decline in passenger traffic growth. During January 2012 to May 2012, passengers carried by domestic airlines grew by 5.3 per cent, much lower than the growth in mid-to-high-teens seen in the previous calendars.
Traffic growth may have declined due to the rise in air fares in 2012. This underlines the price versus load factor trade-off faced by the industry. Uncertain economic conditions could also keep demand muted. Calibration in fleet addition will hence be essential. Especially as costs remain high.
Fuel cost pressure
The cost of aviation turbine fuel (ATF) has moderated in recent months; yet, it remains costlier than a year ago. A kilolitre of the fuel now costs Rs 61,169 in Delhi, 10 per cent less than Rs 67,800 on April 1, this year, but 9 per cent higher than the Rs 56,247 a year back.
The steep fall in the rupee in recent months has blunted some of the benefits.
Also, the cost of the fuel varies widely across the country due to different state sale tax rates. For the listed airlines, fuel cost accounted for 45-75 per cent of sales in the March 2012 quarter.
Magic pills?
Much hope has been riding on the proposed move to allow foreign airlines to invest up to 49 per cent in Indian carriers.
There are expectations that the process will be fast-tracked after the impending Presidential elections. But this may come late for airlines such as Kingfisher, which are gasping for funds. In any case, it remains to be seen whether foreign airlines will be ready to invest in companies with parlous financials.
If yes, at what cost? The other relief measure — direct import of ATF to reduce tax — has been allowed and some airlines have obtained approvals. But given the challenges involved in direct fuel import, its viability is open to question.
With or without Kingfisher, India’s aviation sector may continue to face headwinds. The possibility of more airlines slipping badly cannot be ruled out.