LONG RUNWAY BEFORE TAKE-OFF

Despite a significant fall in oil prices in the last one year, the Indian aviation industry has been going through a turbulent phase, including the last financial year, and domestic airlines are set to post losses of about USD 1.4 billion collectively during FY15, as per estimates by the aviation consultancy firm Centre for Asia Pacific Aviation (CAPA). However, India’s troubled airlines could finally be flying out of cloudy weather with the assumption that oil prices will remain stable at the current level. As such, domestic airlines should be able to post operating profit this financial year, according to aviation experts.

Since 2004 the Government of India has deregulated international air traffic and allowed private Indian carriers to extend their services to international routes. Leveraging this positive policy ambience, airlines such as IndiGo and SpiceJet have carved a niche for themselves by adopting a low-cost business model. Now, another few factors have pushed growth in the domestic aviation space, such as foreign direct investment (FDI) in domestic airlines, low-cost carriers (LCC), information technology (IT) interventions, and a rising need for regional connectivity.

Low Fares: Driving Domestic Air Traffic Growth

The growth in passenger traffic at Indian airports is estimated to have accelerated to 12.6 per cent to handle 190.1 million passengers in 2014-15 from the 6 per cent growth recorded in the previous year. A strong rise in domestic passenger traffic due to hefty discounts on fares by domestic carriers boosted this growth. Domestic passenger traffic accounts for 70-75 per cent of the total air passenger traffic. During 2015-16, Indian airports are expected to handle 207.2 million passengers, 8.9 per cent higher as compared to 2014-15. A total of 151.8 million domestic passengers are likely to travel from the Indian airports as compared to 139.1 million estimated for 2014-15. This translates to a rise of 9.2 per cent.

During the year, the industry also witnessed increase in competitive intensity as capacity addition outpaced growth in passenger traffic. The available seat kilometers (ASKMs) increased consecutively for the second year and expanded by 4.9 per cent in 2014-15, while revenue passenger kilometers (RPKMs) grew by 13 per cent on the back of 15.9 per cent growth in passenger traffic as per the Directorate General of Civil Aviation (DGCA).

IndiGo has seen the most remarkable turn of fortune among India’s domestic airlines in 2014-15, accounting for more than one-third of the total market. Market leader IndiGo further consolidated its hold and closed the year with 36.6 per cent market share in the January-March quarter as against 33.9 per cent in the October-December quarter followed by Jet Airways, Air India, SpiceJet, GoAir and JetLite by 20, 17.8, 9.4, 8.8 and 4.6 per cent respectively.

However, Spicejet lost its market share from around 19 per cent in H1 FY15 to 11.7 per cent in H2 FY15 due to a liquidity crisis during that period. Now its aims to regain its market share. SpiceJet Chairman Ajay Singh has so far invested around Rs 800 crore in the last five months after his return to the ailing airline as its promoter. Singh was to invest Rs 1,500 crore in the airline over a period of time.

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Regional Connectivity Through PPP Model

India’s airports handled 190.1 million passengers as on March 2015, having grown at a CAGR of 13.36 per cent per annum over the last decade. Going forward, passenger numbers are expected to triple over the next decade, which will require massive investment in airport expansion and construction. Therefore, government agencies have projected that around 500 airports in all, both brownfield and greenfield, would be required by 2020. The private sector is sought to be involved in a big way through different PPP models with substantial involvement of state support in terms of financing, concessional land allotment, tax holidays, and other incentives. Today, there are five PPP airports accounting for approximately 55 per cent of the total passenger traffic in the country.

Further accelerating the modernisation and development process, the Indian government envisages an investment of USD 12.1 billion for Indian airports under the 12th Five Year Plan, of which a contribution of about USD 9.3 billion is expected from the private sector. Government of India (GOI) is open to private participation in the process of providing regional and remote area connectivity to Tier-II and Tier-III cities, including 100 smart cities, through construction of low-cost airports airports across the country.

Keeping pace with the government policy, the Airports Authority of India has also completed the expansion and upgradation of two metro airports at Kolkata and Chennai and has undertaken the development of 35 selected non-metro airports. GoI has granted ‘in principle’ approval for setting up of 15 greenfield airports in the country at Mopa in Goa, Navi Mumbai, Shirdi and Sindhudurg in Maharashtra, Bijapur, Gulbarga, Hasan and Shimoga in Karnataka, Kannur and Aranmula in Kerala, Durgapur in West Bengal, Dabra in Madhya Pradesh, Pakyong in Sikkim, Karaikal in Pudducherry, and Kushinagar (Agra) in Uttar Pradesh.

As many as nine players including international companies have shown interest in the modernisation of the four airports at Chennai, Kolkata, Jaipur and Ahmedabad for which the AAI had invited Request for Qualification (RFQ) in January 2015. These nine players include GMR Airports, GVK, Tata Realty, Essel, Adani Ports & SEZ, Siemens Postal Parcel & Airport Logistics, International Business Development Flughafen (Zurich), Flemingo Duty Free Shop (P) Ltd. and Cochin International Airport. “Good bids will augur well for the forthcoming greenfield airports at Navi Mumbai, Mopa and Agra,” said Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG.

FDI inflow in air transport (including air freight) during April 2000 to March 2015 has been very low at about USD 569.8 million (Rs 2,764.81 crore). We believe that government intervention in the form of widening foreign direct investment (FDI) limit into Indian airlines could also help them out of the red.

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Low ATF Price: A Crucial Savings Factor

Aviation turbine fuel (ATF) in India is subject to a multiplicity of taxes and fees, the end result of which is that domestic carriers pay up to 50 per cent more for fuel than in say Dubai or Singapore. During FY15 ATF prices in India declined by 33 per cent. Fuel costs account for 45-55 per cent of the revenue of domestic airlines. A 4 per cent reduction in fuel cost may potentially add around 2 per cent to operating margins.

The central government has been actively encouraging states to reduce sales tax to 4 per cent, arguing that the economic benefits from increased connectivity and traffic will far outweigh any loss in revenue. Several smaller states have already cut the tax rate and have benefited from an increase in frequencies and fuel uplift. Consequently, tax revenue has not declined as much as might have been expected. As a result, several other states such as Punjab, Karnataka, Telangana and Uttarakhand are expected to follow. As a result, with a concerted effort it may be possible to convince them of the benefits of providing a lower cost environment that will stimulate business and tourism flows.

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However, the key to achieving a meaningful impact at an industry level is a reduction in tax at four of the largest airports – Delhi (20 per cent), Mumbai (25 per cent), Chennai (29 per cent) and Bangalore (28 per cent) – which also levy some of the highest taxes.

“The government should take this opportunity to push through with bold decisions such as classifying ATF as a ‘declared good’ that would result in a uniform sales tax of 4 per cent across the country. Combined with the fall in base prices, this could reduce airlines’ operating costs by a game-changing 30 per cent that would stimulate growth and set the industry on a more viable long term trajectory,” adds the CAPA report.

Conclusion

The sharp decline in fuel prices is a major source of relief. We believe that for the next one year ATF prices will remain lower and thus help boost the margins of the aviation companies. If they report positive figures at the operating level over the consecutive next four to six quarters then it will help to reduce their debts through positive cash flows.

New owner Ajay Singh has changed things for SpiceJet and the company has reported profit after seven consecutive loss-making quarters. So far Singh has invested around Rs 800 crore and a major chunk of the funds have gone into clearing the dues of various vendors, government taxes and lesser companies. A part of it has also been utilised in repayment of some of the bank dues. For Jet Airways, which derives more than 55 per cent of its total revenues from international operations, the profitability arising out of lesser competition has increased its market share from 1 per cent in FY04 to around 13 per cent in FY15. It has further strengthened its presence in the international arena with Etihad. 

We believe there are still clouds of concern in the aviation sector and the government has to take a lead role in clearing that. Besides, aviation players should also continue to focus on quality, cost and passenger interest to create a more enabling environment for the aviation industry. Therefore readers should wait for a couple of quarters before committing any funds to this sector.