New players to make aviation pickings even smaller
For the fact that Indian airlines are expected to have lost a collective R8,000 crore last year and owe lenders some R80,000 crore, there is a great deal of international interest in the country’s aviation sector. Much of this comes from the anticipation that a market where penetration—at just 0.04 trips per capita per annum—is way behind even China’s is bound to grow exponentially. The trend so far has been modest with the passenger throughput having grown at just 13% annually between 2003 and 2013, but strong economic growth and rising disposable incomes are expected to catapult India to among the top three aviation markets globally by 2020, from the 9th spot that it now occupies. Which is probably why both Air Asia India, launched in June, and Tata–SIA which hopes to kick off operations in October are convinced there is money to be made. The two will operate at opposite ends of the price chain, each of which has had its share of casualties; while Kingfisher Airlines went bankrupt last year, Jet Airways announced on Monday it was exiting the low-cost segment. In a competitive environment, the survivors aren’t doing too well either—full-service player Jet Airways and no-frills carrier SpiceJet have been both losing money and market share.
While there is no doubt a slowing economy has hurt demand in the last three years—compelling carriers to discount fares heavily—the problems in India’s aviation industry also have to do with a fair amount of oversupply. Strangely, however, there hasn’t been any meaningful consolidation with private promoters rustling up equity contributions or roping in foreign partners and the government reluctant to wind up Air India. With supply only expected to go up in the next few years—HSBC estimates the growth in the supply of narrow body seats will rise from 8% in FY14 by about 11-15% between FY15-FY17—and the entry of two deep-pocketed players, the market is likely to become a lot more fragmented. In the meanwhile, given the high taxes, India will probably remain among the costliest fuelling stations in the world, so keeping costs in check will not be easy. Which is why flying the Indian skies alone cannot be a profitable proposition. The government has done the right thing by opening up the sector to foreign direct investment, it should now ease the 5/20 rule so that all airlines can access the overseas markets. And it should take Air India off the ventilator. Else, irrational pricing will result in couple of more carriers grounded.