The new year may bring in better tidings for Indian aviation gradually emerging from a stormy period that was manifested by an antagonistic environment of high costs, a depreciated rupee, regulatory uncertainty, declining traffic and heavy financial losses.
28th Jan 2013
Indian Aviation 2013- slow progress ahead
The new year may bring in better tidings for Indian aviation gradually emerging from a stormy period that was manifested by an antagonistic environment of high costs, a depreciated rupee, regulatory uncertainty, declining traffic and heavy financial losses. In the first 11 months of 2012, passengers carried by domestic airlines declined to 3%. Most airlines lost money with the exception of budget IndiGo.
Signs of a turnaround in 2013 are becoming apparent as airlines are making higher yields despite traffic having slowed down. The news of the government allowing foreign direct investment (FDI) that permits international carriers to purchase 49% into Indian carriers, rallied the market as reports poured in that Jet Airways and Kingfisher Airlines were in talks with Etihad Airways and SpiceJet with Qatar for an equity investment. However, Qatar recently denied it was in discussions with SpiceJet when CEO Akbar Al Baker said: “Qatar Airways categorically denies it is interested in investing in Spicejet or any other Indian airline.This is pure speculation by individuals who deliberately want to spread such unfounded rumours to raise the stock value of their entities.”
Jet Airways filing to the Bombay Stock Exchange on Jan 3 confirmed talks with Etihad: “Discussions have commenced recently pursuant to the liberalised FDI Policy which permitted foreign investment in the shares of an Indian airline. The discussions are in progress, but no terms have been firmed up at present. Various structures are being explored by the legal and commercial teams and care being taken to ensure that all the Indian regulatory requirements are fully complied with.” There is speculation that Etihad that also has a code share with Jet, might buy a 24% stake- roughly $330 million. At the time of going into print, no further announcement had been made.
The confirmation of Jet and Etihad possible future deal has brought airline Kingfisher, hoping to get a piece of the pie from Etihad, back to its knees as it struggles to get a restructuring plan in place that DGCA will be convinced of. The carrier saw a turbulent 2012 with its aircraft grounded since October 1 last year, when its pilots went on strike protesting non-payment of salaries. Kingfisher continues to owe 8 months back-dated salaries to its employees. The government suspended Kingfisher’s licence after it failed to explain disruption of services. Kingfisher's licence, meanwhile, also expired on Dec 31. It has now submitted another plan to restart operations by the end of February with seven planes to be increased to 20. There is, unfortunately a lot of cynicism on this as the carrier with an over $2billion debt, will not be permitted to fly unless it convinces the DGCA its finances are in order and vendors paid, said a senior DGCA official to AAA. “Safety is also linked to the financial health of a carrier and that is of concern to us,” said the official.
There is need for caution yet. Kingfisher Airlines pullout of from the market has resulted in a supply and demand situation with lesser capacity in the market, and the high fares as a consequence, are hurting passenger numbers. In Dec 2012, for instance, domestic passengers were down by almost 8% compared to the previous month. Data released in November last year by the Director General of Civil Aviation) revealed capacity- including number of fights and seats in November were down by 6% and demand had reduced by over 7%.
There are turns and twists. An improved alignment between capacity and demand has seen yields strengthen and several airlines are now making profits, at least in the peak quarters, says a recent Centre for Asia Pacific Aviation (CAPA) report. CAPA adds the decision to allow 49% foreign airline investment, the sector may see more than one such transaction in the coming year. “This will have a significant positive impact, in terms of capital and sentiment, in raising the professionalism of the sector and bringing India's market in line with 21st century global aviation. New aircraft orders will be placed in 2013/14 as the market starts to look ahead to the next phase of growth.”
Cost pressures and a weak policy environment will continue to be a challenge in 2013, analysts forecast. Al Baker’s comment is telling. “India is a huge market and a potentially lucrative one. While we have expressed interest in expanding our presence in India, we will only be interested in any potential investment once we are sure regulations and laws are properly liberalized,” is a huge indicator why foreign airlines are slow to jump into the FDI wagon.
A recent directive by the aviation minister Ajit Singh to be the final approving authority for any import of aircraft to India over-ruling an empowered aircraft acquisition committee (AAC) headed by senior government officials that cleared requests from airlines, charter companies and private individuals to buy aircraft, is rattling airlines whose business plans for fleet size and deliveries have been planned and are currently under implementation. This, airlines say, will only delay the process further, given the minister’s busy schedule. However, Singh said the low cost carriers which started in India were also meant to promote regional connectivity to smaller towns which they have been unable to do as narrowbodies are not the ideal fit for towns with smaller runways. “His aim to be the final approver is to ensure regional connectivity is not lost sight of while clearing airlines' request to bring in planes," an aviation official said. Airlines are not amused. “Can we change our business plan at the whims and fancies of a minister?,” an airline official said on anonymity.
The immediate victim of this decision is IndiGo, that alongwith Indonesia's Lion Air, had the second highest capacity growth among all budget carriers’ in 2012 after Spanish airline Vueling and has been rapidly expanding adding new routes, having added 70 flights on domestic and international routes by market share according to CAPA. It received a rude shock according to Mint, when it was allowed to import only five of the 16 aircraft it had sought to in 2013, in a move that some analysts see as a setback to its expansion. IndiGo, has 61 aircraft presently and had plans to end 2013 with an addition of ten more, taking its fleet size to 71. It has on order, 209 aircraft with Airbus spread out till 2025, an average of 17 aircraft a year—given that the ministry approves. Mohan Ranganthan, member of the government-appointed Civil Aviation Safety Advisory Council, was quoted saying in Mint that the ministry’s move would, apart from handicapping IndiGo, also send out the wrong signal to investors. “The government recently amended its rules and allowed foreign airlines to invest in Indian carriers, but moves such as these indicate that policy changes with every minister,” he added.
With the health of Indian aviation hedged to a great deal on FDI, International Air Transport Association (IATA) Director General and CEO of the IATA Tony Tyler has reiterated at various forums that India will need to reduce the high costs of operations before it trudges further. “No, I don't think it (allowing foreign airlines to invest in Indian carriers) is a game changer, but it is a good thing. But it will not solve the problems of Indian aviation. It certainly is a step in the right direction, but it is not the panacea that some believe it is,” Tyler said to Indian news wire PTI recently.
“As long as high taxes prevail, high airport costs and congestion, and poorly developed air navigation (services) means more congestion, high cost of operations exist, you are not going to get a lot of people to invest in airlines,” Tyler added. Candid that merely investing fresh capital would not solve the problems of the industry, which “has to be used in a way to improve the business in some way. It can be used to grow the business. If the business is loss-making then some of it needs to be used to restructure.” High airport costs were impacting domestic air traffic. “The Indian airport costs, let us not kid ourselves, remain a big problem. .... Domestic traffic has been in decline recently. High airport costs have to have something to do with it,” he said.
Declining air traffic is a concern too. “If you put the cost of operating for the airlines it is going to reduce the amount of operations they are going to do. They are not going to be able to put fares in the market that will keep people flying,” Tyler said.
Second MRO in Sri Lanka
As the construction of Sri Lanka’s second international airport in Hambantota in the South nears completion by summer, the airport will have a facility for Maintenance, Repair and Overhaul (MRO) to address the needs of neighbouring markets including India. Sri Lanka’s Information minister Keheliya Rambukwelle said recently cabinet approval had been given to obtain foreign financial assistance for the project by the China Exim Bank that has granted an $80 million loan for the facility. The MRO will be constructed by the China Harbour Corporation, also the contractor for the airport. In 2009, SriLankan Airlines MRO at Colombo has been carrying out C checks on budget carrier Indigo’s aircraft. IndiGo then had only 24 aircraft. It now has 62.
Air India restructures
Ailing national carrier Air India received a boost last year when the government approved a turnaround plan for restructuring of finances of the cash-strapped carrier, including infusion of additional equity. By early Jan. six of the 27 Boeing 787s ordered in 2005, were delivered, which analysts say, have helped in route restructuring and in operational efficiencies. By slowly replacing its older aircraft with the fuel-efficient 787s, it hopes to make a turnaround after five consecutive years of losses. Following an order for 111 aircraft, the carrier’s fleet age has reduced. Presently, of the 112 aircraft in its inventory, 87 are new with an average age of 2.5 years.
“If Air India has an outside chance at achieving a successful turnaround, the time is now…..With no significant capacity induction expected in the overall domestic market, the carrier should be in a position to maintain its improved yields and load factors. Meanwhile, the financial restructuring plan should result in a significant reduction in overall interest costs thereby reducing losses at the net level, says Sydney-based Centre for Asia Pacific Aviation (CAPA) report. CAPA India, has however voiced concern that Air India may not have the capacity to fully leverage the demand in the market, as it has only around 45 aircraft dedicated purely to domestic operations that are inadequate for a sustainable turnaround.
As part of its turnaround plan, Air India has decided to spin off its engineering subsidiary into a separate business, Air India Engineering Services Ltd, which is likely to become operational soon. The ministry of civil aviation is looking at divesting a part of the subsidiary after hiring a foreign executive to head it. However, the divestment plan is presently facing resistance from Air India’s workers unions.
Civil Aviation minister Ajit Singh recently asked the carrier to reduce its monthly revenue shortfall by implementing cost-cutting measures on expenses related to salaries, overseas offices and fuel. “Air India should think out of the box to change its image of being a public sector unit and transform it to a commercial organization,” Singh said.
"We will have to see it for a quarter or a year to see how much the turnaround plan paid off. But definitely, the capacity gap left by Kingfisher benefited Air India," said Amrit Pandurangi, senior director of Deloitte.
As regional hopefuls await the introduction of a new Regional Aviation policy, a report which is currently under preparation by Deloitte India, plans and projects continue to be announced in an ad hoc manner. In October, the Minister had declared that approval had been granted for 15 greenfield airports including a new metro airport in Navi Mumbai and regional airports in Mopa (Goa) and Kannur where work was expected to commence within this financial year (March 2013). There are no signs of them moving as yet. Regional airports in India require careful consideration of various developmental aspects with long-term implications. land is increasingly becoming a factor stalling airports. There are 457 functional and non-functional airports. Of these, 91 are managed by the Airports Authority of India (AAI), and 125 by the military.