October 24, 2020

Aviation: save the goose that lays golden eggs

Airlines face high fuel costs, low airfares and poor yields. Govt. must step in: analysts

Sources : www.thehindu.com

Date : 09-09-2018

The number of Indians flying may be growing at about 20% a year but, in contrast, most domestic carriers are bleeding. The Indian airline industry is facing turbulence. This time around, legacy issues and over capacity seem to have aggravated the situation.

Like in the past, high oil prices, currency fluctuations and lower yields have pushed airlines into a cyclical trap with at least two full-service airlines, Air India and Jet Airways, gasping for breath.

Staff salary payments have been delayed and frantic efforts are on to raise fresh capital. The three full-service airlines, including Vistara, have been posting losses. Low-cost airlines are better placed but except for IndiGo, none has the balance sheet to withstand further deterioration in environment.

“Of course, we are impacted,” said GoAir CEO Cornelis Vrieswijk. “But we have massive opportunity to bring costs down further. We are focusing on operational efficiency. We have to be efficient and low-cost to survive.” GoAir is progressively inducting fuel-efficient A320Neo aircraft to keep costs low. It is also banking on technology to remain cost- efficient.

“For airline operators, the increase in costs has been exacerbated by significant downward pressure on yields,” said Kapil Kaul, CEO, Indian subcontinent & Middle East, CAPA, an aviation consultancy and research firm.

“This is due to the rapid increase in capacity as carriers take delivery of new aircraft at an unprecedented rate. Traffic, however, continues to be stimulated by the lower fares on offer, delivering larger losses.” He said many carriers are ill-equipped to withstand the current downturn. Most airlines have cash balances equivalent to only 2-3 weeks of expenses.

CAPA estimates Indian carriers will incur a combined loss of $1.9 billion this fiscal. It also said Indian carriers would need $3 billion in capital in the near team, including $400 million by low-cost airlines, to sustain operations.

Structural challenges

External factors such as oil prices and the exchange rate have contributed to headwinds. But a number of long-term structural challenges are bogging the sector down. “Slot constraints, insufficient parking bays and congestion at key airports, and high taxes on fuel are the main challenges,” Mr. Kaul said.

Acute pilot shortages, particularly commanders, and the continuing institutional weakness at the Directorate General of Civil Aviation and the Bureau of Civil Aviation Security are adding to the woes, Mr Kaul said.

Amber Dubey, partner and head-aerospace and defence, KPMG, said volatility in oil prices and currency were here to stay. “A low phase like this is the time to take tough, transformational decisions on fleet, route network, service quality, organisational processes, culture and people. [Those] that change will emerge stronger when the upswing comes.”

He batted for the creation of a robust aircraft leasing industry in India. “This may require tweaking of taxation treaties. If Ireland and Singapore can do it, no reason why India can’t.”

He said airports expansion needs a massive push as congestion is restricting airline profitability. The use of satellite navigation, such as GAGAN, should be enhanced to reduce flight time and fuel wastage, he said.Mr. Dubey added the Centre must lower taxes. “The stupendous growth in aviation has given a lot…of taxes to the government. The Centre should now consider [ways] to avoid the untimely demise of the golden goose. Fifty months of double-digit growth came on the back of huge investments by airlines and low fares. When crude prices fell to below $40 per barrel, the Centre increased the tax rates. Now that crude oil prices are hovering around $80 per barrel… and the dollar is at an all-time high, it is a fit time for government intervention.”

“Indian domestic ATF is almost 50-60% costlier than in the U.S., the EU, West Asia and Asia-Pacific. [But] airfares in India are one of the lowest in the world on a rupee per seat-km basis. This contradiction has to end.”

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