Is Future of Aviation Sector in Dark?

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The leading names in the global aviation industry are optimistic that India will do well in future in spite of the continued losses being suffered by 5 of the leading Indian carriers. It is expected that together these organizations will experience an unprecedented loss of 2.5 billion dollars or INR 12,500 crores in 2012-13.

The Executive Vice President of the Sales and Marketing Division of Airbus, Kiran Rao, has told the media that at present profitability is a major area of concern for the entire industry.

Airbus, one of the top names in the aviation industry of Europe, is also a major operator in the Indian market for commercial aircraft and holds approximately 70 percent of the aggregate market share.

Rao states that the major problem in India is that profits have not been in tune with the increasing expenses for fuel, airport charges, and raw material. According to Rao, strategy or management issues are not the major areas of worry – in fact the business models of the Indian airlines are pretty sound as per Rao.

The Chief Commercial Officer of Virgin Atlantic, Julie Southern, has stated that there is no reason as to why the Indian carriers cannot do well when airlines around the world are making profits. However, Southern has asked the Indian airlines to carefully review their business models, a major pre-requisite for achieving success.

She has stated that the aviation market in India is a fairly big one and people are always willing to travel. The fact that the financial capability of the Indian middle class is increasing, means that the aviation market in the South Asian nation can expect a greater customer base in the future.

Rao, has however, stated that the government policies have to be changed. The administration, according to the Airbus VP, has to alter its outlook about the industry and not regard it as a luxury for a selected group of people – they need to regard it as an integral part of India’s economic growth.

Rao states that if India does not have a proper aviation network in place it might not have the desired rate of economic growth. A leading official of Emirates, the international carrier based in Dubai, has stated that the Indian aviation sector will be able to tide over the present crisis and bring the whole situation under control.

The Vice President of Emirates for India and Nepal, Orhan Abbas, has stated that the future of the Indian airlines looks good even from a short term perspective. Abbas feels that India has previously withstood critical economic conditions and come out stronger and this time the outcome will be a similar one as well.

Abbas has also pointed at the way India sustained its economy after the global financial meltdown of 2008 as an example of its capabilities. He stated that in India there is no reduction in load factors in spite of a critical financial situation and it was praiseworthy in his opinion.

He has also revealed that Emirates will not be using this situation to their advantage and increasing its operations in India. He has expressed optimism that the Indian carriers will be able to perform well in the days ahead. Abbas has further revealed that the UAE based carrier will not increase its frequencies or add to the present list of destinations given the present situation being faced by Indian carriers such as Kingfisher Airlines reducing their international operations.

At present Emirates is strengthening its position in the Indian market and operates 185 flights to 10 destinations on a weekly basis. He has stated that the carrier has a reasonably good financial position in India and its load factor in its Indian flights is 80 percent.

The Indian government is looking to open up the avenue of foreign direct investments in the aviation sector – a position that can be used by Emirates to expand its market shares but Abbas has stated that the Dubai carrier is yet to take any decision on that regard. He has also revealed that the prices of tickets will always keep changing due to the soaring prices of oil across the global markets.

ICRA Ratings, a well known credit rating agency, has revealed in its recent report on the Indian aviation sector that in the medium term the levels of passenger demand will remain and grow by 12 to 15 percent if the GDP growth does not become weak.

The aviation sector of India has been facing a tough time of late with several problems such as high prices of oil and limited authority over pricing due to several carriers flying at more than their maximum capacity and some periods of less than desired growth in demand.

In the short term, several airlines will face critical problems such as liquidity crises and high debts. Majority of the Indian airlines need lot of financial assistance in order to improve their balance sheets. Development in financial condition will also help these companies to take the steps that are necessary for improving their viability and services in the long term.

In the long term, the Indian carriers will require to improve their cost structure by rationalizing at every level. This includes striking the perfect balance between routes and flights so that they can become more cost effective. They also need to improve their prices and that can be done by properly aligning their capacity to the levels of demand growth.

As per the ICRA report, the future of the Indian aviation industry looks promising thanks to factors such as a substantial potential for growth owing to the following factors:

  • Increasing financial capability of the considerable middle class population
  • Increase in levels of expendable income
  • Positive demographics
  • Rising ambitions of middle class
  • Quick economic progress
  • Lower levels of penetration

In the past decade the Indian aviation industry has experienced a CAGR of 16 percent in terms of passenger traffic. After the introduction of the low cost carriers, which led to lesser yields, the CAGR in passenger traffic has increased to 19 percent during 2006-11 from the 13% of the previous 5 years.

In spite of the commendable growth, India has one of the lowest rates of air travel penetration in the world. China with an air travel penetration of rate of 0.2 trips per person on a yearly basis is at a better position than India. The US, which is the biggest aviation market in the world, has a rate of 2 trips for every person in a year.

Till 2003 the Indian aviation sector was controlled by the full service carriers (FSC). But things changed with the introduction of Air Deccan, one of the first low cost carriers of the country. Soon similar carriers such as SpiceJet, Jet Airways, Indigo, Kingfisher Airlines, and GoAir entered the Indian market.

However, the low cost carriers (LCC) do not seem to be a viable option in the long term as both the LCCs and FSCs need to pay similar airport charges. This has been further proved by the withdrawal of Kingfisher Airlines from the segment.

In addition, the high fuel expenses are a major problem as they take up a significant amount of the overall expenses and the extent is greater than permissible as per global standards. The fact that central and state government taxes on oil are high only adds to whole problem.

The high rate of overcrowding at the airports also contributes to their expenses. It is estimated that just by being present at a top airport for 30 minutes fuel expenses can increase by 60 thousand to 115 thousand rupees.

The costs in these cases are influenced by the type of plane in question. This problem can only be solved if the infrastructure improves to the extent that the low cost carriers can function at the secondary airports.

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Last Updated on 03 April 2012