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Civil Aviation

Uncertain outlook for the short term, bright in the long run

New Delhi. The civil aviation industry looks set to face rough weather in the months ahead despite the economic recovery and the increase in passenger traffic.

Before the budget was presented, the outlook was quite rosy for the industry which had been making big plans for fleet and route expansion along with going on a hiring spree. The 2010-11 budget proposals, however, have led to an increase in aviation turbine fuel prices owing to imposition of customs and excise duties on imported crude oil and petroleum products.

In addition, service tax will now be levied on airlines passengers. In the present scenario, it looks difficult for airline companies to absorb this level of taxation and it may have to be passed on to consumers in the form of a hike in air fares. This will, in turn have an impact on the volume of air passenger traffic and ultimately once again affect the profitability of the India’s airlines sector.

The annual Economic Survey presented just before the budget highlighted the improved performance of the aviation industry. It said the civil aviation sector had shown signs of slowdown in passenger traffic during 2008 due to the steep rise in fuel coupled with the impact of global economic slowdown. The survey pointed to the fact that signs of recovery had become visible in the second half of 2009 with scheduled domestic passenger traffic having gone up from 40.8 million in 2008 to 43.3 million in 2009. On the other hand, it noted that cargo traffic remained in doldrums and showed almost no growth.

The survey accurately observed that the airline industry appeared to be looking up after the crisis in the latter half of 2008.

It was at this time that large scale retrenchments by major companies like Jet Airways had created a hue and cry in the country. The scale of revival is indicated by official traffic data released recently showing that domestic passenger traffic increased by as much as 23 per cent in January this year compared to the same period last year.

Jet Airways and its subsidiary Jet Lite had the highest number of passengers at 10.28 lakhs but among the budget airlines, IndiGo was the leader with 6.25 lakh passengers. The Jet Airways – Jet Lite group now has 25.4 per cent of the market followed by Kingfisher at 22.2 per and Air India at 18 per cent.

The “no frills” airlines continue to do well and their combined market share is a substantial 34.7 per cent. In fact, these airlines have been looking to go on a hiring spree to their expanding fleet’s requirements. IndiGo, for instance, is reported to be considering hiring as many as 1000 personnel including 100 pilots, 400 cabin crew and other passenger service staff.

Its fleet of 24 aircraft is set to rise to 40 by the end of 2011. Similarly, SpiceJet’s fleet will also go up from 19 to 28 and it needs staff for its new inductions.

At the same time, industry insiders point out that the hiring will not really create any new jobs. Most of these airlines had hired many new personnel in 2006 and 2007 but had to keep a large number of these appointments on hold in 2008 after the recession struck the economy. Many pilots who had originally been hired by these companies were either retrenched or their employment was kept in abeyance. They will now actually be given flying jobs.

Thus prospects for fresh pilot recruitment appear slim for the time being.

Civil Aviation-1The concerns about profitability of larger carriers like Air India and Kingfisher also continue as their bottomlines are under threat. Air India is having to bear the burden of enormous losses that would have pushed any private airline to close down but governmental support is propping up this behemoth. This artificial respiration cannot continue for all time.

Even though Air India is the national carrier, there is increasingly a feeling that the airline must revamp and restructure or be allowed to sink or swim on its own.

The latest reports for 2009-10 indicate, however, that Air India which merged with the domestic carrier Indian Airlines in 2007, has shown a decline in operating losses. Going by pulished reports, these have declined by Rs 1300 crore during the financial year owing to a 14 per cent rise in passenger traffic. The airline’s load factor also rose to 64.5 per cent as compared to 58.5 per cent during the previous year.

Air India still has a long way to go as the total losses of the entity are estimated at around Rs 5400 crore. The government has assured funds for restructuring the National Aviation Company of India Limited (NACIL), as it is now called, but this will have to be accompanied by efforts to cut costs by the airline itself. The budgetary support will be in the form of equity infusion and the first tranche of Rs 400 crore was to be given earlier this year. The 2010-11 budget proposals also envisage an outlay of Rs 1200 crore for financial restructuring of NACIL.

As for Kingfisher, it is clear that owner MrVijay Mallya has overstretched himself by going ahead with huge investments for fleet expansion along with launching international routes that are not fetching much revenue for the time being. At the same time, losses have dipped during 2009-10 and the seat load factor has gone up, indicating that measures taken to improve efficiency have actually had a positive impact on its bottomline.

Jet Airways has also shown improved performance as it finally recorded a profit in the third quarter of 2009-10, largely due to massive cuts in expenditure. Its low cost subsidiary, JetLite also posted a small profit and seems to have finally turned the corner.

The fortunes of the Indian civil aviation industry, however, will now hinge on the impact of the higher air fares on consumers.

Civil Aviation Minister Praful Patel has assured that he will be talking to Finance Minister Pranab Mukherjee about the extension of the service tax to air passengers. But the prospects of a rollback in the tax appear dim, as Mr Mukherjee has highlighted the fact that the services sector now occupies a large share of the growth in GDP but a minuscule share of taxation.

Similarly, the imposition of import duty on crude oil and excise duties on oil products is not likely to rolled back. Both these levies are likely to be passed on in the form of higher air fares of passengers. It now has to be seen how this will impact air passenger traffic which had risen significantly in 2009.

Despite all these negative elements, the aviation industry looks set to be on an upward growth path.

All the major aircraft manufacturers attended the recent India Aviation 2010 show in Hyderabad. Boeing, EADS Airbus, Bell Helicopters, Bombardier, Eurocopter or Gulfstream, they were all there to make sure that they had a share of the Indian pie.

This country is now projected to be one of the fastest growing aviation markets in the world with a demand of over 1000 aircraft over the next 20 years. According to Boeing officials, Asia Pacific is the largest market with 8960 planes. And within this region, they say India is the fastest growing with a projected requirement of over 1000 planes estimated to cost US $100 billion by 2028 owing to its fast growth rate, rising middle class and increasing disposable incomes. The total domestic passenger traffic is expected to reach 48 million during 2010 from 43.3 million in 2009.

Airbus is also bullish about India. Company officials say the demand in this country is 1038 aircraft worth $138 billion, which will be the world’s fifth biggest.

Boeing also plans to set up an MRO (maintenance, repair and overhaul) facility at Nagpur where it has acquired 50 acres in a special economic zone for this purpose. Eurocopter, part of the EADS group has also announced plans to set up MRO facilities in Mumbai and Delhi.

In other words, the medium and long term outlook for the Indian civil aviation industry is certainly heartening as it looks to be on a high growth path.

As for the short term, however, there are many areas of concern especially the need for domestic airlines to come on even keel financially. The budget carriers appear to be on a better wicket right now and there are even predictions being made that the entire industry will soon comprise entirely of low cost airlines. It is thus time for the higher fliers like Air India and Kingfisher to tighten their belts to ensure that they move towards a situation where profitability can be sustained in the long run.

© India Strategic