Why is the Indian aviation industry in red?

Our Bureau Mumbai | Updated on February 13, 2020 Published on December 28, 2019

80 per cent of the Indian aviation market is predominantly low-cost airline market.

The Indian aviation industry has been impacted by many issues ranging from high fuel costs to economic slowdown, lower airfares according to experts.

According to Ministry of Civil Aviation’s data, reviewed by BusinessLine, Indian airlines has recorded operating losses of Rs 6,845.78 crore during the first eight months of this financial year, its highest since FY15.

Even though there are only four months left for the fiscal to end, the total operating expenses incurred by the Indian airlines is over Rs 88,010 crore in comparison to Rs 91,232 crore the previous fiscal.

Also read: Four-year high: Airlines’ April-Nov losses at ₹6,845 crore

According to Hetal Gandhi–Director, CRISIL Research, about 35-40 per cent of the operating costs for the Indian aviation industry are driven by fuel prices. Additionally, 20-30 per cent of the operating costs are dollar-denominated. This indicates significant exposure to volatility in raw material prices. “The increase in the price of the dollar was an added cost to the airlines”,she explained.

Central Excise Duty on Aviation Turbine Fuel (ATF) has been reduced to 11 per cent on October 11, 2018, from 14 per cent.

Value Added Tax/Sales Tax levied on ATF by various State Governments has also been varied by them from time to time. Basic Customs Duty of 5 per cent is levied on import of ATF with effect from September 27, 2018.

According to the MOCA data, during the April-November period, Central government collected Rs 2,540 crore in excise duties and Rs 229 crore as customs duties. This was a 1732.8 per cent increase from FY15, when the excise duty collected for the whole year was Rs 1,063 crore and customs duty was Rs 58 crore.

Also read: Pilots, cabin crew recruitments up by over 80% as airlines expand operations

Abhilash Varkey Abraham, Research Analyst, Aerospace & Defense, Frost & Sullivan said that factors like overexpansion and crippling debts increase overall operating costs.

“The uncertainty in the sector can potentially affect airlines over the first half of 2020. Addressing these issues combined with an uptick in passenger travel and airline capacity can see the industry stabilizing in the second half of 2020,” Abraham added.

Ashish Nainan, aviation analyst with CARE ratings is concerned that after Jet Airways’ demise, all airlines added capacity. The overhead cost of additional fleet and new aircrafts meant, the losses only swelled for the incumbents. If that was not enough, the deep-discounted airfares were an added burden for the airlines.

He believes “that the lack of pricing power has been the single most vital reason behind the mounting losses of airlines in the country.”

80 per cent of the Indian aviation market is predominantly low-cost airline market. With a dominance of one single airliner holding 45 per cent market share. “For budget airlines, high passenger load factor (or PLF) along with stable passenger yield becomes is critical for breakeven or profitable operations.”

Will the sector stabilise?

According to a recent CAPA report, this a short-term dip. The financial performance expected to normalise from 3QFY2021. “Unless the issues around fleets/ aircrafts is not solved, the losses are expected to continue for the sector for atleast the next two quarters.” Nainan added.

Nainan added that while the sector may stabalise gradually, the expansion will be an issue for the majority of the sector. “Especially the international routes would come at a much slower pace than what is required,” he pointed out.

Abraham explained that in the current negative scenario for the industry, airlines will need to prioritize profitable routes over increasing market share and set sustainable pricing measures. While Nainan said that streamlining of the fleet, addressing the issue around engines and the resultant grounding of fleets will be vital. Along with this, airlines will have to work upon a strategy that would reduce cancellations, amounting to lesser the mounting costs.

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Published on December 28, 2019
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