x Abu Dhabi, UAEFriday 19 January 2018

Airlines eager to set up in India despite stiff challenges

As a slew new airlines get ready to take off in India, they face many challenges such as high taxes, rising fuel prices and stiff competition.

Passengers arrive in Mumbai. New airlines plan to capitalise on India's 1.2 billion population. Punit Paranjpe / AFP
Passengers arrive in Mumbai. New airlines plan to capitalise on India's 1.2 billion population. Punit Paranjpe / AFP

New airlines are planning to launch in India at a time when existing carriers are facing strong headwinds amid a turbulent operating environment and high debts.

The ventures, which include AirAsia’s plans to start operations of a budget carrier in the next few months, are hoping to capitalise on the country’s population of 1.2 billion, as Indians increasingly take to the skies.

But there are serious challenges in the near term as carriers grapple with high taxes, rising fuel prices, and stiff competition – factors that have pushed airlines to record losses and led to the downfall of Kingfisher Airlines, which has not flown for more than a year.

New entrants will add to the pressure on the industry, analysts say.

“Clearly there’s not enough space for all,” says Amber Dubey, a partner and head of aerospace and defence at KPMG. “We expect consolidation over the next 18 to 24 months. We may have four strong pan-India carriers, with others either merging into them or operating limited services in niche markets. Only the best will survive.”

The Indian conglomerate, Tata, announced plans in February to set up a budget carrier in the country with AirAsia. The airline, AirAsia India, has already recruited hundreds of staff and the plan is to launch operations by January.

This followed New Delhi’s decision in September last year to open up the aviation sector to foreign direct investment of up to 49 per cent by overseas carriers for the first time.

Tata also has another carrier in the pipeline. It has teamed up with Singapore Airlines (SIA) to launch a full-service airline, of which it would own 51 per cent and SIA the remainder. SIA is planning an initial investment of US$49 million in the venture, while Tata is investing $51m.

The proposal has already been approved by the Foreign Investment Promotion Board and is now awaiting clearances from departments including the finance ministry. The companies are hoping to launch the airline by June.

A charter airline, Air One, has also applied for permission to start a scheduled carrier service. And Air Costa, a new regional carrier in Andhra Pradesh, began operations last month.

Saj Ahmad,the chief analyst at StrategicAero Research, thinks new airlines are unlikely to enjoy financial success, given the challenges of operating in the subcontinent. “India, as a market, has not been kind to airlines,” he says.

“Considering that the appetite for air travel in India is about 1 per cent of the entire population, it’s clear that there is too much capacity and too many players chasing a small amount of traffic.

“About the only positive impact more entrants in the market will have in the short term is in low fares to attract passengers on their jets. That sadly, does not equal financial reward when yields are flat as a pancake,” Mr Ahmad adds.

A recent report by India Ratings & Research stated that new players entering the market could drive airlines into price wars. “In India, the industry also contends with tax and regulatory-driven inefficiencies of its cost structure,” it said, adding that it “expects that highly leveraged players with weak parental support have a high likelihood of being distressed”.

The leverage levels of Indian players was higher than their global peers, with debt in the domestic airline industry totalling $13.3 billion in the financial year 2012, according to the report.

Capa, an aviation market analysis firm, estimates losses in the airline sector in the quarter between June and September could exceed $500m.

“Airlines continue to face the dual challenge of a hostile cost environment and soft yields,” according to Capa. “And the market environment is one in which airlines have a tendency to initiate loss leader pricing during low seasons to generate cash.”

Jet Airways last month posted its worst ever quarterly loss of 8.91bn (Dh529.9m) rupees between July and September. Etihad Airways is buying a 24 per cent stake in Jet as part of a $600m deal.

Jet cited the depreciation of the rupee against the US dollar, rising fuel prices, and higher airport charges as the factors behind the dismal performance. It was more than eight times the loss the airline experienced in the same quarter last year.

Discounted fares during low season months contributed to the decline, analysts say.

But Mr Dubey points out that airlines are eyeing the longer term potential of the market.

“The long-term outlook of the Indian aviation sector is bright,” he says. “It’s the short-term outlook that has significant challenges. Most of the challenges are man-made and hence give us confidence for the future. That’s the reason global airlines were interested in India even before the slew of reforms were brought in.” 

He says the wave of problems can be resolved and if this is achieved, foreign airlines entering the country will be duly rewarded.

“India is perhaps the costliest place to run an airline,” Mr Dubey says. “Indian ATF [jet fuel] is one of the costliest in the world – nearly 60 per cent higher than in Middle East and South East Asia.

“As regards MRO [maintenance, repairs, and overhaul], it’s a travesty that Indian carriers find it cheaper to fly empty aircrafts abroad than to get the repairs done in India. Airport charges too have gone up since they have all undergone massive capital expenditure and need to service their debt. Third party ground handling invites over 30 per cent royalty charges not to mention the impact of the rupee depreciation. Thus every element of the cost structure has increased in the recent past.

“But all that is changing,” Mr Dubey adds. “Indian aviation is now spreading to smaller cities. And the middle class is now getting into flying, thanks to discounted offers, higher purchasing power and sheer aspiration. More and more state governments are now looking at aviation as a way to invite investment, tourism and jobs and are reducing the excessive tax on ATF.”

For their part, the companies behind the new airlines are confident they can turn a profit. 

“I can only say that we will be profitable,” Mittu Chandilya, AirAsia India’s chief executive, was quoted as saying by The Hindu Business Line, a business newspaper.

“Otherwise, we will not be in this business. It is not a charity business. It is about empowering aviation and giving people an opportunity to fly.”