Challenges faced by the aviation industry

Article by Ankita Agarwal on September 24, 2012 Discuss now (0) Go to comments Aviation is an important parameter of a nations economic health. This is a vital industry which contributes significantly to the Gross Domestic Product (GDP) and provides employment to the masses raising their standard of living and connecting them with the outside world. Indian aviation industry is one the worlds fastest growing industries. The Government has taken several measures over the years to offer an environment of growth to the industry players. The efforts of Indian Government to transform the industry into a more liberal and investment friendly one, modernizing the airports along with adding new airports in the country and offering improved FDI policies have contributed significantly to the opportunities. Apart from Governments efforts, the factors like increase in disposable income of consumers, changing Indian mindset towards air travel, entry of low-cost carriers, greater inflow of tourists from all across the world and increase in air cargo movement; all these factors have resulted in better opportunities in the sector. But the aviation industry is also confronted with severe challenges posing threat to the survival of air carriers. Though many new entrants have joined the industry, a large numbers have also withdrawn themselves owing to heavy losses, and many others are still struggling hard to survive. Air India and Kingfisher Airlines are good examples of this crisis. A major reason behind quitting the industry is the heavy losses Indian carriers are reporting. Now lets find out the reasons for these losses.

Why Indian Aviation Industry is facing Huge Losses

The industry observed a growth of 1.74% in the passenger traffic carried by scheduled domestic airlines for January-July 2012 over the same period in 2011 but still facing heavy losses. There are many reasons behind these huge financial losses Indian carriers are facing: 1. High ATF Prices: Aviation Turbine Fuel (ATF) is the major cost component in airlines operations. The cost of fuel for Indian operators accounts for nearly 45% of the total operating costs which is around 34% for most operators in other parts of the world. One of the major reasons is the high sales tax levied on ATF by respective state governments. In different states of the country, the sales tax on ATF ranges as high as 25-30%. Moreover, direct import of ATF was not allowed until recently. 2. High Airport Charges: The airport charges are very high in India as compared to other countries. The Airports Economic Regulatory Authority (AERA) recently approved a massive 346% rise in Delhis Indira Gandhi International Airport charges making it among the worlds most expensive airports. 3. Service Tax: There is 12.36% service tax on air tickets in India. Indian aviation industry players frequently use third party services for ticketing, aircraft maintenance, ground handling and catering etc. which come under the regime of service tax leaving Indian operators into trouble in stiff competition. This service tax on air tickets and on the

services purchased by Indian airline operators further add to the operating costs.

4. Emergence of Substitutes: Air travel in India is facing tough competition from railways. The railways were facing competition with the introduction of low cost air carriers therefore various steps were taken to improve the rail services in the country. Many new trains with improved service quality have been introduced offering passengers a good substitute comparing to air travel. Though there is an overall growth in air passenger traffic but this has affected this traffic negatively. 5. Advancement in Technology: Technological advancements in the field of telecommunication have also replaced the need for air travel to a great extent. The corporate sector is increasingly utilizing communication technology like video conferencing in order to save time and costs. Virtual communication facilities have negatively affected air passenger traffic especially the international one. 6. Stiff Competition: There is stiff competition in aviation industry which leaves the operators helpless. High operating costs along with highly price sensitive consumer profile compel Indian operators to reduce passenger fares in order to compete for market share. This tendency to lure passengers through attractive discounts and low fares has resulted in price wars in the industry. 7. Flight Delays: Flight delays are a common everyday scene but they leave huge impact on operators as well as economy. The delays result into money costs, time costs and cost of lost demand also because it discourages many air passengers. A delay in flights not only negatively affects the aviation industry but other industries as well because aviation largely connects people with their business. There is a need to make joint efforts towards the growth of aviation industry rather than indulging in unhealthy competition and price wars. The Government should also implement strong measures to reduce taxes and improve infrastructure.

References

Dhoot, V. (June 4, 2012). Aviation Ministry proposes abolition of service tax on air tickets & sales tax reduction on ATF. The Economic Times. http://dgca.nic.in/reports/rep-ind.htm PTI (June 12, 2012). IATA attacks India for rise in airport charges. Business Standard. PTI (September 9, 2012). Ask State Governments to Cut Sales Tax on ATF: Commerce Ministry advises Finance Ministry. The Economic Times. Indian Aviation Scaling New Heights. (2009). Deloitte Touche Tohmatsu India Private Limited.

Overview and Challenges Faced by Indian Airline Industry Last decade saw the Indian Airline industry grow at a breakneck speed. The industry experienced a drastic increase in number of passengers, driven by privatization of aviation industry and introduction of low cost carriers like Deccan Airlines, GoAir, SpiceJet etc. Infact, Indian Aviation Industry was one of the fastest growing Aviation Industry in the entire world. Economic growth and increasing link with global businesses resulted in a dramatic increase in passenger traffic. However, the current global economic slowdown and dramatic rise in aviation fuel prices continues to negatively impact the Aviation Industry across the world. The following report will brief the reader on overview and challenges faced by the Indian Airline industry. Overview of Indian Airline Sector Liberalization on Aviation sector followed a rapid transformation of Indian Airline Industry which has gone from being a government-owned industry to an industry which is now being dominated by the privately owned airlines, offering both full services and low cost carriers. The first low cost airline, Air Deccan was launched in the year 2003 with the key objective to increase their reach to a largely untapped middle class segment. Low cost carriers were primarily driven by the increasing per capita income, improved connectivity and affordability. Supportive Government initiatives and increasing private and public investments further boosted the industry. However, airways still forms only a small part of the overall transportation services in India, with annual passenger traffic of around 96 million in 2007, compared to 6 billion passengers carried by railways in the same year. Challenges Faced by Airline Industry After a period of drastic growth, Indian Airlines is now gripped with challenges that are also impacting the industry across the globe, including high Aviation Turbine

Fuel (ATF) prices, rising labor costs, shortage of skilled labor, excess capacity, huge debt burden and intense price competition. High Aviation Turbine Fuel (ATF) Prices ATF prices now form around 80% of the total operating costs of Airline Industry. The industry across the world continues to be plagued with high ATF prices which have demonstrated the inverse relationship between airline stock prices and fuel prices. ATF prices have almost doubled over the last year. Almost all Indian carriers are also feeling the heat and are desperately resorting to measures like cutting routes, increasing fuel surcharge, promoting the use of e-tickets and charging for food items to reduce their losses. Skyrocketing ATF prices, depreciating rupee coupled with global recession has directly impacted the Indian Airline Industry. The industry reported a $10.4 billion loss in the last year. Increasing air fares have worked against the logic of increasing profits, as it has resulted in decreased air traffic. Besides focusing on designing fuel efficient engines, aircraft manufacturers like Boeing and Airbus, along with OEMs are developing sustainable bio-fuels which will give them some relief from the vulnerability of profits due to consistently rising fuel prices. Excess Capacity Driven by the drastically increasing passenger traffic over the last 3 years, almost all Indian airlines build their capacity assuming the growth would continue over the next few years. Several new aircrafts were bought within a short span of time which resulted in excess capacity of around 15% to 20%. Aircrafts ordered during good times are being delivered during recession. According to industry experts, around 17% of the current fleet (around 4,000 aircrafts) are scheduled for delivery during the next 3 years. Even though the industry grew above 40%, almost half of the growth was primarily stimulated due to low fares. Maintaining such low levels of fares will be difficult due to excess capacity, especially during the ongoing global slowdown. Consolidation therefore seems to be the next logical step to get rid of this excess capacity problem. Hugh Debt Burden Healthy profits and increasing passenger traffic saw airlines raising significant amount of capital from Financial Institutions and Banks to fund their aggressive expansion plans. Banks also were liberal in lending airlines. The top three airlines including Air India, Kingfisher Airlines and Jet Airways are now carrying a cumulative debt burden of approximately $8 billion. Incidentally, this is almost equivalent to the losses of $8.5 billion posted by all global carriers. Restructuring

this huge amount of leverage will be a challenge as resorting to equity capital will also be equally difficult during economic slowdown. Poor Infrastructure Infrastructure continues to be a major constraint for Indian Airline Industry today, which has been aggravated further due to excess capacity created during good times. Maintenance and Air Traffic Control (ATC) infrastructure are grossly inadequate if the industry expects to grow any further. While steps are being taken on this front to upgrade major airports in Mumbai, Delhi and Hyderabad, security concerns still remain to be addressed. Attracting investments from private sector will go a long way to develop and maintain the infrastructure which is crumbing due to the built-up excess capacity. Regional Connectivity Even though the industry is weighed down with excess capacity, regional connectivity continues to be poor, primarily due to the lack of infrastructure. Industry experts suggest that increasing regional connectivity instead of concentrating in metros and redeploying current fleet to routes where there is demand will help airlines in managing their excess capacity. Conclusion Indian Airline Industry was one of the fastest growing Airline Industry across the world during the last decade. However, skyrocketing fuel prices, economic slowdown, slashed corporate travel budgets over the last 3 years has forced all Indian Airlines to rethink their business model. Excess capacity build-up and poor infrastructure continue to plague the industry which is also experiencing a decline in passenger traffic at the same time. Mergers, liquidation and consolidations seem to be necessary. Improving energy efficiency of engines, developing infrastructure, increasing regional connectivity will definitely have a positive impact on the industry.