the story So Far: Following low-cost carrier GoFirst’s bankruptcy filing last week, aviation safety regulator Directorate General of Civil Aviation (DGCA) on Monday, May 8 directed the airline to stop selling air tickets immediately. DGCA issued a show-cause notice to GoFirst for “failure to continue operating the service in a safe, efficient and reliable manner”, before the regulator decided to cancel the airline’s permit to offer commercial flights Gave 15 days time to reply. The unprecedented distress call by the airline that re-branded itself just two years ago raises concerns about the health of the Indian aviation industry which is already reeling from the damage caused by the pandemic.
How big is the Indian aviation sector?
The country’s domestic air traffic has been recovering in the past few months after being hit hard by the coronavirus pandemic. In March, domestic carriers flew 13 million passengers, which was 11% higher than the same month in the pre-pandemic years of 2018 and 2019, according to the DGCA. According to the Ministry of Civil Aviation, India will have over 140 million passengers in FY2024 alone. CAPA- Center for Aviation projects India will handle more than 1.3 billion passengers annually over the next 20 years. The country currently has 148 airports and is the third largest domestic market in the world in terms of seat capacity. As of March 2023, IndiGo continues to be the leader in the domestic market with 56.8% market share, followed by Vistara (8.9%) and Air India (8.8%). AirAsia had 7.6% of the market, while GoFirst was at 6.9%, followed by SpiceJet at 6.4%. The latest entrant Akasair, which started operations in August 2022, managed to acquire 3.3% stake.
Is this sector economically viable?
Despite being recognized as the ‘fastest growing aviation sector’ in the world, airlines in the country have struggled to survive in the highly competitive and inefficient aviation industry. While the travel restrictions during the pandemic severely hit the coffers of all carriers, their financial condition was in trouble earlier as well. While India’s airlines faced cumulatively huge losses (₹15,000 crore) in the financial year 2020-2021 due to the pandemic, losses are not a post-COVID phenomenon. In 2019-20, IndiGo was the only airline to post a profit, while all other players posted losses of ₹4,600 crore, led by the then state-run Air India.
Financial crises have ravaged major airlines over the past few decades – seventeen airlines, domestic and regional, have gone out of the market.
Meanwhile, the consolidation of four carriers including Air India and Vistara under one umbrella by the Tatas is making it even more difficult for smaller airlines to capture the market, CAPA pointed out in its recent report. While AirIndia in its earlier state-owned version was poor for competition, with the current consolidation, 75-80% of the market will be captured by IndiGo and Air India combined, leaving around 20% (if it revived), and the latest entrant Akasa.
What costs do airlines bear?
Aviation policy in India is broad based and is dealt with by the Ministry of Civil Aviation under the legal framework of the Aircraft Act 1934 and the Aircraft Rules 1937. DGCA is the statutory regulatory authority that comes with issues related to safety, licensing. , airworthiness, and so on. While the original Act and rules have seen frequent amendments, aviation experts argue that India has not kept pace with modern technology in aerospace and rising costs of the industry which ultimately affects passenger growth.
The Indian aviation sector initially saw a boom in the 1990s as a result of liberalization reforms and the breaking of the monopoly created by Indian Airlines and Air India, but in the early 2000s only two major airlines were licensed (Jet Jet ) Airways and Sahara) survived. Low-cost carriers entered the market around 2003 and diversification and low fares were expected to drive industry growth. However, no-frills brands faced intense competition to keep prices down, with the government imposing a high tax on Aviation Turbine Fuel (ATF).
According to estimates, while India’s airfares are 15% below the break-even point, heavy-duty ATF contributes to the carrier’s single biggest expense, amounting to anywhere between 40-50% of operating expenses. Some Indian states impose provincial taxes of up to 30% on jet fuel. It also makes short-haul routes unviable for smaller airlines, while large carriers such as IndiGo offer ultra-cheap fares on routes flown by rivals, reducing costs on less-competitive legs and scaling to lower overheads. use their reach to exploit economies, note a Bloomberg Analysis.
Indian aviation policy has created barriers to entry and growth, while not affecting players equally. From 2004 to 2016, new airlines in the country must have been in operation for at least five years and have a fleet of at least 20 aircraft to be able to fly internationally, which stabilizes the carrier’s operation and viability. does. This changed in 2016 with the National Civil Aviation Policy (NCAP), which removed the five-year domestic experience rule, but kept the 20 aircraft fleet requirement – domestic airlines must have at least 20 aircraft (or 20 percent of its entire fleet). %) mandatory size whichever is higher) for domestic operations. While new entrants in the industry such as Vistara and AirAsia India lobbied the government to remove the 5/20 rule, legacy carriers who had to meet earlier requirements to go international have criticized it as being worse for competition. opposed the change.
Most of the Indian airlines do not own the entire fleet as their financial condition does not allow them to make huge one-time payments to buy the planes but instead lease them from companies based out of India. According to PwC, about 80% of India’s total commercial fleet is on lease. However, leasing adds high cost to the operation as these leases of approximately six months are denominated in US dollars. Airlines have to pay an annual lease rent of about ₹10,000 crore to lessors, which makes up about 15% of Indian Airlines’ revenue, except for Air India, which owns a major part of its fleet. The cost of these leases further increases when the Indian rupee depreciates during short- and long-term global financial developments, for example, an oil price shock, which simultaneously increases the cost of ATF, to the carrier’s advantage. Reduces expenses. Until the government’s plan to let leasing companies set up shop in India and make it a leasing hub takes off in full swing, airlines will continue to wrangle over paying expensive lease rents and leases.
Airlines also incur costs in terms of airport charges for the use of airport facilities which include aircraft landing, freight handling and other charges related to the use of airport infrastructure such as runways and passenger terminals. Internationally, airlines pass the bulk of these charges on to passengers, however, to remain competitive in India, carriers will have to offer lower ticket fares to increase access. For state-run airports, these charges are regulated by the Airport Economic Regulatory Authority (AERA), but the recent privatization of airport operations, (handing over major airports to firms such as Adani) has led to further fee hikes. expressed concern about. There are also high costs associated with training airline crew. Besides this, the shortage of pilots also reflects the insufficient number of flying training organisations.
Why was the Gofirst fleet grounded?
Recent months have seen numerous aircraft landing at the airport, often due to mid-air disturbances and cancellations due to operational reasons. For GoFirst, which filed for bankruptcy in the National Company Law Tribunal (NCLT) last week, 28 of its 54 aircraft are grounded. This, it says, is due to “the gradual failure of Pratt & Whitney’s engines while it continues to incur 100% of its operating costs”. The airline said that 50% of its fleet had to be grounded by December 2022, causing a loss of over ₹10,000 crore to the airline. Meanwhile, US engine maker Pratt & Whitney has refuted the claim, saying the airline “has a long history of meeting its financial obligations”.
Besides this, the airline owes a total of Rs 11,463 crore to its various creditors. While lessors are now racing to get their aircraft back before the NCLT bars claims, GoFirst is not the only low-cost carrier currently struggling with a grounded fleet. In the case of SpiceJet, its aircraft in operation are now down to around 47-50 out of a total fleet of 78-80 aircraft. The lessor has already taken back 20 of its aircraft due to non-payment of dues. Furthermore, the grounding of planes has not happened purely due to financial constraints. Engine and spare parts problems have grounded 13 per cent of the profit-making and market-leading IndiGo’s fleet. Air India has also grounded part of its fleet. With supply chain troubles in recent times affecting all major players to a great extent, industry experts have called for expediting the setting up of maintenance, repair and overhaul (MRO) segment domestically. Air Deccan founder Capt GR Gopinath (retd) points out that “complex taxes, customs duties, other duties and tyrannical regulations have to be removed to facilitate bringing in parts, repairing and overhauling them, and re-exporting them or here for use in aircraft”. This, he says, is a major constraint as airlines find it easier to send their aircraft to major MROs abroad (Dubai, Singapore or Germany), some of which employ Indian technicians. Layers of costs associated with policy and infrastructural inefficiencies impact the viability of airlines that struggle to remain competitive.