Indian airlines have fallen on hard times, battered by soaring oil prices and a weak rupee in recent months.
They may be getting some relief with crude prices softening over the past few weeks, but there remain challenges for the sector in a fiercely competitive market, analysts say.
“These are difficult times and definitely it’s a rough patch,” says Mark Martin, the founder and chief executive of Martin Consulting, an aviation consultancy.
India’s aviation sector supports 7.5 million jobs directly and indirectly in the country and makes up 30 billion rupees (Dh1.56bn) of its gross domestic product, or 1.5 per cent of the economy, according to the International Air Transport Association.
There are seven major airlines that dominate the market, with three full-service companies including the debt-laden, state-owned Air India, and budget operators such as IndiGo and SpiceJet.
With so many airlines, there is rising competition, and as companies add more flights, it has become increasingly difficult to be profitable.
“We have this double whammy of declining yields and increasing costs,” says Binit Somaia, the South Asia director at Capa Centre for Aviation. “We’re seeing an unprecedented increase in capacity on domestic routes, increasing by about 20 per cent year-on-year. Trying to fill a 20 per cent additional capacity is likely to be difficult unless you reduce fares.”
The rise in fuel prices coupled with the depreciation of the rupee meant that the third quarter, which is traditionally a low season for India because of monsoon rains, was particularly difficult for Indian airlines.
“In the case of Indian carriers, about 60 per cent to 70 per cent of their operating expenses are denominated in foreign currency, so [a soft rupee] has an impact,” says Mr Somaia.
Although no airline is on the brink of collapse, their financial performance of late has been weak across the board. Recently reported losses were steep for the quarter ending September, as Indian airlines, along with aviation companies worldwide, grappled with the spike in oil prices this year. The situation was only exacerbated by the fact that the rupee at the same time plunged to a series of record lows against the dollar, making it Asia’s worst-performing currency.
Budget-airline SpiceJet posted its second consecutive quarterly loss between July and September. IndiGo is India’s largest airline by market share, at more than 40 per cent, and is considered the country’s strongest financially. But it reported its first quarterly loss since going public in November 2015 for the July to September quarter. IndiGo swung to loss of 6.5bn rupees during this period compared to a profit of 5.5bn rupees a year earlier, blaming fuel prices, rupee depreciation and the competitive fare environment.
“Typically in the airline industry, you would expect to see higher fares to cover the increased costs, however that has not happened here,” IndiGo’s co-founder and interim chief executive Rahul Bhatia told investors when its earnings figures were released in October.
But the airline said it was taking steps to try to manage the challenges.
“For example, we have adopted various initiatives to reduce the fuel burn on our planes by reducing weight and improving navigation and landing procedures,” said Rohit Philip, the chief financial officer at IndiGo.
As airlines remain locked in competition, IndiGo has just launched a sale of tickets, with fares priced from 899 rupees.
The airline has indicated that it is pushing ahead with its expansion plans, despite the headwinds.
“India remains a significantly underpenetrated market with all the Indian carriers combined having about 600 commercial planes flying between themselves,” said Mr Bhatia. “In comparison, some of the largest carriers in the US, Europe and China would alone have more planes than this.”
With Brent crude prices easing by 30 per cent in recent weeks to about $60 a barrel, this is something of a relief to the sector, but there is the risk that prices could bounce back to higher levels.
Jet Airways, based in Mumbai, is also struggling with losses and has delayed payments to employees.
“We are in active discussions with various investors to secure sustainable financing to navigate through the current headwinds and create long-term growth,” Vinay Dube, the chief executive of Jet Airways said in a statement released on Tuesday.
All this has led to market rumours swirling in recent weeks that major Indian conglomerate Tata, which has interests ranging from real estate to steel and owns Jaguar Land Rover, is looking at stepping in to rescue the beleaguered airline.
In a statement issued last week on mounting speculation about its interest in Jet, Tata said: “We would like to clarify that any such discussions have been preliminary and no proposal has been made.”
Such a move by Tata, which already has joint ventures in the full-service companies Vistara and AirAsia India, is considered by analysts to be something that would be positive for the sector.
Mr Dube said Jet had “reviewed our network and are deploying aircraft on more profitable, productive and economically efficient routes”, adding that “with the peak season upon us, I am optimistic about our ability to build and accelerate revenue momentum”.
Meanwhile, government-owned Air India, which is burdened with billions of dollars of debt, is now unlikely to be privatised before the general election which is due in May, industry insiders say, following a failed attempt to attract bidders earlier this year.
Analysts say the industry is rapidly moving towards a situation where there is likely to be a reduction in the number of players.
“It’s been our position since the beginning of 2018 that some form of consolidation was likely within one or two years,” says Mr Somaia. “That consolidation could either be the failure of an airline, an exit by an airline, or a merger. We believe that that scenario is still likely.”
The Indian government could do far more to support the aviation sector, according to Mr Martin.
“There really hasn’t been anything significant from the government and that’s created a lot of challenges,” he says.
In October, the government did reduce the excise duty on aviation turbine fuel to 11 per cent from 14 per cent, in an effort to bring some relief to the sector. But in September it imposed a 5 per cent basic customs duty on turbine fuel from the previous rate of zero.
The view that authorities could be doing more is echoed by Iata, which says that accelerating infrastructure development, including building more airports would give a major boost to the industry.
“While it is easy to find Indian passengers who want to fly, it’s very difficult for airlines to make money in this market,” says Alexandre de Juniac, the director general and chief executive at Iata. “India’s social and economic development needs airlines to be able to profitably accommodate growing demand. We must address infrastructure constraints that limit growth and government policies that deviate from global standards and drive up the cost of connectivity.”
But the long-term outlook is brighter, with consumer demand only set to increase in India, which is only going to fuel growth.
There is the enormous potential for the industry, in a country where only a single-digit percentage of the 1.3 billion-strong population flies, and where more people are taking to the skies amid rising incomes and the sector’s expansion.
India’s aviation market is expected to become the third largest in the world by 2025, according to Iata.
The country has had the world’s fastest growing domestic aviation market for the past three years, according to the industry body. It forecasts that air passenger numbers to, from and within India will more than triple over the next 20 years to more than 500 million passenger journeys a year.
“Air travel’s here to stay in India,” says Mr Martin.