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Tailwinds, turbulence in indian aviation industry
The closure of Jet Airways last week came as a rude shock to the country’s aviation industry. But, the episode appears to be the latest in a business which has witnessed several behemoths bite the dust. DT Next takes a deep dive into the pain points plaguing the sector.
Uncovering the Jet fiasco would require one to retrace the flight path of the country’s illustrious but ill-fated, oldest private carrier. MR Sivaraman, Former Director-General of Civil Aviation (DGCA), who cleared the licence for Jet Airways to commence its operations in the year 1993, asks, “The airlines got off to a flying start despite initial suspicions surrounding the source of funding. After it obtained the licencing authority clearance, Jet Airways took wings and onboarded 130 aircraft on lease.”
However, aviation being a business that involves huge cash inflows on a daily basis, brings several queries to the fore. Says Sivaraman, “At its peak, Jet operated 1,300 flights daily every day at almost 80 per cent capacity (sometimes even 100 per cent) and crores of rupees was earned in revenues. Even after the lease payments were made, there still would have been a significant surplus. Where has all the money gone and why aren’t banks releasing the forensic audit report concerning Jet Airways?”
The former DGCA who previously held positions of Revenue Secretary, and Executive Director of the International Monetary Fund, feels many norms were flouted several airlines. He says, “Big guns in aviation have folded up after episodes involving non-payment of fuel charges, navigation and parking charges on time.” Sivaraman recalls an episode from 1993-94 that led to him being served a Rs 3 crore lawsuit. He was charged with grounding an aircraft in his capacity as the Revenue Secretary. He tells us, “I had asked the then Customs Commissioner to seize a commercial aircraft and offload the passengers. The case was taken up in Parliament and when the Finance Secretary asked me, I took personal responsibility and presented a case for losses to the government to the tune of Rs 28 crore, arising from non-payment of dues.”
Idealism aside, the sector by nature, is ridden with systemic challenges and regulatory bottlenecks. S Machendranathan, a former bureaucrat from Tamil Nadu, had in his stint as Additional Secretary and Financial Advisor in the Ministry of Civil Aviation, been involved in the turnaround of Air India. He spearheaded the Airports Economic Regulatory Authority (AERA) and opines that airlines are not in favour of being regulated across the board. He says, “The advent of low-cost carriers and price wars has hit the industry hard. Routes, realisation, costs and revenue management systems are the cornerstones of the business, and no one seems to get the mix right. Unless operators opt for self-regulation, it will be an uphill task for the sector.”
While airport costs constitute 10 to 12 per cent of the flight costs, it is the Aviation Turbine Fuel or ATF that is a speed bump. It forms 45 to 55 per cent of the total cost and there is no control over the fluctuations in ATF pricing, due to global crude price, Machendranathan adds. Those in the aviation business are however, aware of the cost conundrum. By reporting an inflated growth, the operators have not gained, points out Machendranathan, who goes on to cite the case of Etihad being brought in as JV partner to bail out Jet Airways in 2013-14. “We know the problem and we are aware that airlines operate on thin margins. While there is a clamour for capping higher ticket costs, there also needs to a base charge below which one cannot price a ticket,” he says.
Take the case of Air India, where the turnaround strategy necessitated a wage cut of 20 per cent and the sale of Rs 5000 crore worth identified assets. But, no desirable realisation came through. Machendranathan says that each potential route has to undergo a detailed evaluation and the entry of low-cost carriers have dealt the death blow which lead to the collapse of well-known airlines.
Speaking to media recently, Rajan Mehra, former India head of Qatar Airways and an aviation veteran observes, “Fares offered by Indian carriers are among the lowest in the world. Even 10-15 years ago the fare was the same or even higher than today.” High operating costs and price wars have caused many an airline to shut shop. But that’s not all. Deloitte India Partner Peeyush Naidu is reported to have said that the management of individual companies are ultimately responsible for their airlines’ success and failures.
The way forward
So where do the solutions come from? Sivaraman suggests a high degree of caution should be exercised by institutional lenders. He says, “Jet promoter Naresh Goyal, who offered no collaterals, should have been asked to pledge his shares owing to mismanagement. The balance sheet of every single airline of the country must be scrutinised. The Centre must constitute a committee that constitutes aviation specialists (IAS officers who have aeronautical engineering or mechanical engineering background) who can provide a recovery solution, given the spate of airlines folding up. Passenger intensity must be studied. For instance, routes linking Chennai with Bhopal, Varanasi and Mangaluru, have now gone kaput. He also suggests wet leasing to other airline as an option that would enable faster recovery of money and allowing FDI in aviation.
Anushila Chaturvedi, Chairman, Airline Operators’ Committee (AOC), Kolkata, says, “The aviation business does not get the adequate support from the government. For instance, operating costs in Kolkata are so exorbitant that they have made a few foreign airlines reconsider flights from here. It is cheaper to operate out of Bengaluru as the airport authority there offers far better scope to expand business.”
Kanika Tekriwal, founder of JetSetGo, a Delhi based start-up that offers private chartered jet services in an aggregator-based model, has a few answers up her sleeve, “When you lease an aircraft in India, you end up paying withholding tax as well. We also need to work around the premium charged by lessors on aircraft leased in India. We need to find ways to repair more aircraft and components in India itself. We also need to know about the feasibility and end results of schemes like UDAAN. The government needs to revisit the aviation policy and bring in more reforms and the operators need to seriously consider revising the prices.”
TECHNICAL SNAGS, FINANCIAL WOES HIT HARD IN FY2019
Of the pending order book of over 850 aircraft for domestic airlines, over 64 % comprises A320 neo family with P&W engine (78 aircraft for Indigo and 114 aircraft for Go Air) and B737 Max (220 aircraft for Jet Airways and 129 aircraft for SpiceJet)
Globally, currently all 376 B737 Max aircraft in operations have been grounded, and Boeinghas a pending orderbook of 4,636 B737 Max aircraft
For Airbus, currently there are 798 A320 neo family aircraft in operation, with a pending order book of 5,773 aircraft
It is estimated over 66% of the aircraft in operation have the P&W engine, and over 57% of the aircraft on order have the P&W engine
Grounding of these aircraft will thus impact an extra 15% of the industry capacity
Capacity impact on domestic industry
98 of the total 670 plus aircraft in the industry grounded
119aircraft – The Total fleet of Jet Airways at its peak. The airline was forced to cease international flights on April 12, 2019 as they had an operational fleet of less than five, the DGCA requirement.
12 aircraft – Which is over 16 pc of total fleet of SpiceJet grounded as required by a regulatory directive. This was post technical issues reported with the flight control software of the Boeing 737 Max (B737 Max) aircraft
12 Pratt & Whitney (P&W) ENGINES TROUBLES
Indigo and Go Air have 33% (72 aircraft) and 61% (30 aircraft), respectively, of their fleet comprising the A320 neo family aircraft with the P&W engines
Airbus 320 neo aircraft family (includes A318, A319 neo, A320 neo and A321 neo) with the Pratt & Whitney (P&W) engines have also been facing recurring technical glitches recent issues with gear box, as against issues with oil seal and combustion chambers earlier which may result in the DGCA ordering the grounding of these aircraft as well
The situation could worsen if DGCA orders grounding of Airbus 320 neo aircraft family with Pratt & Whitney engines
Then and now: How private carriers in India came crashing down
Kingfisher Airlines Ltd: The airline group founded in 2003, through its parent company United Breweries Group, had a 50% stake in low-cost carrier Kingfisher Red. Till December 2011, the Airlines had the second largest share in India’s domestic air travel market. Meanwhile, Captain GR Gopinath started India’s first low-cost carrier Air Deccan in 2003. The airlines faced extreme financial difficulties and was subsequently bought over by Kingfisher in 2007. Kingfisher ran into continuous losses since inception, ran high debts and finally closed operations in 2012, having declared bankruptcy. Chairman Vijay Mallya later fled to London leaving his creditors in a lurch. In March 2016, the consortium of 13 Indian Banks led by State Bank of India moved the Debt Recovery Tribunal to recover its dues which included Rs 9,000 crores owed by promoter Mallya.
Air Deccan: Captain GR Gopinath started India’s first low-cost carrier Air Deccan in 2003. The airlines faced extreme financial difficulties and was subsequently bought over by Kingfisher in 2007. In 2017, it was reported that Gopinath was working to revive the brand Air Deccan brand and had participated in the Centre’s UDAAN scheme via his existing charter company called Deccan Charters. He won the rights of several routes connecting regional destinations. The new brand started its operations on 23 December 2017.
Air Costa: Headquartered in Vijayawada and based out of Chennai Airport, it was promoted by the LEPL Group. The regional airline commenced operations in October 2013 using two Embraer E-170 aircraft with the first flight taking off from Chennai on 16 October 2013. The airline got a permit for pan India operations in October 2016. The airline focused on connectivity between tier II and tier III cities in the country and invested Rs 600 crore ($83 million) as of 2015. In February 2017, Air Costa suspended operations stating financial difficulties regarding the lease of aircraft.
East-West Airlines: The first scheduled private airline in the country to take wings in 1992 in Trivandrum, after the announcement of the Open Skies policy in 1991. The industry reform led to the arrival of several private air charter operators in India. In Nov 1995, the company’s MD Thakiyudeen Wahid was shot dead near his Mumbai office. The airline owed $3.3 mn dollars to PLM Equipment - a US firm from which it had leased three Boeings. PLM Equipment appealed to the Directorate General of Civil Aviation (DGCA) to deregister the aircraft and then went to court. The Delhi high court ordered the company to pay up or return the aircraft.
Paramount Airways: Headquartered in Madurai, it started operations in October 2005. Flying regional destinations in the south and east, it operated scheduled services, targeting business travellers until it ceased operations in 2010. It was the first airline in India to launch the New Generation Embraer 170/190 Family series aircraft. The airline close down after legal issues arose between Paramount Airways and the lessors of their Embraer aircraft. This led to termination of all services as the fleet was grounded and seized by the leasing companies. In May 2016, the CBI registered a case against promoters of Paramount Airways on allegations of defrauding, diverting loan amount and cheating public sector banks to whom the airlines owed Rs 550 crore.
NEPC Airlines: Operational from 1993 to 1997, it was headquartered in Chennai, and promoted by the Chennai-based NEPC group, founded by Ravi Prakash Khemka. The NEPC (Natural Energy Processing Co Ltd) group acquired management control in Damania Airways and renamed it as Skyline NEPC in May 1995. Damania Airways, headquartered in Mumbai, was founded by the brothers, Parvez Damania (who later became instrumental in the inception of Air Sahara) and Vispi Damania. NEPC Airlines and its subsidiary, Skyline NEPC, were grounded in 1997. International Air Transport Association (IATA) suspended them for non-payment of dues following which they were taken off the computerised reservation system (CRS).
ModiLuft: The first of India’s first post-deregulation airlines was launched in May 1993 by the industrialist SK Modi, in technical partnership with Lufthansa. The two companies had parted ways after the Modi accused Lufthansa of not abiding by its funding commitment. The latter alleged ModiLuft had defaulted on lease payments for the four Lufthansa aircraft. The relationship soured in mid-1996 after Modi attempted to compel Lufthansa to take a stake of up to 40 per cent in the Indian carrier. In May 1996, Lufthansa decided to terminate its agreement with ModiLuft. ModiLuft’s Air operator’s certificate (AOC) had not lapsed and was used by the promoters of the low-cost carrier SpiceJet. As SpiceJet was beset with challenges, one of its co-promoters Bhulo Kansagra (the other being Ajay Singh) sold his stake to Wilbur Ross, a US distress investor in 2008. Ross in turn sold the stake to Sun Group’s Kalanithi Maran subsequently. Facing imminent closure, the airlines was taken over by Ajay Singh once again in 2015. He turned it profitable this time around.