The glory days of the Indian aviation industry are over.
After a breakneck speed of growth in the recent years to become the third largest civil aviation market in the world, the sector has run into headwinds that has translated into heavy losses.
Fiscal year 2019 was particularly difficult.
Even as the loss-making state-owned carrier Air India struggled to find takers in a stake sale to prevent a complete shutdown, oldest private airlines Jet airways collapsed in April failing to contain costs. Cut throat competition for greater market share leading to knockdown ticket prices was mainly responsible for their fate.
Other budget carriers in the fray saw their profits and earnings getting eroded for the same reason. Worse, while trying to fill up the vacuum created by the grounded Jet airways, they invited more trouble. As they added capacity (SpiceJet and IndiGo literally went on an aircraft-leasing overdrive) and offered cheap tickets to draw customers and up profits, they soon realized that there was overcapacity.
Efforts by airlines to reduce costs by ordering fuel-efficient aircrafts did not yield the desired results either because of inordinate delays in delivery. SpiceJet, for example, has been left in the lurch with Boeing 737 MAX, which it had ordered, being banned from flying after two suspicious crashes in Ethiopia and Indonesia that killed 346.
Meanwhile, two other budget carriers Go Air and IndiGo are also seeing their spends go up with the aviation watchdog DGCA ordering them to replace the faulty P&W engines on their fleet of Airbus 320neo aircraft.
And the biggest villain of course has been the volatile fuel prices (aviation fuel accounts for almost 30 to 50 percent of an airline’s cost) due to sporadic tensions in the Middle East. Rise in Brent crude prices by more than 30 percent this year coupled with the weakening rupee have given the companies a major headache.
Beset with so many problems, the aviation sector is likely to run into losses to the tune of $600 this fiscal year.
Given such a poor showing in 2019, chances of a swift turnaround in 2020 seems bleak.
Experts predict the financial pain to dog private carriers in 2020 as well as they look to expand their fleet and services. In a cost sensitive market like India, where even dirt-cheap ticket prices are expensive for most, airlines will be forced to keep it that way as they battle to fill up seats.
A case in point is IndiGo, which already holds half the market share. It is expected to aggressively increase that share further, notwithstanding its grounded planes and uncertainty over P&W engines. And with tepid growth in the number of passengers – analysts expect it to grow by 5 percent in 2020 owing to a slowing economy – it is expected it to sell tickets at ultra-competitive rates this year too.
To undo the self-inflicted damage, the aviation industry needs to thrash out a bold plan to hike tariffs. In December 2019, top three players in the telecom sector did just that to end a three-year-long price war that bled most companies.
To sum up, the success of the sector hinges on the rationalization of prices alongside a growth in passenger numbers.
However, with a sluggish economy where passenger count will most likely not see much of an increase, performance will likely remain dismal. Troubles in privatizing Air India, with towering debts owing to a large workforce and obligations to fly a number of loss-making routes, is also also predicted to hamper progress of the aviation industry.