Of late, the airlines’ improved prospects have injected fresh confidence in the voices of industry executives and a new spring in their step

Most often, the darkest night is followed by a dazzling dawn. India’s airlines, especially the three major groups—Jet Airways, Kingfisher Airlines and Air India—have endured many difficult and challenging months. At times, their very survival seemed in doubt. However, air travellers during January-November 2009 numbered almost 400 lakh, marking an increase of 5.45 per cent over the same period in 2008. October-December 2009 was probably the best quarter the industry has experienced in almost two years, dispelling much of the gloom and doom. The airlines’ improved prospects have injected fresh confidence in the voices of industry executives and a new spring in their step.

Not so long ago the airlines were in dire straits. A major drop in passenger traffic—especially premium traffic—caused by the economic downturn, as well as high fares and escalating operating costs, sparked rumours of the impending collapse of one or more carriers. In desperation, private airlines warned they would stop flying if they weren’t bailed out. However, they backtracked on their threat after wangling minor concessions from the government. Also symptomatic of the uneasy situation were separate strikes at Jet Airways and Air India that paralysed the two airlines for several days in September. How did things come to such a pass?

The Story So Far

India’s commercial aviation revolution that kicked off in 2003 brought soaring passenger numbers, with growth approaching an unprecedented 40 per cent by 2007. The airlines pulled out all the stops and began feverishly placing orders for new aircraft. But the throng of travellers at the turnstiles and the ring of the cash registers hid an unpleasant truth—a capacity bubble was building. As several startups jostled to gain market share they resorted to setting fares well below cost, and yields were actually falling. A severe shortage of trained personnel occurred and the resulting sharp hike in pay packets was partly responsible for significantly increased operating costs. At the same time, already inadequate airport infrastructure just couldn’t be upgraded fast enough to cope with the increased scheduling. The situation was ripe for disaster. The spark was provided by oil prices which rocketed to a peak of $147 (Rs 6,500) per barrel in July 2008. Most carriers were then forced to raise fares, rather unfortunately timed to coincide with the onset of the global economic crisis and the slowdown in the Indian economy. Air passengers fled in dismay, leading to a drop in traffic of around 10 to 12 per cent year-on-year.

The brake on growth may have proved a blessing in disguise since it permitted infrastructure to catch up to some extent. Airports across the country are gradually being upgraded, reducing delays and allowing airlines to achieve quicker turnarounds and higher aircraft utilisation. Delhi and Mumbai airports have been privatised. Greenfield airports at Bangalore and Hyderabad are fully operational. Chennai, Kolkata and 35 non-metro airports were also taken up for revamp and work at several of these is over.

Better Times in Store?

The performance of the airline industry is quite closely linked with the state of the economy. India’s GDP growth slowed from 9 per cent in 2007-08 to 6.1 per cent in 2008-09. Steep as the fall was, it was a stellar performance when viewed in the grim global perspective. The economy is now recovering nicely, reaching GDP growth of 7.9 per cent in the last quarter of 2009 and experts are vying with each other to brighten predictions. Even the World Bank, not famous for overlyoptimistic assessments of India, projects annual growth of 8 per cent from 2011 to 2014. The portents for the airlines are accordingly promising.

The future increasingly looks to be dominated by the low cost carrier (LCC) model. Since LCCs burst on the scene in 2003 the growth of the segment has been nothing short of spectacular. Within six years, around 70 per cent of domestic capacity is low cost. Much of the capacity addition is not because of the expansion of the LCCs themselves; rather it is due to the decision of legacy carriers, like Jet Airways and Kingfisher Airlines, to rapidly reconfigure the majority of their domestic airliners to all-economy, nofrills flights. Air India intended to follow suit but now plans merely to expand the services of its low-cost arm, Air India Express, to domestic destinations.

Jet Airways and Kingfisher Airlines could soon be the largest LCCs in the country. If they succeed in implementing lower cost operations and manage to develop a more competitive cost structure, their prospects should become decidedly brighter. Full service could, in future, be restricted to a few flights between metros or may even disappear entirely. According to the Centre for Asia Pacific Aviation (CAPA), the low cost trend is driven by a decisive change in the demographic profile of the Indian domestic traveller. Whereas five years ago, approximately 80 per cent of air travel in India was for business, today that figure is less than half. Leisure travel grew more than 25 per cent in the second half of last year.

Deliver Us from Debt

Jet Airways, Kingfisher Airlines and Air India (Domestic), together with their low-cost arms, now command 67 per cent market share. Both Jet Airways and Kingfisher Airlines have undertaken stringent cost-cutting measures and rescheduled/cancelled some airliner acquisitions resulting in gradual improvement in their operating health. They have probably succeeded in breaking even during the last quarter. The big three airline groups, however, are shackled with a combined debt of approximately $10 billion (Rs 45,970 crore), incurred mainly through ill-judged expansion plans. With banks understandably reluctant to lend them any more, Jet and Kingfisher are now striving to de-leverage their balance sheets, urgently seeking to raise capital through the equity route.

Jet is in the process of handing over most of its domestic and regional international routes to LCC arm Jet Airways Konnect. This strategy will allow it to compete more effectively against “pure” LCCs, like IndiGo and SpiceJet. Kingfisher’s efforts at rightsizing capacity seem largely successful. However, its interest burden is a major challenge as is the penalty for keeping some aircraft grounded. CAPA expects that 2010-11 will be a defining period for Kingfisher Airlines, which has accumulated debts of $1.2 billion (Rs 5,515 crore) till September 2009.