India’s aviation industry is at a critical juncture following years of heavy losses, analysts say. But there is still much to be done amid a turbulent operating environment if airlines are to soar to profitability.
A new carrier launched by Singapore Airlines and the Indian conglomerate Tata, called Vistara, took to the skies this month. This comes as SpiceJet, the Indian budget airline, is struggling to stay afloat, prompting fears that it could follow the debt-laden Kingfisher Airlines into collapse.
It all adds up to a “critical juncture”, according to the industry research body Capa Centre for Aviation.
“After facing a constant stream of economic, regulatory and structural challenges that has resulted in India’s airlines losing a combined US$11 billion over the last eight years, Indian aviation could be on the verge of entering a new era of profitable and sustainable growth”, it says.
“But this is by no means a certainty. Falling oil prices and improving economic conditions provide a favourable backdrop, but all of the key stakeholders will have to play their part for the sector to recover and thrive.”
Capa adds that the government will have to deliver on promises of removing red tape, while “industry players will need to learn to operate in an open and competitive environment and allow vested interests to take a back seat.
“If this can be achieved, Indian aviation has massive potential that can be unleashed, delivering huge benefits to tourism, trade and the economy.”
Sky-high fuel costs have played a significant role in pushing Indian airlines to huge losses over the past few years, so the decline in oil prices will bring some relief to carriers.
But a number of other challenges remain, including increasing competition, insufficient infrastructure, and other steep operating costs such as taxes. The launch of Vistara comes just seven months after Tata started flights of its other new joint venture airline, AirAsia India.
Fierce competition between airlines in India has led to fare wars, and the launch of Vistara, although not a budget carrier, is adding even more pressure to the market. Air India and Jet Airways, the other two remaining full-service carriers in India after Kingfisher ceased operations in 2012, have announced discounts on fares in recent days in a bid to shore up sales during what is traditionally a lean season anyway.
“The airline industry has become increasingly competitive owing to introduction of new airlines in the full service and LCC [low-cost carrier] space, which in the end has been a boon for travellers,” says Neelu Singh, the chief operating officer of Ezeego1.com, an online travel agency. “The airline flash sales have given rise to a trend of advance planning and booking among Indian travellers.”
Ms Singh welcomes the entry of Vistara, which she describes as “a refreshing change” for passengers
“It is definitely good to have one more player in the full-service category which will give more choice to the customers. The concept of premium economy is a first of its kind in India and will certainly attract a lot of mid-managers who are looking for more comfort than an economy class but cheaper fares than a business class.”
Commenting at the time of Vistara’s launch, Goh Choon Phong, the chief executive of Singapore Airlines, explained that the company was keen to be part of India’s growing aviation market.
“We are confident that Vistara will help to stimulate market demand and provide economic benefits to India,” he said.
But the budget carrier IndiGo is the only major Indian airline that has consistently been able to achieve profits over the past few years.
Air India, the loss-making state-owned flag carrier has been guzzling hundreds of millions of dollars of taxpayers’ money each year. Air India reported a loss of 52 billion rupees (Dh3.08bn) in the financial year which ran to the end of March 2013 compared with a loss of more than 75bn rupees the year before that.
Jet Airways in November reported its first profitable quarter since 2012 for the three months to the end of September, but that was largely because of a one-off gain from the sale of its frequent-flyer business.
Without that sale, it would have suffered a loss of 2.35bn rupees compared with 8.33bn rupees in the same quarter a year earlier. Jet is aiming to return to profitability by 2017.
Mumbai-listed shares in Jet plunged on Wednesday after it was revealed that Naresh Goyal, the airline's chairman, had pledged his 51 per cent shareholding to Punjab National Bank, without providing explanation. Abu Dhabi's Etihad Airways owns a 24 per cent stake in Jet, which it bought as part of a $600 million deal.
This followed New Delhi’s decision in September 2012 to open up the aviation sector to foreign direct investment of up to 49 per cent by overseas carriers for the first time, a move that reflects the appeal of India’s aviation industry despite the hurdles. The market is believed to have huge potential, with a population of 1.2 billion in India and growing wealth among the middle class.
But for SpiceJet the future seems uncertain. The cash-strapped low-cost carrier cancelled about 1,800 flights last month as it scaled back its fleet on its financial woes. It has been granted a series of extensions on fees owed to airport authorities. It was also grounded for several hours in mid-December after oil companies demanded money due before they would refuel the carrier’s aircraft. There are hopes that a rescue plan will be devised this month with the SpiceJet co-founder Ajay Singh reportedly working on a solution with potential investors.
Saj Ahmad, the chief analyst at StrategicAero Research, an aviation consultancy, questions whether the airline can endure such a turbulent market.
“Can SpiceJet survive?” he says. “I have a sliver of hope that it can because it is still flying, but the caveat here is that I would not be alarmed if it sinks because a white knight fails to arrive or revised business plan can’t be enacted.”
Given the fact that airlines are struggling to attain profitability, Mr Ahmad is sceptical about whether India actually needs another carrier in the form of Vistara.
“The problem is that there is just too much capacity and not enough traffic to go around,” he says. “Only 3 per cent to 4 per cent of the Indian population use air travel.”
AirAsia India, meanwhile, has an additional set of issues to face following the crash of an AirAsia plane last month in the Java Sea. AirAsia India is a joint venture between the Malaysian airline, AirAsia, and the Indian conglomerate Tata, along with Telstra Tradeplace, an investment holding company. The crashed jet belonged to Air Asia’s Indonesian venture.
“AirAsia, for all its success, is now a tainted brand in the short term because of last month’s crash and they won’t be able to keep providing funding for AirAsia India indefinitely,” Mr Ahmad says. “Whether people like it or not, brand association is everything, and AirAsia cannot escape this negativity in the same way that Malaysian Airlines suffered in the wake of MH370 and MH17 events last year. It will take months for AirAsia to regain trust and much will ride on the outcome of the crash investigation to determine whether the pilot, weather, airplane or some other factor is to blame.”
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