The sector is going through a state of turbulence that seems to last longer than many expect. Avoiding a crash is a tall order
As things stand now, India’s aviation sector faces what one can easily call a double jeopardy. On the one hand it is going through a crisis that many aviation market mavens call of its own making, especially after the finances of Jet Airways took a plunge for the worse recently and, on the other, it is being hit by the impact of the latest crash of a Boeing 737 Max (Ethiopian Airlines) last Sunday after which the Directorate General of Civil Aviation (DGCA) grounded all planes of the making in India, following the preemptive measures taken across the globe.
What’s happening with Jet Airways could make an interesting case study and the inferences could prove very important to the future of Indian civil aviation in general, if not necessarily for the future of the Naresh Goyal-controlled airline. Jet Airways is facing the worst financial crisis in its history. It missed repayment to foreign lenders, in an obvious reflect of its poor financial conditions. The company faces a default of $109 million by March 28, mainly to HSBC Bank Middle East. And in all likelihood, it is not going to pay the installment, prompting action from the banks, which will take control of the airline and appoint a new board. Goyal’s shareholding in Jet will come down to about 20% from 51%.
Already, Jet is facing the wrath of the market. Its shares fell 5% this week and is expected to fall more as the airline keeps cancelling flights owing to the fact that a large chunk of its aircraft is grounded. Last Tuesday, March 19, Jet’s shares closed at Rs 229.05, down by 3.35% on the BSE and on the NSE, they fell 3.65% to Rs 228.10.
The Union Civil Aviation Ministry says it wants to intervene in this crisis. Minister Suresh Prabhu’s secretary will hold an emergency meeting on Jet cancelling flights. But the crisis is not going to end any time soon. Already, 41 aircraft of Jet are grounded due to non-payment of lease rentals. And Jet’s aircraft maintenance engineers’ union is on combat mode. It wrote to the DGCA that Jet had not paid three months of salary to them and this could affect flight safety. The government cannot brush aside such statements especially given that the Ethiopian Airlines crash happened just recently and there is a huge hue and cry around safety of flights across the globe.
The Jet story
Understanding Jet’s downfall is important because it will also help one figure out the quirky, crazy business models existing in India’s aviation sector for some time now. According to consultants and journalists tracking Jet, the biggest mistake the airline may have committed over the years was to grossly underestimate the power of its biggest competitor, IndiGo, which over the past few years expanded its fleet and services so much so that all of its competitors had to either play along and take huge risks in investments and strategy, or perish to the competition.
In an industry that sees high competition, especially in the low-cost space, taking the kind of risks that IndiGo had forced its rivals to take proved detrimental to many airlines including Jet. IndiGo is the largest and fastest growing airlines in India now, which grabbed market share from other top players. Such an aggressive expansion strategy, coming at a time when aviation fuel charges are at a high level, proved disastrous to the aviation sector at large even though it helped IndiGo, which revolutionised the low-cost market despite a small start.
When the market witnesses so much capacity expansion, which hovers several notches above the demand, it becomes very difficult for the sector to keep prices at meaningful levels. Naturally, the small players get elbowed out and the other players like Jet, which has been highly leveraged and debt-laden thanks to legacy issues including a bombed 2017 and nearly Rs 1500 crore buyout of Air Sahara, just crumbled under the pressure. Adding to their woes was the aviation fuel prices, which continue to move northwards thanks to global factors and high taxes (which is a political hot potato in India). The industry is also dogged by excessive parking, landing charges and poor operational efficiencies of players such as Air India.
Also, India’s aviation market sees an influx of low-cost airlines now that the so-called full service operators (a business where the money is) can barely find existence. Even the network carriers are forced to keep fares at par with the low-cost players due to high competition. Even for IndiGo , which faces a pilot shortage, the rising costs, owing to aircraft rentals, energy spends, are a worry. Since factors such as ATF prices and rupee value are beyond the purview of the local players, the government may be forced to cut excise duty on jet fuel from 11 per cent to soothe the wounds of the airlines, but in an election year, that is going to be a tall order.
Globally too, the aviation industry is going through a rough patch. Even though the International Air Transport Association (IATA) notes the industry’s net profit will marginally improve to $35.5 billion in 2019 from $32.3 billion in 2018, the industry body expects high fuel costs and operational inefficiencies continue to push the sector into air pockets. In 2018, IATA had cut its profit forecast by 12% to $33.8 billion from its December estimate of $38.4 billion. Sparing 2017, when airlines globally made good money, the recent history of aviation was not a rosy affair and in 2019 all signs point towards further turbulence, especially in the wake of media reports that found glaring and scandalous errors in the way Boeing pushed it’s faulty aircraft that eventually caused the Ethiopian crash.
To sum up, with the global headwinds not in favour and more trouble emerging in the local market with Jet Airways employees threatening to go on strike, India’s civil aviation sector is going to witness very turbulent days ahead and as an analyst told Number13, there is no “silver bullet” to the current crisis.