After Kingfisher, it’s Jet. Can anything save the airline industry?

The hits just keep on coming for the Indian aviation industry. On Tuesday, Kingfisher Airlines was in the news because it planned to cancel up to 31 flights daily until 19 November because of a severe cash crunch and dwindling numbers of cabin crew and pilots.

Then on Wednesday, The Economic Times reported that Jet Airways, India’s largest carrier by passengers, was planning to cut up to 10 percent of its workforce, or about 1,000 employees, because of high fuel costs and intense competition on key routes from low-cost rivals. While that plan might run into resistance (the airline ran straight into trouble the last time it tried to retrench people), the point to be noted is that it’s far from alone in its operational woes.

And of course, there’s little need to iterate the perennial problems of state-run Air India.

Reuters

The dire state of the airline industry is evident by the fact that barring Indigo, pretty much all the main carriers – low cost and full service – Jet Airways, SpiceJet and Kingfisher are expected to post losses for the quarter ending September.

In a recent report, HSBC Securities estimated Jet Airways’ second-quarter loss at about Rs 350 crore. The airline will announce its results on 11 November. Even Spicejet, which posted a loss in the quarter ending June, after reporting profits for nearly two years, is expected to extend its losing streak.

In fact, all three carriers are expected to post losses of about Rs 750 crore, according to a recent Economic Times report.

Ironically, the airlines’ woes come against a backdrop of strong market expansion. Global aviation body IATA said recently that India’s aviation market expansion was the strongest in the world, tripling in the past five years. It also predicted the Indian civil aviation market to register a compound annual growth rate of more than 16 percent between 2010 and 2013.

It doesn’t require rocket science to understand why airlines aren’t greatly benefiting from the expansion.

One, airlines pay high fuel costs and airport charges. Jet fuel accounts up to nearly 40 percent of an airline’s operating costs. The price of jet fuel has climbed by nearly 45 percent from a year ago. Adding to the problem is the fact that states have slapped their own taxes on jet fuel. The average tax on jet fuel in India is 24 percent, second only to Bangladesh, which charges 27 percent. Throw in a sharp rupee depreciation (which increases the cost of crude oil imports) and it’s easy to see why the cost of operations is relatively high for airlines in India.

Two, airlines like Jet and Kingfisher have been using flawed business models for their full-service carriers. While Jet has now said it will focus on low-priced offerings, Kingfisher has scrapped its low-cost Kingfisher Red operations.

Three, in a bid to capture market share, airlines are pricing tickets aggressively. As a SpiceJet official recently noted, some carriers continued to price their tickets below cost and offering 15-50 percent discounts on tickets as they try to undercut the competition. Irrational pricing adds to the burden of turning a profit.

Four, some airlines like Air India, Jet and Kingfisher are heavily burdened with debt, which they mostly took on to purchase aircraft. Air India’s debt is a crippling Rs 42,570 crore, while Jet’s is about Rs 13,400 crore, according to a recent Firstpost article. Kingfisher’s debt totalled Rs 6,000 crore.

Five, maintenance costs for airlines are quite high. The country has very limited maintenance and aircraft repair operation centres and the few centres we have are expensive, again because of high taxes. Maintenance costs account for about 13 percent of total operating costs for an airline.

Given these challenges, it’s not surprising that foreign investors have been busy dumping stocks in the aviation sector in the past quarter. According to Business Standard, foreign investor stake in Jet Airways has dropped from 5.7 percent in the quarter ending June to 4.6 percent in the quarter ending September.

Foreign investment in Kingfisher Airline, already low at 3.02 percent dropped further to 2.1 percent during the same period, while in SpiceJet, foreign investment declined from 10.16 percent to 6.17 percent at the end of September.

The state they are in now, India’s airlines are unlikely to attract foreign investment even if the sector is thrown open. For now, the sector seems destined to fester in its own crisis.

Firstpost