Indian Aviation Sector Ready for Takeoff, Turbulence Ahead, can lead to Hard Landing

Open Skies Policy and Liberalization drove Growth until Now

Ever since the Indian Economy was liberalized in the early 1990s, the Indian Aviation Sector has been one of the high growth segments with a multitude of operators and players trying their luck under the “Open Skies” policy pursued by successive governments.

Some of the drivers for the growth of the Indian Aviation Sector have been the liberalization of ownership patterns with foreign players allowed to hold minority stakes in the Airlines leading to much needed global capital coming into the country and the sector.

Apart from this, the capital investments by the Indian government in the existing Airports as well as throwing open the construction of new and Greenfield airports in the main Metros such as Bangalore and Hyderabad led to augmentation of capacity as well as creation of world class international airports resulting in more carriers operating to and from the country.

In addition, the cuts to the taxes such as the fuel and other operating costs have meant that carriers were more than willing to engage in heavily discounted pricing which along with the entry of LCCs or Low Cost Carriers meant that air travel which was hitherto out of reach of the middle-class Indians was now affordable.

Thanks to these developments, the Indian Aviation sector has grown at a blistering pace for the last two and half decades. The double advantage of this growth was an increase in passenger volumes along with private carriers becoming bolder in their pricing and destination flying strategies.

High Growth, Higher Revenues, and Lesser Profits

Having said that, it must also be noted that while the sector did indeed grow and the airlines clocked high operating revenue, the fact remains that most of them except for carriers such as Indigo and to a lesser extent Jet Airways did not witness a quantum jump in profits and have been “in the red” for years running continuously.

The reasons for this apparent paradox of high revenues and lesser profits are that though the aviation fuel and the landing costs, as well as the maintenance costs, have been cut considerably, they remain one of the highest in the world thanks to the legacy of India’s socialist past.

In other words, though successive governments have lowered the taxes on aviation fuel and have given concessions for landing rights and code sharing along with reciprocal seat capacity addition, there is yet a long way to go before the operating costs of Indian Airlines as a percentage of their revenues come on par with global standards.

Added to this is the fact that in the initial rush to enter India post liberalization, many carriers resorted to aggressive price cuts which over time led to the LCC model where the Airlines were indeed engaged in a “race to bottom” leading to more benefits to the passengers rather than to themselves.

Indeed, when the whole objective of the carriers has been to lower the ticket costs in a frenetic scramble for revenues, then the end result is that they have to take a hit on their profitability as they are mostly offering seats at prices that are lower than their operating costs.

Turbulence in Recent Years

While these strategies were indeed looked upon favourably by investors in the heady days of the economic boom during the last two decades, once the global economic crisis of 2008 hit, the Indian Aviation sector had to contend with the harsh reality of sinking bottom-lines and investors demanding more “bang for the buck” when contrasted with the earlier “ask no questions” approach.

This led to many carriers “shutting shop” as can be seen in the high-profile examples of Kingfisher Airlines with its flamboyant promoter “throwing good money after bad” continuously until it made no sense whatsoever after a point. Further, even Spicejet teetered on the verge of bankruptcy until it was bailed out by its erstwhile promoter.

Ready for Takeoff Again

Coming to the immediate present, the Indian Aviation sector seems to have learnt its lessons from the past wherein it no longer “cross-subsidizes” it’s LCCs wherein it has discontinued its practice of high prices for business travellers and corporates to complement and supplement its budget segment so that profits in the former can make up for losses in the latter.

Moreover, the Airlines have now realized the virtues of flying to Tier 2 and Tier 3 destinations which are the growth segments in the next few years. Indeed, given the fact that the current Business-Friendly Government too is encouraging this trend with sops and subsidies means that the Indian Aviation sector is once again looking to take off though the journey itself might be turbulent.

The reason for the cautious optimism is that with the addition of capacity and the seat sharing agreements with global carriers and especially those from the Gulf Region, the Indian carriers can indeed become truly global by not only flying directly to international destinations but also with code share agreements be the intermediary carriers that can “connect” international destinations with Indian cities.

In addition, flying to Tier 2 and Tier 3 cities and towns can boost revenues along with the anticipated revision to the 5/20 rule that hitherto restricted Indian Carriers from flying abroad unless they have been operating for five years or have a fleet of 20 aircraft.

To conclude, the skies do look bright, and perhaps with more sectors friendly policies in the upcoming budget along with adoption of the web and Smartphone-based mobile transactions by the carriers, they can indeed have a smooth landing.

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