With KFA grounded & AI hit by labour unrest, govt allowing foreign carriers to invest in domestic airlines was a silver lining
After a miserable 2011, the Indian aviation industry continued to fly through turbulence in 2012 despite some relief on the policy front with direct import of aviation fuel being allowed and the government finally permitting foreign carriers to invest in domestic airlines. There is some optimism for 2013 with yields improving and interest from
foreign carriers to invest in India increasing.
The year began with Ajit Singh taking charge at the civil aviation ministry and, soon after, the government ceding to the industry’s demand to allow direct import of aviation turbine fuel (ATF).
On February 22, the Directorate General of Foreign Trade allowed direct import of ATF by airlines in a move that was expected to ease spiraling fuel costs for airlines. However, infrastructural issues have meant that, till date, no airline has started importing ATF. Soon after the decision was announced, experts said that without support from oil marketing companies for infrastructure to import ATF, the benefit would be limited.
?The actual benefit, if any, would be limited and much less than the current anticipation of 10% fuel cost savings,? said brokerage firm HSBC Global Research in a research note released on February 19.
?Fuel cost-saving greater than 5% is unlikely in our view as fuel price is rising and, in all likelihood, airlines would benefit only on a portion of their total fuel consumption as opposed to the general expectation of the entire fuel usage.?
The government also allowed the aviation industry to borrow up to $1 billion via external commercial borrowings in an attempt to bring down the burden of high interest cost due to their high debt burden. While Air India tried to borrow from overseas banks, the sentiment towards the Indian aviation industry was so bearish that no one wanted to lend to the sector.
February was also the month where Ajit Singh faced his first major crisis. Debt-ridden Kingfisher Airlines? daily flights dropped to 160 from an earlier curtailed flight schedule of 240 daily flights as its bank accounts were frozen. The airline also grounded most of its fleet and operated only 28 out of its 64 aircraft.
The airline’s bank accounts were frozen by tax authorities after it defaulted on paying its dues. A month-long fiasco ensued and, after several meetings with the aviation regulator and airline officials, Kingfisher finally decided to stop flying on international routes on March 20. The airline, which would eventually get grounded later in the year, got a small lease of life and its bank accounts were de-frozen.
The Kingfisher crisis also stopped it from becoming the first Indian airline to join a global aviation alliance after oneworld Alliance put its membership request on hold. Briefly, the airline was also shut out of IATA’s clearance systems, which meant travel agents weren’t selling Kingfisher Airline tickets.
While the storm was brewing at Kingfisher, airlines like Jet Airways, SpiceJet and IndiGo shunned the attitude of dropping fares for filling up seats and focussed on profitability. The results were immediate and after five straight quarters of losses, Jet Airways and SpiceJet flew into profits in the April-June quarter of fiscal 2012-13.
Apart from higher fares, the airlines also benefitted from the slow death of Kingfisher Airlines as passengers were willing to pay a little extra for the guarantee that the flights will take off.
But trouble in the skies was not far away. Amid the positivity in April, there was a storm brewing among national carrier Air India’s pilots.
Nearly 434 pilots of Air India flying on international routes, represented by the Indian Pilots Guild, went on a 58-day strike from May 8. The bone of contention was that their counterparts from erstwhile Indian Airlines were also being selected for training to fly the Boeing 787 Dreamliner, which would arrive later in the year.
The strike stretched to become one the longest in Air India’s history as the government played hardball. The 58-day strike also crippled the national carrier’s international operations and left thousands of passengers stranded. The strike caused a revenue loss of R610 crore to the national carrier and was finally brought to an end by the Delhi High Court.
Higher fares also started affecting passenger growth in the country. After experiencing a compounded annual growth rate of 18% from 2005 to 2011, the number of air passengers started falling from May onwards.
From May onwards, passenger numbers have fallen every month and between January-November 2012, the number of air passengers at 534.14 lakh fell 2.49% compared to 550.33 lakh in the same month last year.
Losses also returned after a profitable first quarter. All listed airlines posted losses in the June-September quarter. The government, in an attempt to revive the aviation industry, took the decision to allow foreign carriers to invest up to 49% in Indian carriers. The move opened up another source of fund-raising for struggling carriers like Kingfisher Airlines.
Global aviation body International Air Transport Association or IATA’s chief executive Tony Tyler welcomed the decision, but said that structural problems persist in the aviation industry in India.
?As long as high taxes prevail, high airport costs and high cost of operations exist, you are not going to get a lot of people to invest in airlines,? Tyler to news agencies.
?Unless conditions in India are improved for the airlines, you are not going to see a flood of foreign carriers coming into the industry. Foreign capital needs a return just as anywhere else.?
Gulf carriers, which were waiting for a passage into India, went into overdrive as their Indian counterparts began talks. But before they could help liquor-baron Vijay Mallya’s Kingfisher Airlines, the airline was grounded.
Pilots and engineers of the troubled carrier went on strike from October 1, grounding the airline as they did not get paid for seven months. After the death of one of the employee?s wife, pressure mounted on aviation regulator Directorate General of Civil Aviation (DGCA) to take action. On October 20, the carrier’s licence was suspended by the DGCA after Kingfisher failed to respond to a show-cause notice sent by the regulator.
Kingfisher hasn’t flown since although it has submitted a revival plan and a request to renew its licence, which expires on December 31. Heading into the new year, there is some optimism that foreign investment may flow into the domestic airlines. Gulf carrier Etihad has been reported to be in advanced stages of talks with Naresh Goyal-promoted Jet Airways.
Low-cost carrier SpiceJet, too, has explored its options of bringing in foreign investors. Another positive for airlines has been the improving yields, but that has come at the cost of demand. The government has tried to address the falling demand by asking airports to reduce airport development fee.
In 2013, airlines will hope to become profitable by reducing debt and bringing in a foreign carrier. Although, share prices have increased due to optimism among investors, as things stand, the Indian skies still remain turbulent.
