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Outlook 2012: India’s loss-making aviation sector facing its most critical phase in almost a decade



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Indian aviation enters 2012 facing its most critical challenges since the advent of the 2004 industry reforms. The paradox of India’s airline sector is that it serves one of the world’s fastest growing economies and is posting double-digit traffic growth, yet CAPA estimates Indian carriers combined will lose USD2.5 billion in the 12 months ending 31-Mar-2012. This is on total revenues of just under USD10 billion – a worse result even than in FY2008/09, when traffic was declining and fuel prices spiked at USD150/barrel. In the domestic market, India’s airlines lose USD25-30 every time a passenger boards an aircraft. This situation has prompted unprecedented intervention by the Prime Minister, who has outlined a 12 point agenda upon which the Ministry of Civil Aviation must report every month.

TO ORDER the CAPA India Aviation Outlook 2012, which will be released on 15-Jan-2012, please download the order form attached top left or for more information contact Shuchita Gupta on or +91 11 2341 4440. The form outlines special discounts for CAPA Members.

Policy paralysis and a slowing economy a poor combination

The outlook for the operating environment in 2012 is not encouraging. India’s economy has slowed noticeably in the last two quarters and GDP growth for this current fiscal year is likely to be closer to 7% than the 8.5-9.0% forecast at the start of the year. With increasing concerns about the direction of the global economy, India’s growth in FY2012/13 could possibly dip below 7%. This is a rate of expansion that most economies would envy, but it falls short of the Government’s own targets and of the growth needed to achieve the Government’s employment generation and poverty alleviation objectives.

Negative global economic sentiment, led by the financial crisis in Western Europe, is only partly to blame. India’s slowdown has largely been driven by internal factors, primarily a Government at the centre that has been plagued by corruption and governance scandals. These have diverted attention from implementing the reforms needed to modernise the economy, directly frustrating investors. Capital has consequently been fleeing the country, depreciating the Indian rupee by almost 20% since Sep-2011. For the airline industry the result is higher costs – of fuel, aircraft leases and maintenance.

Air India monopolising government attention. With no solution in sight, it is actually
creating the problem

A lack of reform within the aviation ministry itself – without a dedicated minister since Jan-2011 – has served to heighten paralysis at the macro level. For almost the entire year Mr Vayalar Ravi, Minister of Overseas Indian Affairs, had the Ministry merely tacked onto his main role. His almost exclusive obsession with Air India caused policy inertia, seriously damaging the entire industry. Perhaps the most retrograde decision has been to grant Air India first right of refusal on private carrier applications for international traffic rights. These national assets – in the form of bilateral entitlements – are thus being viewed through the prism of a seriously bankrupt company. Air India has limited capability to operate new routes, meanwhile blocking private carriers from doing so. As has happened so many times before, the only winners in this scenario are the foreign airlines from whom Air India is being “protected”.

Despite the preoccupation with Air India, the airline has no turnaround plan. Its sole strategy is to spend up to USD1 billion annually in government subsidy throughout the coming decade – as much as the entire national higher education budget. Why this is necessary when there are perfectly good private sector operators ready and able to offer air services simply beggars belief. But there is worse: to generate cash flow, Air India is pursuing a suicidal taxpayer-funded commercial policy, discounting fares that private carriers are forced to match. Here is the main cause of the losses posted by the industry – taxpayers’ money being used to destabilise private sector airlines. Passengers have enjoyed a temporary consumer surplus, benefiting from cheap airfares, but an unviable sector is not ultimately in the interests of the travelling public.

Government needs to focus on industry viability and safety

Meanwhile, the Government risibly continues to micro-manage issues such as the rights of airlines to sell exit row seats or charge for additional checked-in luggage. Seasonal increases in demand which result in higher fares trigger scrutiny by the regulator – yet there is no intervention in the case of predatory pricing. If airlines cannot charge higher fares during peak season to counter losses during the leaner months, it is simply not possible to maintain a viable operation. And quite clearly the losses incurred by the industry indicate that airlines can hardly be accused of price gouging.

Rather than focussing on micro issues, the Ministry of Civil Aviation’s objective should be to create an environment which recognises and supports industry viability and competitiveness. The sector must be in a position to operate safely and efficiently, delivering sustained and reasonable profits and covering its cost of capital. 

A new, dedicated Minister of Civil Aviation is a positive, but he faces a challenging task

On 18-Dec-2011 Ajit Singh took over Mr Ravi’s civil aviation responsibilities. A dedicated minister is a positive development, but a change of leadership at this critical time means uncertainty will persist, especially in the absence of a clear strategic framework for the sector. Mr Singh’s task is to create an environment that will allow airlines, and indeed the broader aviation industry, to become viable. Even airports and general aviation operators are struggling. The solutions are relatively easy to identify, but the weak link is the political and bureaucratic will.

Traffic is expected to continue to grow strongly, but financial recovery will be slow

Recovery, particularly for the full service carriers, Air India, Jet Airways and Kingfisher, will be slow. India’s airlines have approximately USD16 billion in debt, including outstanding payments to vendors, of which USD6-7 billion is for aircraft-related loans. Air India’s debt will increase by a further USD4 billion if it proceeds with plans to purchase its order for 27 Boeing 787s, generating an annual interest burden of USD1.25-1.50 billion. A combination of low fares and sustained high costs, thus make sustainability unlikely. Several expenses have been out of the control of the airlines, fuel, for example, has been at elevated levels for almost 12 months, general inflation in India has been at close to double digits, airport and ground handling charges have been increasing, and a shortage of skilled labour means wage pressures are mounting. 

Under these challenging circumstances, India’s airlines have struggled to raise capital. Aside from Air India’s equity infusion from the Government and a preferential shares issue by SpiceJet, plans to raise in excess of USD1 billion from capital markets have been deferred. The situation has been made more difficult by record low market caps for the listed carriers – several carriers have immediate financing requirements greater than their current market cap. Aircraft financing has also dried up and carriers are increasingly turning to leasing to finance their aircraft deliveries. Heading into 2012 airlines will continue to struggle to raise equity and will need to take on additional debt, further eroding viability. Banks have become a critical pillar of the aviation sector – to date they have provided invaluable support to Air India and Kingfisher Airlines, but in 2012 they are likely to be called upon by even more carriers, increasing their aviation exposure further above the current USD6 billion. The negative impact on the balance sheets of Indian public sector banks in particular could create a political issue in itself.

Poor government policy means airports also face financial challenges

Meanwhile, private and state-owned airport operators continue to struggle. The operators of Delhi and Mumbai Airports have invested USD5 billion in modernising these facilities but the revenue collection has been less than expected due to the economic regulator not permitting a dual-till framework, while the Supreme Court ordered both airports to cease collection of Airport Development Fees from passengers, pending approval by the Airports Economic Regulatory Authority. 

The state-owned Airports Authority of India (AAI), which has 125 airports under its control, of which around 75 handle scheduled services, is also in a state of financial distress. CAPA estimates that airlines have accumulated approximately USD240 million in outstanding payments to the AAI, which it meanwhile continues to face significant capital expenditure commitments to support its extensive airport modernisation programme – creating a cash crunch for them too. The AAI’s complex business model which includes managing the largest portfolio of airports in the world under a single operator, investing huge capex in airports which are largely loss-making and the provision of air navigation services, will come under increasing pressure in 2012.

Solutions are obvious, implementation is more problematic

The Government can easily take immediate steps to assist the sector. These include reducing the punitive sales taxation on aviation turbine fuel; permitting foreign airlines to acquire up to a 26% shareholding in Indian carriers (a proposal now before Cabinet); approving private carrier applications for international rights; removing restrictions on ancillary revenues; and obliging more rational pricing by Air India.

In the longer term, the focus needs to be on creating a well-structured policy and regulatory framework and on enhancing the efficiency of the nation’s aviation infrastructure, particularly airports and airspace.

The fundamental drivers of aviation growth in India remain strong and it should emerge as the third largest market in the world within five years. But this will require important decisions in 2012 by government and operators alike to position Indian aviation as a safe, efficient and viable sector. With just two years to go until the next elections, the sad prospect presents, however, of a government which will be prepared only to allow the rot to persist. Yet an active Mr Singh has it within his grasp to engrave his name as the Minister who turned around India’s industry.

CAPA’s India Aviation Outlook 2012 will provide the most detailed insight into the direction of the sector at this most critical juncture. Coverage includes:

Forecasts for 2012/13

  • Traffic, capacity and yields;
  • Profit and loss projections for each carrier;
  • Fleet induction plans and expected new orders;
  • Airport growth prospects.


  • Strategic plans of all scheduled airlines;
  • Outlook for full service and low-cost business models in India;
  • Bilateral policy and international route development;
  • Scenarios for global alliances in the Indian market;
  • Capital raising prospects and aircraft financing plans;
  • CAPA risk assessment of airline finance and operations;
  • Prospects for new entrants, particularly regional airlines;
  • Performance of and prospects for foreign carriers.


  • Status of airport modernisation programmes;
  • Greenfield airport development projects;
  • Projected timeline and implications of Navi Mumbai Airport tender;
  • Expected developments with airport charges and their impact on fares and traffic;
  • Regulatory settings at the Airports Economic Regulatory Authority;
  • Strategic direction of the Airports Authority of India;
  • Investment in air traffic management infrastructure;
  • Prospects for the corporatisation of air navigation services;
  • Financial analysis of the leading airport operators.

Regulatory Issues

  • Likely impact of  the new leadership in the Ministry;
  • Expected direction of the New Civil Aviation Policy;
  • Progress against the Prime Minister’s 12 point plan;
  • Status of the formation of the Civil Aviation Authority;
  • Prospects for foreign airline ownership in Indian carriers;
  • How airfares are likely to be regulated.

Outlook for Ancillary Sectors

  • Maintenance, repair and overhaul;
  • Business and general aviation;
  • Cargo and logistics;
  • Ground handling operations;
  • Skills and training.

CAPA India will be releasing a further detailed report outlining a roadmap to ensure the long-term economic viability of the Indian aviation sector, reviewing policy and regulation, fiscal issues, airline and airport financials, evolution of business models, efficiency of infrastructure and the role of financiers and investors. We can also provide custom advisory and research services to organisations with interests in Indian aviation.

To order the CAPA India Aviation Outlook 2012, which will be released on 15-Jan-2012, please download the order form attached top right or for more information contact Shuchita Gupta on or +91 11 2341 4440. The form outlines special discounts for CAPA Members.

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