India's aviation industry on the verge of crashing
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:: Issue Analyses
India’s aviation industry
on the verge of crashing
Imm Jeong-seong
Senior Business Analyst of POSCO Research Institute
S
Since February 18, Kingfisher Airlines, India’s second largest
airline, has cancelled more than 200 flights, causing chaos in
India. The gravity of this event is significant, as Kingfisher had
cancelled flights before, in November 2011. Kingfisher claimed
it cancelled flights because the Indian Revenue Service had frozen its bank
accounts. Currently, Kingfisher owes tax arrears of INR 1.8 billion to the tax
authorities. Kingfisher was founded in 2005 with the expectation that it
would turn a profit shortly. However, its dream of “dominating the sky” was
shattered after the world was struck by two rounds of financial crisis in 2008
and 2011. Kingfisher Airlines accumulated losses of INR 64.1 billion and
debts of INR 70.6 billion from 2005 to the third quarter of 2011.
Opposition parties, including the Bharatiya Janata Party (BJP), are
opposed to any move by the government to bail out the debt-ridden
Kingfisher Airlines. Civilian Aviation Minister Ajit Singh said that private
companies should find ways to rescue themselves. On February 22,
however, the Indian government put pressure on banks to support the airline,
079
Summer 2012� POSRI Chindia Quarterlyfor fear that the bankruptcy of the company would break connections to
small and medium cities, compromising the convenience of the public, and
drive up flight fares overall. However, sixteen creditor banks are opposing
further bail-out packages to the ailing airline, claiming that they would not
consider providing additional financial support or extending the maturity
period unless Vijay Mallya, the chairman of Kingfisher Airlines, capitalized
an extra INR 15 billion, and offered collateral. In the worst case scenario,
Kingfisher will go bankrupt.
The banking sector, political circles, and the public are all seemingly
hostile toward Chairman Mallya, because he is the owner of UB Group, a
spirits company, and a billionaire with a net worth of USD 1.4 billion
(according to the 2010 Forbes list of billionaires). Chairman Mallya has
often been in the spotlight for his flamboyant lifestyle─luxurious parties,
grandiose mansions, high-end cars, and yachts. He also owns professional
teams in F1, cricket, soccer, and other sports.
○● The expansion of India’s aviation industry after doors
opened to private operators
In 1953, the Indian government nationalized eight private airlines,
including Tata Airlines, to form Indian Airlines. For the next forty years,
Indian Airlines dominated the domestic market, but the Indian people were
not happy about its high fares, frequent delays, and substandard passenger
services. The competition landscape changed in 1994 when Jet Airways and
Air Sahara entered the market, after the government opened the sky to the
private sector. However, all seven new companies, including ModiLuft,
created in the 1990s, were nudged out of the market by 2001.
From the government’s deregulation of the aviation industry in 2003
until 2006, five low-cost carriers (LCC), including Air Deccan, were
created. As a result, the market share of Indian Airlines fell from 100% in
1994 to 40% in 2003, and to 20% in 2007, while the share of private airlines
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POSRI Chindia Quarterly� Summer 2012:: Issue Analyses
continued to grow, to 83% in January 2012. Private funds entered the Indian
aviation industry with the anticipation that demand for air travel would
increase, considering the number of India’s middle class, which is higher
than that of the USA, and its vast land, within which a train trip typically
takes at least twelve hours.
In fact, domestic demand has surged since the opening of the aviation
industry. There are many reasons. Potential demand has been realized,
income has increased rapidly due to India’s high economic growth since the
mid-2000s, and the number of business trips has increased. The number of
passengers on domestic flights increased 3.8 times, from 13.7 million to 52
million, over the ten years from 2000 to 2010. In 2011, this number was
reported to exceed 60 million. The number of regular passengers, excluding
duplicate passengers, is estimated to be about 20-30 million, which is less
than 10% of the 300 million middle class in India. According to Airbus,
Europe’s leading aircraft manufacturer, domestic air traffic in India is
estimated to increase to 160-180 million passengers, while international
passenger traffic is expected to reach 80 million passengers by 2020.
○● Poor performance due to oversupply and low-cost
competition
India’s aviation industry, which seemed to be sailing smoothly, was
impeded by two global financial crises in recent years. The Indian aviation
industry lost USD 500 million in 2006-07, USD 700 million to 1 billion in
2007-08, USD 2.2 billion in 2008-09, and about USD 3 billion in 2011-12.
Indian carriers had accumulated billions of dollars in losses and debts as of
September 2011: Air India (INR 790 billion), Jet Airways (INR 185.3
billion), and Kingfisher Airlines (INR 136.3 billion). Low-cost carrier
IndiGo is known to be the only Indian airline in the black with no debts.
The Indian government has injected USD 618 million into state-owned
Air India over the last two years. As the company was again at risk of
081
Summer 2012� POSRI Chindia QuarterlyThe number of passengers and cargo traffic of Indian airlines
(Unit: 1 Mil. people; ’000 ton)
2000 2006 2007 2008 2009 2010(e) AAGR
Domestic 13.7 35.8 44.4 39.5 43.8 52.0 14.3%
No. of passengers
International 3.8 7.6 9.1 10.0 11.6 13.1 13.2%
Domestic 167 266 303 278 328 430 9.9%
Air cargo traffic
International 101 124 143 174 219 261 9.9%
Source: The Directorate General of Civil Aviation (DGCA)
bankruptcy in February of this year, the government allowed Air India to
raise INR 74 billion by issuing bonds. Creditor banks approved a INR 180
billion debt restructuring plan, and decided to provide the ailing airline with
cash credit worth INR 22 billion. Currently, some airlines, including
Kingfisher, Air India, and Jet Airways, are unable to pay their employees,
and many pilots have moved companies. Since last October, approximately
80 pilots at Kingfisher, 40 pilots at Air India, and 50 pilots at Jet Airways
have left for IndiGo or foreign airlines.
What ails India’s airlines? First, too many airlines have been created in
optimistic anticipation of the future, resulting in an oversupply of airlines.
Since 2000, five Indian airlines have gone bankrupt. Oversupply of airlines
is gauged by the passenger load factor (PLF), the passenger load divided by
the seating capacity. The PLF in the Indian market, which was only 55.5%
in 2001, improved gradually until 2008, when it fell to 63.7%. The number
recovered in 2009, but only to 72.0%, far below the 2008 global average of
77%.
Second, aggressive low-cost competition played a role. LCC’s entered
the race, and lowered the fares for flights from Delhi to Mumbai to INR
721. Indians, known to be savvy price-checkers, flocked to LCC’s, and
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POSRI Chindia Quarterly� Summer 2012:: Issue Analyses
Indian carriers’ market share and passenger load factor
(Unit: %)
Jet Kingfisher
Air India Jet Lite* IndiGo* SpiceJet* GoAir*
Airways Airlines
M/S (2010.12) 17.1 17.7 7.7 18.6 18.6 13.8 6.4
M/S (2012.1) 17.1 20.9 7.9 11.3 20.8 16.3 5.8
PLF (2012.1) 71.2 76.8 80.1 70.2 85.9 75.6 77.4
Source: The Directorate General of Civil Aviation (DGCA)
Note: 1. * refers to LLC. Figures of Air India and Kingfisher include those of their own LLC’s.
2. PLF is a ratio of passengers actually carried versus the total passenger seating capacity of an airline
network carriers had to cut their fares dramatically. Network carriers started
to launch their own LCC’s: Jet Lite (Jet Airways), Air Deccan (Kingfisher
Airlines), and Air India Express (Air India). Kingfisher Airlines, which has
implemented differentiation strategies and was conferred 5-Star Airline
status, also joined the low-cost competition and soon had the highest market
share.
Third, the Indian government’s policies emphasizing free trade and free
competition influenced the Indian aviation industry. The Indian government
made agreements with other countries, as part of its open sky policy, to
allow foreign private airlines to operate domestic flights in India. This led to
oversupply in the domestic market. Indian airlines lost their international
routes to foreign carriers.
○● Limits of integration and cost-saving
India’s aviation sector seems to be passing the buck to the government.
It is citing many reasons for the poor management of Indian airlines: high
raw material costs, which account for about half of total costs; a steep sales
tax rate (24%) on aviation turbine fuel for domestic use; and high airport
083
Summer 2012� POSRI Chindia Quarterlytax. As a result of incessant
requests by Chairman Mallya, who
Companies having a presence
in the Indian market also need is also a Member of Parliament
to respond to ever fiercer (Council of States), it was finally
competition following the
decided at a recent ministerial
opening of the Indian market
to the world. meeting that Indian airlines would
be allowed to import jet fuel
directly. Some anticipate the
decision will bring a 10-15% cut in
fuel costs, while others point out that the plan is unrealistic, citing problems
such as having to set up fuel storage.
Indian airlines are demanding that the government lift a ban on foreign
airlines investing in Indian airlines. Currently, foreign investors are allowed
to acquire up to 49%, but only if they are not in the airline business (100%
for non-resident Indians). At a recent ministerial meeting, the Indian
government decided to allow foreign airlines to acquire as much as a 49%
stake in domestic airlines. A final decision was to be made in the Cabinet of
India after the results of elections held in March of 2012.
India’s airlines have been preparing measures to save themselves. The
first of such measures was integration. In January of 2006, Jet Airways
announced its plan to acquire Air Sahara. (The agreement was made in
April of 2007.) The Indian government announced a plan to merge Indian
Airlines (domestic) and Air India (international) under the name Air India.
In 2007, latecomer Kingfisher acquired Air Deccan, which had been
operating international flights. In October, 2008, Jet Airways and Kingfisher
Airlines formed a strategic alliance to save costs, increase revenues, and
expand networks. However, such M&A’s did not help ailing Indian airlines
address management troubles. Air India, Kingfisher Airlines, and Jet
Airways have remained in the red.
In order to address management risks, Indian airlines have pushed up
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POSRI Chindia Quarterly� Summer 2012:: Issue Analyses
their flight fares one after another since 2009. Fares on certain routes
increased two-fold, but their revenues did not rise, because Indians tightened
their purse strings during the global economic recession, reducing their use
of flights. Before the economic downturn, Indian carriers had raised salaries
significantly as incentive for their employees to stay with their companies;
the average pilot’s salary at Indian airlines once surged to INR 50-60 million
(USD 0.93-1.12 million). Eventually, financially-distressed Indian carriers
were forced to lower salaries.
Even though India is a developing country, its policies prioritize
unlimited competition. Therefore, private companies must find their own
ways to survive. This is true not only for the aviation industry, but also for
other industries, such as the automotive and steel industries. If a foreign
company wants to enter the Indian market, it must gear up to increase
competitiveness. Companies having a presence in the Indian market also
need to respond to ever fiercer competition following the opening of the
Indian market to the world.
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