Indian Sky at Peril

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By SK Nag

The Indian aviation sector is fast losing its business relevance. The decline was tacitly indicated when Sahara exited the business. However, the airline was taken over by Jet at a much higher price than actual worth. This decline was further reinforced when Kingfisher’s lending partner stopped financing them anymore and Grounded the service. The owner became a fugitive, and the rest is history. The industry that was overgrowing, stretching its wings across the country’s length and breadth to connect all Tier-II & III cities gradually, started losing its focus, and an aberration is observed. 

The abrupt grounding of Jet airways like Kingfisher in 2012 had impacted the Indian aviation industry very severely. But the absence of Kingfisher Airlines was majorly compensated with the rapid scaling up of Jet Airways. Jet had the fungible capacity then. But today, this sudden disappearance of Jet Airways has brought this sector to a level of incompetence. Available players in the industry are fragile to support the current need. They all are operating at a sub-optimal level, which will be challenging to scale up. 

Rightful policy intervention is imperative now for the Govt. agencies that are managing the sky policy. Some significant and innovative policy reform is the need of the hour. Temporary filling up the gap with an existing operator like Indigo & Spice Jet may support the requirement on an adhoc basis. Nevertheless, a definite long-term plan must be in place. Now we have time to set right our sky because of ‘Work from Home’ restriction resulting from COVID . Indian GDP contracted by almost 25%, which is a temporary phenomenon. This contraction in GDP will push the economy further faster when it will start recovering. Struggle for existence in the business will demand an incredible pull the economy. Now all of us deferred our consumption owing to COVID, and trades are abysmally low. We know how long the slowing in consumption will prolong. Group dynamics of public sentiment will need a room for growth. 

Jet Airways enjoyed the lion’s share of Passenger traffic & Air Cargo portfolio. The major player in Cargo handling in India, barring Air India, was Jet Airways. They were by far one of the sector leaders. No other significant Indian Cargo operators are available to support the Cargo demand. After looking at the scary balance sheet of Air India, the business entities have understood the level of dependency on Air India. India’s economy will grow due to global demand, and to cope with this business need, India must have an efficient and entirely sufficient Air Cargo system in operation to extend the required support to the economic growth; otherwise, this will be a big show stopper in the coming days. It will not be surprising if we see more foreign players dominating our domestic aviation sectors and charging the consumers exorbitantly high. 

Jet Airways, which has dominated the sector being almost de facto National carrier for a couple of decades, and after their sudden grounding, the sector’s stability is jolted. But how this sector will be strengthened is a big question now. The airline industry predominantly has some typical elements of costs, which are Aircraft Fuel (24-28%), Aircraft leasing (10-15%), Salary & wages (8-10%), Selling & General expense (3-9%) & miscellaneous expenses (20-28%). These line items of their P&L accounts are hardly under the control of the airline. 60 to 70% of costs are not negotiable. Therefore profit-making opportunity in this business needs a lot of working capital and rotation-of-money (More Rupees per Rupee – Financial engineering technique). In the airline business, everybody makes money except the airline operators.

Every commercial institution has limitations on scalability, taking into account their fungible capacity availability. Although economies of scale sometimes do not allow airline operators to grow beyond specific financial efficiency points, the industry still needs to sweat their assets to become cost-effective. Incumbent airlines that are stressed to expand their wings to meet the immediate demand-supply gap may fall flat due to overstretching their capacity.

There are multiple reasons why this model may not work. The expenditure on ATF, which is a prime concern for all airlines operators across the globe, may go out of control for the following reasons:

  1. Aircraft late landing clearance, resulting in hovering over the destination airport, will increase fuel consumption leading to excess spending on fuel account. DGCA must look into it.
  2. Airline operators have little control over the price volatility of ATF in the international market. P&L accounts will have to absorb this shock from the Profit margin.
  3. Indian airline operators are weak in mitigating ATF price volatility through planned hedging (international operators like ‘Southwest airline’ has been successfully hedging their ATF risk up to 60%. Others may copy this strategy.
  4. Currency fluctuation is also a factor beyond the control of the operator and other industry partners. Rupee volatility, therefore, historically making them lose more in the ATF account open-ended.

Government policy interventions have interested Adani to venture into the sector more seriously. With their entry, the aviation ecosystem will get a fillip, no doubt.

So let us welcome Adani with a high hope.

(SK Nag is Chartered Engineer, Energy Expert and industry mentor. The views expressed are personal opinion of the author. He can be reached at saibal.iim@gmail.com )

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