There has never been a worse time to operate an airline in India.
The airline industry in the world’s second-most populous country caught some unwanted attention in October last year when InterGlobe Aviation, the parent of India’s largest airline IndiGo, reported a quarterly loss of $93 million for the three months ended September. This was the company's first quarterly loss since it went public in November 2015.
What was particularly worrying was that IndiGo had been the only profitable Indian airline at the time. So with even Indigo making a loss, all local airlines – including both full-service carriers and budget airlines – were left in the red.
India’s aviation industry was struck with another huge blow in mid-April when Jet Airways shut down its operations after running out of money and failing to secure emergency funds from lenders.
With as much as $1.2 billion of bank loans outstanding, the country’s second-largest airline by passenger numbers failed to pay its pilots, leasing companies and suppliers for months.
These troubles contradict the general perception that India’s aviation industry is a promising business purely due to the country’s huge population and the demand for flights (actual and expected) that that implies.
However, a combination of factors including high fuel costs, rupee weakness, intense competition and government intervention has served to whittle away airline profitability.
STATE INTERVENTION
Government intervention, in particular, is widely seen by analysts and aviation experts as a problem.
Despite putting an end to the state monopoly on aviation in the early 1990s, New Delhi, it is claimed, gives preferential treatment to Air India, the country’s flag carrier and the only state-owned airline –keeping it afloat despite consecutive years of losses.
Revamped through its merger with Indian Airlines in 2007, Air India has stayed in the red for 12 consecutive years. As of the end of the 2018 financial year, Air India had accumulated losses of over $7.6 billion – more than the country’s health budget for that year.
Through the years Air India has been able to continue with its operations because the government has repeatedly injected it with fresh capital using taxpayers’ money. In its latest move, New Deihi plans to write off $4.3 billion of loans as part of a giant rescue package after it failed to attract any buyers for the debt-laden airline early last year.
These bailouts have created a vicious cycle for Air India and allows it to operate in a way that is not commercially viable. With government backing, Air India has been selling tickets at below-market rates – sometimes even below its costs – and operates with more ground staff than required.
Some analysts believe the government does not want to shut down Air India because it will imply a significant reduction in air transport connectivity across the country. Air India's network covers 86 domestic and international destinations, nearly twice the number of its closest rival Jet Airways.
There are other political considerations. Closing the state-owned airline would kill as many as 22,000 jobs, potentially causing backlash from labour unions and lawmakers.
There are new investment opportunities ahead in India’s aviation sector as the likes of AirAsia India and GoAir prepare to list their shares on the domestic stock market.
However, with the skies remaining unclear for private airlines, it may be wise to wait for the government to create a level playing field between public and private airline operators before investing.
