Outlook for airline industry: 2012

Year 2011, the centenary of the Indian civil aviation, was a turbulent year for the airline industry. Despite annual growth in passenger traffic at 17 per cent; due to escalation in the cost of aviation turbine fuel (ATF), depressed air fares, high taxes/airport charges and heavy interest burden; most of the airlines sank deeper into the red. There was no help forthcoming from the government for the struggling private carriers either by way of funding, respite from high tax rates or industry friendly policies. While there is optimism that the airline industry in India should see a reversal of fortunes in 2012, the time ahead could well bring fresh challenges and even more daunting.

THE INDIAN ECONOMY

The aviation industry is a catalyst for economic growth. While 2011 was indeed a bad year for the Indian economy, the long-term projections by the Planning Commission are encouraging for the airline industry. But there are difficulties in the short term. Growth rate in the current fiscal year is expected to be lower than seven per cent as against 8.5 per cent forecast earlier. The uncertainties in the Indian economy last year did impinge on the fortunes of the airline industry. Besides, the Indian economy could not remain immune to the economic turmoil in Europe and the US. However, with some of the economic indicators turning favourable, it appears that the worst is over. Overall, there may be an upturn in the economy in the next fiscal albeit with a slightly lower growth rate.

SHOCKER IN THE NEW YEAR!

Instead of cheer, the New Year delivered a shocker to the airlines by way of a disconcerting report on the audit of airlines by the Directorate General of Civil Aviation (DGCA). Altogether, the airlines have a collective debt of 1,06,000 crore and the cumulative losses exceed 30,000 crore. The audit reports indicate that the financial position of most of the airlines is in a precarious state affecting maintenance standards with serious implications for air safety. The malaise is serious enough to warrant cancellation of licence in respect of two airlines, Air India and Kingfisher Airlines where there is evidence that air safety could have been compromised. In the case of the latter, 63 per cent of the fleet is grounded.

ROLE OF THE GOVERNMENT

While the portents for the airlines appear ominous, there seems to be a silver lining in the dark clouds appearing on the horizon. Ajit Singh, Minister of Civil Aviation, has indicated that “the government would not allow any airline to close down for financial reasons”. This position reflects a radical change in the position of the government towards the airline industry. While this approach certainly augurs well especially for the private carriers wallowing in deep financial crisis, the rhetoric would have to be followed up by concrete steps led by the government as also the airlines. If the struggling carriers are to have any chance of becoming profitable, to begin with, the government would have to reduce taxes on ATF and rationalise the burden of airport levies. There are encouraging signs that the government would soon permit foreign airlines to pick up stake in Indian carriers up to a limit of 49 per cent. On their part, airlines would have to restructure business models to trim operating costs without compromising air safety. Proposal to import ATF directly for their aircraft has already been approved and this should provide some relief to the airlines.

THE LOW-COST MODEL

Closing down last year of Kingfisher Red was interpreted as an indication of the demise of the low-cost concept. Nothing could be further from truth. By the end of last year, the low-cost carriers had captured nearly 50 per cent of the market share. Penetration by the low-cost carriers in the Indian market is significantly higher than the global market. The trend will not only be sustained in the current year but its market share will only grow as it is this model that offers better chances of profitability for airlines.

REGIONAL AVIATION

The year ahead may witness a fresh impetus to regional aviation with six new regional airlines having been granted no objection certificates (NoC). These are Freedom Aviation and Air Pegasus to operate in the southern region, Deccan Charters for the western region and Indus Airways, Karina Airlines, Religare Aviation for the northern region. This should substantially improve connectivity to Tier-II and Tier-III cities fulfilling a long felt need of the economy. Policy for the promotion of regional airlines was laid down in 2007 but stringent conditions laid down therein, regional airlines failed to get off the ground. Hopefully, with the wisdom of hindsight, the rules will be revised this year to make them conducive to regional aviation. As per an assessment by the Centre for Asia Pacific Aviation, Indian carriers are expected to place orders for up to 200 new aircraft this year worth $12 billion of which around 50 would regional aircraft.

INFRASTRUCTURE

The momentum at infrastructure development related to the aviation industry is likely to be sustained through 2012. Modernisation and upgradation of the metros at Kolkata and Chennai is expected to be completed this year and work on the new airport at Navi Mumbai is also likely to commence soon. The drive by the Airports Authority of India to build heliports apart from the 35 non-metro airports and 23 additional airports in Tier-II and Tier-III cities, will continue. Overall, 2012 should see considerable improvement in the management of air traffic, better connectivity and reduced congestion. The private sector is expected to play a greater role towards infrastructure development providing bulk of the investments through joint ventures. However, growth in the infrastructure for maintenance repair and overhaul is likely to be somewhat modest.

MAKING A MARK

Today, demand is clearly outstripping supply, but in the high-cost environment where profitability is always in doubt, airlines may not be able to add capacity. Rising fuel costs, depreciating rupee and pricing below cost will make running an airline a tough proposition in the year ahead. Growth at best will be modest. The government and the industry will have to work together to draw up a strategy with a visionary roadmap, and develop profitable business models and industry-friendly regulatory framework. The government should work towards managing the environment to ensure that the aviation industry continues to be safe, profitable and competitive. It is only through concerted action jointly by the government and the industry that India can hope to make its mark on the global aviation scene.