As India continues its flight path towards being one of the three largest aviation markets globally, there is much enthusiasm in the narrative. A growing economy, an expanding middle class, and a tendency to travel make for solid sentiments.

While there have been debates about whether the market will grow at 7 or 8 per cent, a point conveniently missed is that, market growth and potential cannot be conflated with profitability. And here, most airlines out of India are found wanting. Profitability has been elusive due to falling yields and rising input costs. The most concrete proof of this is that, India’s airlines have failed to attract private capital. At its core, Indian aviation continues to have structural challenges. The growth narrative glosses over these. Still, the fact remains that India continues to be an extremely price-sensitive market and the pricing practised does not even cover the cost of capital. Given that aircraft finance and maintenance are dollar-denominated, airlines are left covering dollar expenses with rupee inflows against a constantly depreciating currency. Other input costs, including increasing airport charges, fuel and financing, only add to the challenge. The results are seen in the margins, which remain abysmally low for the industry.

Double-edged sword

In the Indian airline ecosystem, many airlines are still promoter-driven entities which is a double-edged sword. Airlines need a solid personality to see things through, and at the same time, the management team should be armed with decision-making powers. All too often, this still needs to happen. Much to the detriment of the industry, private capital, even where it is willing to take additional risk, has stayed away. Assuming the risk-return equation can be altered, the nature of the control provisions and terms of private capital, in many cases, are in conflict. Contract enforcement continues to be arduous. If that is not challenging enough, most investors are wary of Indian courts. While workarounds for this are to focus on arbitration (where India has some of the strongest arbitration laws and provisions) or contractual requirements for jurisdictions with speedier resolution processes, the fact remains that due to the multitude of stakeholders, the courts cannot be avoided. So adding, private capital has yet to show the enthusiasm that the narrative would have one believe.

Lack of enthusiasm

While airports are indeed bursting at the seams, airlines are sitting on voluminous aircraft orders, and with more and more flyers taking to the skies, the margins have compressed even further, and profitability remains elusive. Moreover, as of this writing, the government has had to extend the Emergency Credit Loan Guarantee Scheme which is being availed by some airlines. This also means private capital did not find any value even with depressed valuations and multiple entry options; neither domestic investors nor foreign investors; neither growth equity nor strategic equity.

To be sure, airlines, if managed well, can deliver exceptional returns. This has been witnessed the world over, whether it be Spirit Airlines that offered close to a 15X return to investors in 2011; Brazil with Gol airlines that delivered ~10X return; or WizzAir in Hungary that produced ~85X return to investors. In India, the success story has been Indigo, but it has been an outlier when viewed in context. In the end, even the sale of the national airline had only one credible bidder.

For now, India’s airlines have managed to fly without private capital. But with banks becoming increasingly cautious, credit flows tightening, and promoter equity found wanting at some airlines, private capital must be explored and enticed. And to attract them, structural challenges have to be addressed because private capital will also be critical to airline growth prospects and the entire aviation ecosystem’s growth prospects.

The writer is Managing Partner, AT-TV, an aviation advisory firm.

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