A booming market doesn't necessarily mean massive profit. For a variety of reasons, Indian carriers have struggled over the years. Maybe the government needs to rethink how it regulates airlines?
India may be the world’s fastest growing major aviation market, but it is difficult for airlines to make money as excessive taxes and poor infrastructure choke the industry, according to the International Air Transport Association.
While jet fuel accounts for about 24 percent of a carrier’s average costs globally, it is 34 percent in India, making domestic airlines even more vulnerable when oil prices rise, Alexandre de Juniac, chief executive officer of IATA, said in New Delhi on Tuesday. Federal and local levies of up to 30 percent add to the burden, he said.
“India’s regulatory and tax framework around fuel hits airlines serving this market even harder,” he said at a conference in New Delhi. “India is a particularly challenging place to do business.”
As rising income spurs an air-travel boom in the $2.6 trillion economy, about 10 carriers are vying for passengers taking to the skies for the first time in their lives, offering discounts that have pushed down fares so low that they can barely recover costs. A surge in crude oil prices and a weakening rupee have weighed on their operations. Jet Airways India Ltd. was the latest to signal financial distress, last month reporting its biggest quarterly loss since 2015 and revealing plans to cut its debt pile and raise funds to meet liquidity needs.
Indian carriers are preparing to take delivery of about 1,000 aircraft over the next eight years to meet demand in a market where the number of passengers traveling to, from and within the South Asian country is set to triple to 500 million by 2037. While the scope of the market is impressive, the costly operating environment is bogging down the carriers, de Juniac said.
Losses at local airlines will balloon to as much as $1.9 billion in the year ending March 2019, and the companies need to raise more than $3 billion in capital in the near term, according to Sydney-based consultancy CAPA Centre for Aviation. Most of them have cash balances that can cover expenses for only two to three weeks, it said.
“We understand that governments need tax revenue,” de Juniac said, suggesting an overhaul of the jet-fuel taxes, transparency in fuel pricing and cutting of excise duty. “But the economy needs financially sustainable air connectivity. If you kill the goose that lays golden eggs, there are no more eggs.”
While IndiGo, a low-cost airline operated by InterGlobe Aviation Ltd. is one of the few profitable carriers, and state-owned Air India has survived on government bail-outs, others haven’t been so lucky. Kingfisher Airlines, founded by beer tycoon Vijay Mallya, buckled under debt and ended operations in 2012. SpiceJet Ltd. almost collapsed two years later before its founders returned to gain control and revive the company.
Policy makers are discussing relief measures for the airlines, said Rajiv Nayan Choubey, secretary, Ministry of Civil Aviation.
“What’s happening today is not sustainable,” Ajay Singh, chairman and co-founder of SpiceJet, said on the sidelines of the conference. “Airlines and the government will have to work together to make sure that India remains a great aviation story.”
©2018 Bloomberg L.P.
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Photo credit: An Air India aircraft. The carrier is one of many that is struggling. MercerMJ / Flickr