Waiting for Clear Skies
High passenger traffic growth by itself may not be enough for airlines in India. They are also looking at international operations, cargo and ancillary services.
NOT TOO LONG AGO, starting an airline was easy. Entry barriers were low as anybody with a moderate understanding of the sector could take aircraft on lease (leased aircraft were easily available with limited upfront capital commitment) and start an airline. The costs were low too, with the three biggest cost components — aviation turbine fuel (ATF), leasing and maintenance (for which airlines pay in dollars) — under control. Lower fares ensured that airlines didn’t have to worry about filling seats. Easy availability of leased aircraft also resulted in airline companies making aggressive plans, adding huge capacity, and driving down fares.
The last two years have seen a tragic unfolding of this story. Nearly half-a-dozen regional airlines that had taken a plunge into the sector at its peak, have shut down. The (larger) scheduled airlines have managed to survive the double whammy of high ATF prices and rupee depreciation but continue to face pressure. Out of the eight operational airlines, just two are profitable. Opinions are divided over whether this is the beginning of another down cycle or these are just temporary headwinds (read story ‘Bust! Boom! Bust?’).
Amidst the gloomy scenario, high passenger traffic growth and robust regulatory environment are the biggest reasons of hope for the sector.
After launching the ambitious UDAN (Ude Desh Ka Aam Naagrik) scheme last year, the civil aviation ministry is aiming to build airport infrastructure that can support a billion trips annually over the next 15-20 years. Despite a slow start, UDAN gives a peek into the government’s intention to build the sector, especially airport infrastructure in smaller cities, which are in shambles at the moment (read story ‘Flying Low’). Forget smaller cities, the airport infrastructure in large cities too is reaching saturation point, creating a challenging situation for airlines that continue to add capacity. In India, the air passenger traffic is concentrated around metros, primarily Delhi, Mumbai and Bengaluru.
The airlines, meanwhile, are looking for new growth opportunities, be it expanding their international operations or focussing more on cargo and ancillary services (read story ‘Global Gambit’). It is, however, unclear whether these efforts to keep the growth momentum going in adverse times will yield the desired results. It may take a while before the aviation sector is able to get back into shape.