India's beleaguered aviation sector set for clearer skies in 2010

Indian aviation report, authored by Centre for Asia Pacific Aviation predicts that providing costs, capacity and pricing can be managed, the sector is due a change in fortunes in 2010.

Return to profitability

The report, Indian Aviation: A Review of 2009 and Outlook for 2010 expects India's 7 private airlines, operating 11 separate brands to achieve combined profits of over US$ 250 million in 2010-11.

However with combined debts of US$ 10 billion, the three main airlines - Air India, Jet Airways and Kingfisher Airlines - can't take recovery for granted.

The report written by Centre for Asia Pacific Aviation (CAPA) warns, "Airlines should not allow growth to distract them from focusing on restructuring their operations and profitability".

Domestic and International growth

Following 12 consecutive months of year-on-year decline in domestic traffic, July 2009 saw a return to growth. This continued and is set to lead to growth in domestic traffic of 15% during 2010, an increase on the expected 10% increase for the year.

International traffic that remained positive in the downturn is expected to receive a boost of 10-12%. These improved figures are set to improve profitability and yield.

Focus on budget travel

The most significant industry development has been the new focus on low cost air travel. A model that did not exist six years ago is expected to account for 70% of domestic capacity within 2010.

Five years ago, the report says 80% of air travel was for business; today the figure has been halved.

This change in emphasis has made cost more of an issue. The report explains that the transition to low-cost operations, "should allow the big three carriers to develop a more competitive cost structure, which is essential for their survival".

Further infrastructure investment

Recognising that infrastructure constraints would stifle the industry, the Government have spent US$ 10 billion on airport upgrades. This investment is now having a positive influence on customer experience and aircraft turnaround times and utilization. A further US$ 20 billion is expected in the next decade.

Change in industry structure

With competition still fierce CAPA expects consolidation, describing it as both "desirable and inevitable". In addition, the report encourages Government to make further reforms, amongst them a change in rules on Foreign Direct Investment.

International carriers attracted by the long term opportunity that India presents, are keen to enter the market. Despite the predicted industry turnaround, creating joint ventures through equity sale provides the quickest way for India's airlines to reduce debt levels.

December 29, 2009 Add a comment

India aviation shifts capacity to budget flights as sector wide bailout gets knocked back

With state owned Air India publishing their recovery strategy, government financial aid looks increasingly likely. The sector at large is struggling and privately owned airlines are unable to force government's hand for a sector wide bailout, consequently the industry has been forced to switch focus to no-frills budget flights.

Air India are in debt to the tune of US$ 1.5 billion, India's government has pushed for substantial changes before committing to financial assistance. Chairman and Managing Director, Arvind Jadhav has responded with a major overhaul of the airline.

New structure and plans for IPO

Four, more manageable business units are to be created, cargo, engineering services, ground handling and airline operations. This provides potential for new revenue streams, as outsourced services can be offered to other airlines. Jadhav expects the next nine months to be about survival, medium term plans are for an IPO.

Renegotiating loans, leases and credit

The airline will ask banks to defer loans, leased aircraft will be returned and credit extensions on jet fuel payments will be discussed with state run oil providers.

Wider sector bailout - threats of strikes

The Federation of Indian Airlines (FIA) expects industry losses of around Rs 570 billion (US$ 11.9 billion). They and their privately owned members want an industry wide bailout and have tried forcing the issue without success. FIA and their members announced a 24-hour strike, grounding all domestic flights on August 18. Secretary General of the FIA, Anil Baijal commented, "We have thought about this and now we think the time has come for the government to bail out the private carriers".

Despite the strong stance the strike was cancelled. FIA claimed they didn't want to inconvenience passengers, speculation is that budget carriers IndiGo, SpiceJet and GoAir - who have a better cost structure - pulled out as they were not prepared to support costlier and consequently poorer Kingfisher and Jet Airways.

Switching to low cost

In addition, to the restructure, Air India plan to shift 150 flights a day - about half of Air India's domestic flights to their low-cost carrier, Air India Express. Jet Airways and Kingfisher are now following, switching their domestic fleet to budget flights.

India's budget airline fleet totaled 75 planes in January, Kapil Kaul of The Centre for Asia Pacific Aviation believes that number will grow to 160 by end of year, near 80% of India's domestic capacity. Ticket fares are likely to drop 25%.

Lack of demand

Refocusing on budget travel is a wise decision, low-cost air travel led the sectors growth in the first place, but only between 2% and 4% of the population fly, the rest use rail and road due to cost. India's aviation industry grew quickly, opening new routes and growing fleets, the failure to date has been the inability to stimulate demand in the larger market, consequently flights are empty and airlines unprofitable.

This may explain governments indifference. While they may prefer the industry to get its own house in order they must also recognise the importance of the sector to an emerging market. Division across the sector is no use, a common agreed strategy is required.

August 11, 2009 Add a comment