In the last one week, Vijay Mallya-owned Kingfisher Airlines has hogged the headlines almost everyday in newspapers and on TV news channels. Yes, the flamboyant industrialist and liquor king known for his flashy lifestyle, often makes news, but this time for the wrong reasons, as all reports pointed to the fact that the loss-making airline was forced to cancel many flights mainly because it has run out of cash it needed to pay to buy fuel, pay salaries, pay airport charges and interest to its lenders.
In all these hullabaloo, one fact that did not come across loud and clear was that it is not just Kingfisher but all airline companies and the entire domestic aviation industry in India is in deep trouble. Facing strong headwinds like fuel cost and salaries shooting up, revenue per seat down to a bare minimum, due to cut-throat competition among the players and huge debt burden, airlines are gasping for air.
And things are getting nastier. The aviation industry consultant Centre for Asia Pacific Aviation (CAPA) estimated that in the current financial year 2010-12, the Indian airline industry will make a net loss of around Rs 12,500 crore against an estimated loss of around Rs 9,000 crore in 2010-11. The signs are already visible. The largest domestic player Jet Airways has just reported a net loss of Rs 713.60 crore in the quarter ending September 2011 against a net profit of Rs 12.40 crore in the same quarter, the previous year. SpiceJet Ltd, another listed company, has reported a net loss of Rs 241 crore for the September 2011 quarter against a profit of Rs 10 crore. Similarly, Kingfisher’s loss in the June 2011 quarter was Rs 263 crore.
“The airline industry in India is going through a tough period due to high costs and lower yields. This is evident by the unprecedented losses recently reported by airlines,” says Kingfisher Airlines CEO Sanjay Agarwal. “To counter these pressures and leveraging its strengths, Kingfisher decided to rationalise network, drop unprofitable flights and expedite its fleet reconfiguration.”
To understand the financial mess airline companies have gotten themselves into, just check out the following facts: The public sector company, Air India (created after the merger of Air India and Indian Airlines in 2007), has a combined figure of Rs 67,270 crore of accumulated loss and debt burden. Between the financial year 2007 and 2011, Air India has lost Rs 20,320 crore and its debt mounted to Rs 46,950 crore. To tide over this situation, the airline has requested the government to offer a rescue package which includes equity infusion of Rs 30,000 crore. It is almost certain that the government will bail Air India out as the political price to allow the PSU crash land is too high.
Private airlines are not so lucky. Mallya’s Kingfisher has piled up an estimated accumulated loss of Rs 6,000 crore in the last five years and has a total liability of around Rs 7,200 crore. It owes money not only to banks (Rs 6,200 crore) but also another Rs 1,000 crore to airport operators, oil companies and aircraft lessors. Being highly stressed for cash, the company has requested banks to extend more money for working capital. Says Agarwal, “We have asked our banks for an increase in (working capital) limits due to significant increase in operating costs caused by increase in fuel prices and rupee devaluation.”
According to a report by IANS, CAPA Chief Executive Kapil Kaul has estimated that if Kingfisher is to survive, it urgently requires capital infusion of $400 million (Rs 2,000 crore), including $200 million immediately to maintain its daily operations. “According to our estimates, Kingfisher will require about $800 million (Rs 4,000 crore) to fully fund its business plan over next two years,” Kaul told IANS.
CAPA has estimated that the cumulative debt burden of the three big Indian carriers, including Kingfisher, Air India (AI) and Jet Airways was a whopping $16 billion (Rs 80,000 crore). “Indian banks have an exposure of $6 billion (Rs 30,000 crore) related to working capital and term loans. They will have an additional exposure ($2 billion) on the aircraft-related financing,” Kaul observed.
There are several reasons why the aviation industry is in trouble. The primary reason is the steep increase in price for ATF (aviation turbine fuel) which accounts for the bulk of an airline’s operational cost. Jet Airways, for example, in the September quarter, spent Rs 1,492 crore on ATF accounting for 42 per cent of its total operational cost, a steep 6 percentage points more than it spent in the whole of 2010-11. For SpiceJet, it was worse as ATF accounted for half of the total cost. Says a spokesperson of the company, “Fuel expenses were 83 per cent higher than the same period last year and fuel cost constituted 63 per cent of the total revenue in the current quarter (September 2011) as compared to 43 per cent in the comparable quarter for the previous year.”
Agrees Jet Airways Ltd Chief Executive Nikos Kardassis, “Abnormally high fuel costs, a low fares scenario induced by demand supply imbalance, together with a depreciating rupee and fare cuts, have all collectively impacted the second quarter performance of our company.”
The ATF prices are very high in India because states levy sales tax or VAT on ATF between 23 to 35 per cent. Being a state subject for tax, the Centre cannot control ATF prices or make them uniform. Airlines complain that ATF prices in India are almost double than that of global rates and account for 40 to 45 per cent of operational expenses compared to 18 to 20 per cent abroad. In fact, compared to a country like Singapore, ATF prices in some states in India is almost 70 per cent higher, they say. Another factor that drives costs up is high salaries for pilots and crew members. Though, after the recession in 2009, salaries did not move up rapidly, wage cost for airlines is still very high.
Yet another reason cited for the losses is the overcapacity in the sky. In the last one year or so, airlines leased more aircraft, added many more seats, opened new routes and increased frequency in the metro routes. The net result was that with more seats on offer and dynamic online pricing system, yield per seat nosedived. Points out SpiceJet spokesperson: “The pricing environment continued to be weak, resulting in a decline in the average passenger yields in the September quarter by 5 per cent to Rs 3,317.” He says that with increased capacities getting inducted, load factor during the quarter was also down to 67 per cent from 74 per cent during the same period last year. With the creation of large capacity, airlines are finding it difficult to reach a breakeven load factor which itself has moved up because of higher fuel cost.
It is also true that the herd mentality of Indian business has made many to join the fashionable high flying club without much planning. As everyone thought that by driving volume one can make money, they kept on adding new planes. Though all airlines are flying more flights with the low cost carriers (LCCs) configuration to cut costs, it did not help much as the fixed costs for fuel, interest payments, depreciation and maintenance and so on, constitute 90 per cent of the total cost.
With a big question mark on viability, the civil aviation industry, which has already undergone one round of consolidation as Sahara and Air Deccan were taken over and merged, is now in for more churn. Those in a desperate situation may fold up unless the government extends help by way of lower fuel cost and more bank funding. But such tailwinds, most experts feel, are unlikely to blow.