Venkatachari Jagannathan | 10 Jul, 2023
Explaining the continuing financial choppiness afflicting the Indian
carriers, an expert industry watcher blames it on multiple structural
factors -- absence of a strong capital structure and low-cost
infrastructure, the heavy taxation burden on aviation turbine fuel
(ATF), and the fact that 60-70 per cent of costs are dollar denominated.
In
an interview with IANS, Jagannarayan Padmanabhan, Senior Director,
Consulting, CRISIL Market Intelligence and Analytics, said the duopoly
in the market, which is dominated today by Air India and IndiGo, coupled
with the release of the pent-up demand for travel, has led to "Indian
airlines enjoying healthy yields rarely seen over the past decade,
allowing them to streamline their balance sheets, which were severely
impacted by the pandemic".
Excerpts from the interview:
Q. What is the current status of Indian-owned airlines?
A.
The Indian aviation sector was chugging along healthily, rising to
become the third largest in the world when measured by domestic
passengers carried, when it was hit first by the grounding of Jet
Airways and then by the pandemic lockdown, leading to airlines ceasing
operations. Yet, India was one of the few nations where no airline
exited on account of the pandemic.
The privatization of Air India
was a watershed moment for Indian aviation and it has led to a strong
competitor emerging to challenge IndiGo as the TATA group has also
completed the takeover of AirAsiaIndia. The two airline groups account
for 85 per cent of the Indian domestic market, leading to a duopoly in
the market..
The recovery from the pandemic and the untapped
potential of Indian aviation, considering that India still has one of
the lowest number of air trips per capita (0.14, compared with three to
four for developed nations) has led to consecutive world record orders
by Indian airlines -- Air India, 470 aircraft, followed by IndiGo with
500.
Smaller players are struggling due to legacy issues as well
as technical issues with an OEM (original equipment manufacturer), but
for the two dominant airlines, there is a significant runway for growth
in the medium to long term.
Q. New airlines taking off and crash landing has been a regular feature in India. Why do you think this happens?
A.
There are structural factors at play for a number of startup airlines
fading away quickly. Most of the new airlines lack a strong capital
structure -- and airlines are capital guzzlers especially in the infant
stage.
Further, the airlines lack differentiated
products/offerings and try to ape the incumbents by flying on similar
routes. Look at the airlines that have done well.
IndiGo started
with the idea of a no-frills airline with strict focus on on-time
performance and delivered on the same. Vistara was launched with the
idea of getting the best of service and hospitality to the Indian
market, and both have survived the brutal wars.
Both low cost
carriers (LCCs) and full-service carriers (FSCs), moreover, continue to
operate at the same airports and this leads to high airport and other
charges.
Indian regulations, moreover, did not allow for
International operations for five years; now, the requirement has been
reduced to the acquisition of 20 aircraft, allowing well-capitalised
carriers to get aggressive with their fleet plans and begin
higher-yielding International operations (Akasa is on the verge of
receiving its 20th aircraft, which will enable it to commence its
international operations within a year of its launch).
Q. What are the major expense heads for an airline? What is the kind of flexibility available to them to reduce the costs?
A.
As per data from FY20, the last non-Covid year where financial numbers
for all airlines are available, variable costs account for 70 per cent
(fuel 41 per cent, landing fee 10 per cent, others 18 per cent), and
fixed and semi-fixed for 30 per cent (rentals 3 per cent, employee 13
per cent, and repair and maintenance 15 per cent).
As for
flexibility in managing the costs, fuel expenses can be reduced only to a
certain extent by deploying fuel-efficient aircraft as price is the
major driver of fuel expenses.
Employee costs are on the upswing
on account of the massive cuts during the pandemic and rising attrition
as global players are offering better packages.
The repair and maintenance costs are coming down as more MROs are being set up in India leading to a rationalisation of costs.
Q. What are the revenue streams for an airline and what trends do you see?
A.
Indian airlines focused on passenger revenue with cargo revenue being
an afterthought. Only SpiceJet realised the importance of cargo revenues
and created SPiceXpress. During the pandemic, airlines finally
recognised the importance of cargo revenues, leading them to refocus on
cargo operations.
Q. Is pricing an issue with airlines? If yes, in which sector -- domestic or overseas?
A.
The Indian market was notoriously tough for pricing because of intense
competition, with players jostling to capture market share and
financially weak airlines resorting to discounting to shore up cash.
The
closure of a couple of airlines, coupled with the brutal impact on
airline balance sheets and the rise of a duopolistic market, has led to
improved pricing power for Indian airlines in the domestic market.
Q. Can a low-cost airline succeed in India? If yes, how?
A.
IndiGo is the best example of an LCC not just succeeding, but
flourishing. It has placed the world's largest order for 500 aircraft
and crossed the Rs 1 lakh crore market cap. Some lessons to be learnt
from its success story are: Being nimble in the face of opportunities
(demise of Kingfisher); a strong balance sheet that allowed it to tide
over the pandemic; planning ahead; intense focus on costs and on-time
arrivals; and operating a young fleet.
Q. What patterns do you see in load factor?
A.
Pre-pandemic, Indian airlines were operating at 85-86 per cent load
factors in the domestic space and this declined to 40-50 per cent in the
first phase of resumption of operations post pandemic. With passenger
traffic having recovered now to pre-Covid levels, PLFs are hovering
around 84-87 per cent in the domestic market.
(Venkatachari Jagannathan can be reached at v.jagannathan@ians.in)