'Aviation market needs structural changes to fly high'

The writer is the Managing Partner for the aviation advisory firm AT-TV. Credit: DH Special Arrangement

The past few weeks have seen India’s airlines encounter significant turbulence. Workforce actions, back-to-back safety incidents, an abnormal increase in input costs, payment delays and constrained credit are all coming to the forefront. Despite airports bursting at the seams with ~68 million domestic passengers and 19 million international passengers since January, the losses are mounting. And safety incidents when seen in this context are a cause for concern. The aviation regulator has stepped up scrutiny and rightly so. The overall situation is one that calls for an immediate course correction.

For industry watchers, the Indian aviation market is a paradise and a paradox. A market with immense potential but with structural issues; a market with a growing traveller base but also changing nature of demand; and a market where multiple airlines are flying in a sea of similarity – all claiming to be different. It is a market of contrasts. Where opportunities abound and so do challenges.

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Sadly, the challenges could not have come at a worse time. After the pandemic decimated demand, travellers slowly but surely started returning to the skies. By the beginning of this year, yields were holding strong and the preliminary picture looked pleasant. Forecasts called for 135 -140 million domestic passengers and another 30 million international passengers taking to the Indian skies in 2022. But the supply side challenges were unanticipated. Challenges of constrained credit, unconstrained capacity and input costs have gone awry.

Traditionally input costs have been clubbed as a troika of fuel, FX and financing. Fuel, specifically jet fuel, because it is taxed as a luxury with some of the highest taxation rates globally; FX because the rupee-dollar spread has gradually increased, and financing because the cost of capital continues to be extremely high. This time, all three have risen adversely to alarming levels and are creating a perfect storm.

The results are reflected in profitability. Unstable EBITDA, weak balance sheets and very low levels of cash are indicative of the same. By the numbers, it is clear that for the industry as a whole, under-capitalization is widespread and collective losses for the forthcoming financial year will be north of $ 1.3 billion. Financing is just not to be found and most airlines fall back on parent company backing. Where this backing is weak or non-existent, the default risks are high. Costs are being cut in any and every way possible. And this has started to reflect on and in operations.

For airlines in India, the events of the last few weeks should not be looked at lightly. Because these have ripple effects and will alter the nature of the airlines themselves. Not to mention that the sector will see new capacity addition with the launch of the startup airline Akasa, the revival of erstwhile Jet Airways, and the new Air India under the ownership of the Tata’s.

Overall, while the aviation potential for the country continues to be immense, it will not be realized without deliberate and decisive action. Structural changes are the need of the hour – via more rational taxation policy, via letting market failure take its own course and via carefully coordinated measures that free up credit for the industry.

The sky Is the limit, but getting there requires navigating through turbulence.

(The writer is the Managing Partner for the aviation advisory firm AT-TV)