Indian aviation has a real problem and that became apparent when the quarterly results were announced by Indigo Airlines. Despite a 42% market share, Indigo had to take a huge loss in the quarter. According to CRISIL, the total combined losses of the aviation sector in India are likely to be to the tune of Rs.9300 crore. This is the highest loss made by aviation companies in the last decade. This is also worse than the loss of Rs.7400 crore made by aviation companies in 2014 when oil prices were ruling at $120/bbl. Let us look at the reasons.
Pressure from competition
It is actually ironical that despite being the second largest domestic aviation market in Asia, Indian aviation stocks are struggling. The 18% annual growth in air traffic has come with a lot of competition. While leadership is still with Indigo, other players like Jet Airways, Air India, Spice Jet and Go Air with over 10% market share are also chipping away. Tata group companies like Vistaara and Air Asia are also playing a price war. Across the board, flight realizations have come down by 15% in the last one year itself. That is not great news because it means that growth is coming at a huge cost. That has also meant that competition is squeezing the prices to almost levels of being non-remunerative. As players fight for market share, this pricing pressure is likely to remain a challenge.
Pressure on costs too
While the full service airlines like Jet and Air India are struggling for obvious reasons, the low cost airlines are not spared too. That is because of the sharp rise in the price of fuel. Aviation turbine fuel (ATF) accounts for a major chunk of the operating cost of Indian airline companies and that has been rising with the rise in Brent Crude prices. In the last one year, Brent crude prices have gone up from $45/bbl to nearly $87/bbl. That has taken the price of ATF to above Rs.70,000 per kilo liter. When the rise in costs is combined with stiff competition, we have a situation where the spreads are thinning rapidly. The gap between the RASK and the CASK, which is the spread between the revenue and cost per average seat kilometer, has almost touched negative levels. That is the crux of the problem.
What is way out?
Like the FMCG companies, airlines also need to learn that price wars are futile. It will only kill the economics of the industry. Secondly, the government needs to chip in and probably include ATF into the ambit of GST so that the pricing becomes more regulated. Even in the best of times, free markets only work up to a point. Indian aviation companies must also look at hedging their currency and oil risk efficiently so as to reduce these cyclical shocks. That may be the road ahead! ©