India should not interfere with domestic airline industry, says IATA official

A top executive at IATA has said that the Indian Government should not interfere in the domestic airline industry; instead, it should allow market forces to determine the success or failure of the airlines.

“India is a highly regulated market. The Government in every market sets the rules of the game to provide sufficient infrastructure, but it should see to it that regulatory and infrastructure costs are at a low level. But it should not interfere with the market. The success and failure of the airlines is up to the market and the consumers,” IATA’s chief economist, Brian Pearce told BusinessLine .

Pearce said while airport privatisation in India has generated good quality investments, it has also generated in high-service charges and is holding back air travel.

Stability from top-30 airline group

He added that Indigo is one among 30 airlines worldwide which has been responsible for the improvement in the aggregate industry-level profitability. “Ranking airlines by economic profit shows that a group of around 30 airlines has been responsible for the improvement over the past 30 years. The top-30 airline group has generated sufficient free cash flow to pay down debt and reduce their debt-to-earnings to more or less investment-grade levels. This provides stability and financial resilience if difficult business conditions emerge.”

The IATA chief said there is a long tail of airlines breaking even and a group making significant losses. The performance of this long tail of airlines has not improved over the last decade. “This is the reason why there has been a series of airline failures over the last two years, despite relatively good financial results at the aggregate industry levels,” he said.

These airlines have seen no improvements over the past 10 years. Debt remain 5-6x earnings. This leaves much of the industry vulnerable to cash flow shocks because of fixed repayment and interest rates associated with debt.

Pearce pointed out that the last time there was a big improvement in the airline industry’s financial performance was in 2015 and 2016. Since then, both returns on capital and operating profit margins have been in decline.

Aircraft deliveries

The airline industry could again see a demand-supply mismatch in the case of aircraft deliveries. Pearce said, even if the demand growth picks up in 2020, there is a threat that supply could rise even faster, given the 2,100-plus aircraft that are scheduled to be delivered once, as expected, the B737 MAX returns to service.

“We do forecast that increased deliveries will boost available seat kilometres (ASK) growth in 2020, but this will be limited by constraints in the aerospace supply chain, some rescheduling of deliveries and retirement of existing aircraft,” Pearce said.

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