Good times to hard times: That sums up how India’s airline industry did last year. Cut-throat competition ensured cheap tickets, but that pushed some companies in the red. Airlines aggressively leased aircraft to fill in the gap created by Jet Airways, but soon found that demand hadn’t spiked. The industry’s plans had to be redrawn when Boeing suspended producing 737 Max planes and the regulator asked Pratt & Whitney engines on certain Airbus aircraft to be replaced. The troubles taught the industry a lesson: expand but cautiously. Next on its radar: the hoped-for sale of Air India.
Surajeet Das Gupta, Business Standard
The aviation business in 2019 looked like telecom. Cut-throat competition ensured cheap deals for customers, but that pushed some companies in the red. The government’s companies in both sectors bled: Air India, which is to be privatised, and telecoms BSNL-MTNL, which are to be revived. Ajay Singh, the chairman of SpiceJet airline, once said both sectors have “monopolistic” players.
Singh didn’t take names but he was hinting at IndiGo, the privately owned airline ruling 50 per cent of India’s domestic passenger market, and Reliance Jio, which came from nowhere three years ago to grab 35 per cent revenue share in the telecom sweepstakes and catapulted to be the largest player.
Jio’s rival telecom companies made record losses in 2019--a year most airlines would like to forget, too, despite opportunities created by the closure of Jet Airways in July 2019 and soft aviation fuel prices, which constitute for over 40 per cent of their operating costs.
Airlines, especially low-cost carriers like SpiceJet and IndiGo, went on an aggressive drive to lease aircraft and grab Jet’s slots. Yet within five months, domestic seat capacity filled the void Jet had created and was soon 3.5 per cent higher than the corresponding period in 2018. Jet’s grounding didn’t create a seat shortage, preventing airlines from jacking up ticket prices.
Airlines' yields came down as they kept tariffs low to fill up seats when India’s economy was slowing down. Forecasters had expected a passenger growth of 14 per cent—with Jet in business—but they were clearly off the mark. They now predict passenger growth in FY20 could be 5 per cent or less. Private airlines could face a loss of over $600 million in FY20, according to CAPA, a research organisation for the industry.
Will 2020 turn the tide for India’s aviation industry? Telecom companies ended their three-year-long price war in November 2019 by increasing tariff from 15 per cent to 40 per cent. Taking a cue, airline executives said tariffs increased in November but it will require much more to get the industry back in the black.
“We have seen tariffs go up by 10 per cent-12 per cent in November, after falling last quarter every month. That is a good sign, but airlines have to rationalise their prices to sustainable levels. So zero- to seven-day price needs to go up by 15 percent to 20 per cent and average price by 10-15 per cent could bring viability back to the business in 2020,” said Sanjay Kumar, who worked as chief operating officer at Air Asia and as chief commercial officer at IndiGo.
Rivals accuse IndiGo, the market leader, of keeping prices low to fill up its new planes and stifle competitors. That sounds like telecom operators Airtel and Vodafone Idea accusing Reliance Jio of predatory pricing. And just like Jio, IndiGo executives have rubbished the allegation. Instead, IndiGo executives said they have had no choice to match the fares of low cost carriers (LCC).
A positive trend in 2020 will be slower capacity additions. CAPA predicts that they could even contract and Kumar projects not more than 60 additional planes will be added by all airlines together, reducing pressure on yields.
The Directorate General of Civil Aviation, India’s regulator, last November asked Indigo to replace engines supplied by US-based Pratt & Whitney on its fleet of almost 100 Airbus A320 and A321neo aircraft by January 31--a deadline analysts say may force the airline to cancel flights and reduce its capacity for at least two quarters. Indigo has already cut down its capacity growth projections from 30 per cent to 25 per cent for FY20, and it hopes to maintain the same levels the next financial year that too.
Boeing last December suspended producing 737 Max planes, making SpiceJet’s expansion program uncertain. The airline has had to ground 17 of these aircraft as it awaits word on new deliveries.
Tata Group’s joint venture AirAsia India once talked of doubling its fleet to 40, but seems to have scaled back now.
Good, bad and govt
Airlines hope that they will get relief from the government, akin to telecom companies getting a two-year moratorium to pay their pending dues for spectrum. Airlines are pushing the government to include aviation turbine fuel under the Goods and Services Tax (GST). If that happens it would reduce airlines’ operating cost by 10 per cent.
So how does the future of the different carriers look like in 2020? IndiGo, despite its grounded planes and uncertainty over Pratt & Whitney engines, will relentlessly push for capacity and market share. Irrespective of consolidation, the airline should be able to increase its market share beyond 50 per cent in 2020.
Indigo, in August 2019, quietly overtook Air India to become the largest Indian carrier in terms of international seats deployed. As much as 30 per cent of Indigo’s additional seat capacity in the first half of FY20 was for the international market. However, its foray into mid-distance routes, like to Istanbul, and new routes, like Ho Chi Minh City in Vietnam and Chengdu in China, has been a mixed bag of results. In 2020, Indigo will move from flying only narrow-bodied aircraft on international routes to inducting wide-bodied aircraft. One would see more mid haul flights from the Indigo airlines.
For SpiceJet, which overtook IndiGo in the first half of 2019 in adding seats, the strategy has been to grab the opportunity created by Jet’s closure. It leased more than 30 Boeing 737 planes that Jet Airways operated, making up for its grounded Max aircraft as it got valuable slots in saturated airports like Mumbai. Inducting Jet’s planes increased its cost of operations though, as Max planes are more fuel-efficient That factor shows in SpiceJet’s growing losses, analysts say.
SpiceJet will have to relook at its fleet portfolio in 2020, considering Boeing’s suspension of Max planes. The airline is reportedly in talks with Airbus to buy planes but it has not announced placing orders. India’s second largest airline has denied reports that it was looking at raising over Rs 750 crore by selling new shares through a QIP in order to tide over its financial pressure.
The Tata Group is accelerating expanding Vistara, a full service carrier (FCC), as its runs AirAsia India, a LCC. It will double Vistara’s fleet of over 40 planes in FY20 to accelerate its international business. Vistara will get two wide-bodied aircraft by March 2020, enabling it to enter the long-haul and mid-haul markets where it has no local competition if tottering Air India isn’t counted.
The Tata Group has held back on expanding AirAsia India, especially as the government has not permitted it to fly overseas despite having the stipulated 20 aircraft. Its cautious approach might change as it takes over more operational control of the airline from its partner, Air Asia of Malaysia. Experts say the group’s strategy for the domestic aviation market needs ironing out. “On one side sometimes the two (airlines) are competing in price with each other despite different costs--there is no attempt in synergy despite the fact they have common aircraft of A320s which could reduce costs.” says an aviation expert.
Air India’s fate
A much-awaited event in the industry would be the government again attempting to sell Air India. The national carrier was unable to leverage the closure of Jet because it had 26 aircraft grounded or no money for maintenance checks. CAPA estimates that Air India’s losses could hit $600 million in FY20, up from an earlier estimate of $150 million.
The government has agreed to transfer part of Air India’s debt to a separate company, taking the total debt down to half at Rs 28,000 crore of which a substantial portion is aircraft loans. Secondly, the government has decided fully exit the carrier and allow a new buyer to cut workforce.
But will anyone want Air India? Prospective bidders say that a decision would depend a reasonable reserve price and an investor being ring fenced through a legal framework against past dues, legal cases, and other potential areas of disruption. With deteriorating market share and financial losses, it would be a challenging task to sell Air India.
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