India’s Airlines Are in Trouble Again. What Will the Modi Government Do?

On Wednesday, sources told The Wire that the aviation lobby has asked the Centre to help them obtain unsecured credit from airports and oil companies.

New Delhi: India’s aviation industry, which has had to historically burn cash to sustain aggressive pricing, has once again hit deep air pockets.

While the crash and burn of Jet Airways has assumed centre-stage in the last few months, most major carriers have reported losses in recent quarters. The red ink comes primarily from higher fuel prices at one end and lower ticket prices at the other, as airlines scramble to get more passengers in a market riddled with over-capacity.

The question now is: will the Narendra Modi government come to the rescue?

On Wednesday, sources told The Wire that the aviation lobby has asked the Centre to help them obtain unsecured credit from airports and oil companies.

There are hints of broader government help on the horizon as well. Last week, Bloomberg reported that the NDA-II government had sought the help of Tata Sons to help bailout Jet Airways. In particular, Tata Sons was reportedly in talks with the Centre about a potential haircut on loans that Jet Airways owed to state-run banks.

While this was denied by aviation minister Suresh Prabhu a few days later, it’s unclear where more sustainable growth is going to come from in the future.

Because mere growth has never been a problem: from a measly 14 million passengers in 2000-2001 to over 140 million passengers by 2017, Indian aviation has seemingly done well.

The problem has been profits. Even market leader IndiGo reported its worst quarterly performance ever in June 2018, down 97% year-on-year.

“For fiscal 2019, airline industry is expected to see a domestic capacity growth of about 20% driven by a faster capacity expansion from Low Cost Carriers. This capacity driven passenger traffic growth is expected to put downward pressure on air fares, despite an adverse movement of crude oil and INR-USD exchange rate,” Hetal Gandhi, director, CRISIL Research, told The Wire.

“Despite being a negative working capital based industry, majority of the players have significant working capital debt on account of losses posted during the past decade,” Gandhi added.

Even on the operational front, CRISIL Research expects the operating margins to be at negative 5-7% for fiscal 2019. ”With the existing high leverage and cash losses for FY19, the players are expected to be under severe financial pressure,” he added.

According to CAPA, an aviation sector consulting firm, Indian airlines could end the current fiscal with a combined loss of $1.9 billion. If that happens, they will have to raise fresh working capital to finance their operations.

The industry wants longer credit periods for jet fuel purchased from state-owned oil marketing companies (OMCs) for user charges paid to the Airports Authority of India (AAI) and private airports as relief.

Fuel accounts for 35-40% of airlines’ operational costs, say industry experts.

While crude oil prices have fallen by 30% since October, the same is not reflected in the price of jet fuel used by airlines. On the contrary, the domestic price of jet fuel has risen by over 5% since October 11, though local price is linked to the international market.

When contacted, an IndianOil (IOC) spokesperson said there is a time lag between the movement of crude market and revision of aviation turbine fuel (ATF) price adjustment.

OMCs revise ATF price on a monthly basis, unlike petrol and diesel whose rates are subject to daily price revision.

“When we next revise ATF price on December 1, rate may come down,” Kali Krishna, executive director, corporate communications, IOC, told The Wire.

States are charging exorbitant value added tax (VAT) rates on ATF as the fuel remains outside the Goods and Services Tax (GST).The civil aviation ministry has been pitching for inclusion of jet fuel in the GST. However, a consensus on the issue remains elusive.

According to sector experts, air traffic should grow at 1.5 time of the GDP. Considering 7-8% GDP growth, domestic air traffic should grow by a maximum of 10.5-12%.

But Indian airlines saw an ebullient growth of 17.31% in domestic air traffic in 2017 as they aggressively wooed passengers with aggressive ticket pricing. Frantic capacity addition has added to the aviation’s woes, says credit rating agency ICRA.

The rating agency estimates that Indian airlines will increase their capacity by 15% to 17% this fiscal.

“The key driver for the industry capacity growth continues to be the sizeable order backlog…approximately 1,033 aircraft of various sizes and configurations are on order by Indian airlines,” ICRA said in a recent report.

While capacity utilisation rates, or passenger load factors (PLFs), of airlines have been satisfactory, it hasn’t helped stop their bleeding.

Indigo reported a loss of Rs 652 crore in the quarter ended September 2018, compared with a profit of Rs 551 crore a year ago. SpiceJet, another private airline, has reported loss of Rs 389 crore during the same quarter.

Troubled Jet Airways reported loss of Rs 1.297 crore. It has reported accumulated losses of nearly Rs 2,500 crore in the first half of the current fiscal. Hit by mounting losses, Naresh Goyal-promoted airline is struggling for survival. It has twice defaulted on payment of salary to its pilots and ground staff.

It is now looking to sell part of its business to a strategic or financial investor.

Earlier media reports suggested that Tata Group had shown interest in the troubled airline. However, there is little progress on this front as Tata Sons board has turned cautious and wants more time for due diligence.

Meanwhile, the Federation of Indian Airlines has written to the aviation ministry, seeking its help, according to Bloomberg.

Airlines are “facing challenging times and substantial losses in the domestic environment,” said the letter addressed to aviation secretary Rajiv Nayan Choubey.

As a policy, oil-marketing companies offer credit facility to carriers on purchase of fuel but time period varies from customer to customer, depending on volumes, industry sources said.

Now airlines want this facility be extended uniformly to all players for one month.

“There is a considerable cash-flow mismatch between costs and revenues earned,” said the letter, sent by Ujjwal Dey, a spokesman for the group, urging the ministry to help the airlines get a one-month unsecured credit line from OMCs as well as state-run AAI and private airports.

 

 

 

 

Source:  https://thewire.in/business/india-airlines-are-in-trouble-again-what-will-the-government-do

Leave a Reply

%d bloggers like this: