By Ruma Dubey

Remember eating airline food while traveling from Mumbai to Delhi? Amongst frequent fliers, there used to be talk about which airlines gives the best food on which sector and sometimes, it veered towards even conversation like who gives the best cutlery!

Gone are those days as nowadays we all, almost invariably travel by low cost carriers (LCC) and travelling by full service carrier (FSC) has become a thing of the past, unless of course your company is bearing the cost!

LCC’s – Indigo, SpiceJet, GoAir, JetLite rule the roost today, commanding a domestic market share of 63%. In fact there are some FSC sectors which offer fares on its economy class which is close to fares in LCCs, making India virtually a low-fares market. Thus intense competition, add to that the cost of fuel, airport charges, surcharge and what you have is an airline sector which is literally teetering for survival.

Q2 is seasonally the weakest quarter for airline companies and historically, numbers come in very weak. The Centre for Asia Pacific Aviation, or CAPA posted a report stating that domestic carriers have posted combined losses of $470-550 million in Q2FY14.

Spicejet for Q2Fy14 posted a net loss of Rs.559 crore though revenue had shown a 6% (YoY) rise and its passenger traffic grew 9%. The falling rupee vis-à-vis the dollar led to a forex loss of Rs.42 crore, engine maintenance ate away Rs.78 core and fuel expense rose 2%. Apart from these expenses, this race to reduce costs came at a big price – its yields during the quarter fell 7%.

Jet Airways posted an 8-times surge in standalone net loss for the quarter at Rs.891 crore on a flat rise in net income. Consolidated net loss (Jet Airways + Jet Lite) was even higher at Rs.998 crore.

In both these listed airline companies, losses are a common factor, and causes are also the same – high fuel cost, lean season, falling yields, depreciating rupee and increase in airport charges. The various Govt tax is also one of the reasons why the sector is mired in red.  Airport maintenance and lease charges are also pretty steep.

Running an airline company in India is not easy, rather mostly unprofitable and that is thanks to the high fuel costs and the various state taxes which makes it all the more unviable. A break-up of the air fare shows that the base fare is Re.1 and then there are top ups like passenger service fare, airport fee, service tax and fuel surcharge. The cheapest ticket of Rs.2035 has a fuel surcharge of Rs.1175 and then the next biggest charge is the airport fee. So we are all paying the price for swanky new airports and more importantly, because the Govt is taking a high percentage when it comes to revenue sharing from these User Development Fees. Govt gets around 36% of revenue earned from UDF charges from Delhi airport and 39% from Mumbai airport and AAI’s revenues have increased 100% over the past five years, thanks to these UDFs.  

Aviation fuel is probably the highest in India when compared with Dubai and Singapore. We import the bulk of our oil and hence any rupee depreciation affects us badly. Moreover, oil is also taxed. But this quarter, Q3, things could look up for the sector. CAPA has estimated that companies will do better and this was based on the assumption that the price of Brent crude would be at an average of $110 per barrel and an exchange rate of Rs52-53 to the dollar. It has estimated GoAir to post a profit of $7.5 to 9.4 million, IndiGo’s profit to be around $47 to 57 million, Jet Airways is also expected to report a profit at $38-47 million and SpiceJet’s profit at $25-28 million.

This improvement is expected purely on the basis of cooling rupee and oil prices but structural issues remain intact. Taxes are high but given the fiscal challenges of India, tax cut this is unlikely to happen any time soon. Those in the sector say that India’s navigation service quality also needs to be upgraded. Like Delhi can handle 90 landings and takeoffs per hour but does only 50-60 and Mumbai does 30-35 on its single runway but Gatwick, due to its efficiency does more than double. Lack of proper training is blamed for this low productivity.

More importantly, we could some major structural changes happening in the sector in coming months. Almost all airlines are running LCCs only, with two-thirds of the seats allocated for LCCs. But with AirAsia also expected to make a foray soon, the existing airlines, will have to rework their market propositions – whether they want to be ultra low cost or hybrid or premium FSC. All cannot exist in the same LCC model any more. Also with Jet-Etihad deal taking off, we could see some more partnerships taking to the skies. Indigo is planning on an IPO, so in its run-up to that, we could see a lot of PR exercise which will keep the airlines in news all the time.

Yes, today more Indians than ever before are flying and ideally, all airlines should be making profits. But improper fiscal management, mindless fleet expansion, large debts have kept them perennially in the red.  The sector needs to seriously wake up, stop blaming the losses on external macro factors and look inwards before they get grounded.

FY14 ESTIMATES BY CENTRE FOR ASIA PACIFIC AVIATION (CAPA)

• FY 14 could be profitable for the four private airlines — Jet Airways, IndiGo, SpiceJet and GoAir could post combined profits of US$ 250"300 million or more. 
• Demand for international travel to be in double digits, twice of domestic air traffic.
• More bilateral entitlements expected to be granted to foreign carriers.
• Domestic traffic is expected to expand by only 4"6% in FY14, with most of the growth to occur in H2.
• Malaysian budget carrier AirAsia’s possible entry in current H2 could spur local demand to some extent.
• CAPA thinks direct import of aviation turbine fuel and opportunities to earn revenues from non-ticket or ancillary streams could present a few positives for the troubled airline sector in FY 14 – it estimates that there is the potential for carriers to generate an additional $500 million per annum through this channel to be developed over the next two years and charging for premium seats and priority check"in could generate an additional $10-12 million.