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Aviation hits Turbulence

The latest to hit headlines is Kingfisher Airlines, promoted by the billionaire Vijay Mallya. Facing a severe cash crunch and exodus of pilots, it was forced to cancel a large number of flights last week, causing tremendous hardships to passengers and taking a huge blow to its reputation and credibility.

Even as Kingfisher seeks a restructuring of its massive (Rs70 billion) debt owed to banks, its pathetic condition has focused attention on plight of the aviation industry as a whole, which is accumulating losses by the day. In the six months to September 2011, Jet Airways lost Rs8.36 billion, Kingfisher Rs7.32 billion and SpiceJet Rs300 crore. The state-owned Air India does not publish quarterly results but could easily have lost about Rs40 billion. Their cumulative debt is expected to reach about $20 billion by December 2012.

Most of the problems of India’s airlines are self-created. Kingfisher and Jet paid very high prices to buy out Air Deccan and Sahara, respectively. Both are also paying for their insistence on flying costly full-fare services for which demand falls in hard times.

The loss-making airlines have argued that the business environment is bad because jet fuel and manpower costs have become unsustainable. There is some merit in this argument.

India’s domestic airlines are paying 50 per cent more for aviation turbine fuel here than the price in West Asian and the European markets. Ad valorem taxes of 20-29 per cent are magnifying the impact of high crude prices on the aviation sector. The domestic ATF price has moved up 40 per cent in a year, compared to an increase of 30 per cent globally.

Tough competition makes it difficult for flyers to pass on to the customers the full increase in costs. The average domestic fare of the industry during the September quarter, for instance, was Rs3,300, around 10 per cent less than the average fare in the same period last year. So, despite a 20 per cent growth in passenger numbers, the rise in revenue was checked.

Bizarrely, Indian rules permit foreign direct investment of up to 49 per cent in domestic carriers, so long as the investors are not airline companies. India must allow genuine foreign investors – meaning airlines and not institutional investors with no hands-on experience in the business — to operate in the domestic airspace. The time is opportune because the demand for allowing foreign airlines to pick up stakes in their companies is now coming from domestic players themselves, who desperately need capital. The silver lining is that traffic growth remains strong. The average occupancy is a healthy 80 to 85 per cent. Moreover, in the same adverse business environment, at least one airline, IndiGo, seems to be making decent money. Air India, Jet and Kingfisher need to ask themselves: what has IndiGo done that they haven’t?

To return to Kingfisher, the 13-bank consortium has refused any fresh support to the debt-ridden company until its promoters meet their commitment to bringing in about $300 million fresh equity through global depository receipts. This is a fair and legitimate demand. On its part, Kingfisher management is in talks with potential investors including, reportedly, Mukesh Ambani, and working on plans to revamp operations and cut costs. We have to see what comes out of this exercise.

Views expressed by the author are his own and do not reflect the newspaper’s policy