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    Indian aviation sector going through a cyclical downturn, says MoS Jayant Sinha

    aviation | IST

    Indian aviation sector going through a cyclical downturn, says MoS Jayant Sinha

    In an exclusive interview with CNBC-TV 18, Jayant Sinha, minister of state for civil aviation, said that the airline industry was going through a cyclical downturn due to various factors like yields, oil prices, interest rates and currency.
    "We have a situation where interest rates, the currency and oil prices are heading in the negative direction for the airline industry and as a result of that, we are going through a classic cyclical downturn for the airline industry," he said.
    Sinha assured that the ministry was working hard to be able to provide a supportive policy environment for the industry so that it can get through this downturn well and in a healthy fashion.
    Here is the full transcript of his interview with CNBC-TV18's Shereen Bhan:
    I want to start by asking you for an overall check on the health of the sector(civil aviation). I am looking at an ICRA report, which pegs the aggregate loss of the sector at about Rs 3,600 crore in 2018-2019. That is up from about Rs 2,500 crore in 2017-2018. At this point of time, we are looking at the precarious situation that Jet Airways finds itself in, Air India of course continues to be in trouble, we have seen other carriers like Indigo also reflecting a degree of pain in their results. How concerned are you today?
    Sinha: As you know well and I think everybody who has been following the airline industry for some time knows the industry is very cyclical and it is driven by two-three factors. One is yields, that is what the pricing is, the other is oil prices, interest rates and then of course the currency. So right now, we have a situation where interest rates, the currency and oil prices are heading in the negative direction for the airline industry and as a result of that, we are going through a classic cyclical downturn for the airline industry.
    As far as the government is concerned, as far as our role as policymakers is concerned, we are working hard to be able to provide a supportive policy environment for the industry so that people can get through this downturn well and in a healthy fashion. Of course, we have a situation in the industry where we have, particularly, as far as domestic travel is concerned, wide separation in terms of the full service carriers and the low cost carriers. The low cost carriers obviously have a much superior cost position relative to the full service carriers. The full service carriers try to make it up with better service with the frequent flyer programmes with the international travel. So it is of course very intense competitive battle and in that competitive battle, of course, the full service carriers have not been able to maintain their profitability as they had in the past. So we have to see how all of this plays out.
    Again, as I said, industry conditions of course are going through cyclical downturn and at the same time, we have this competitive battle going on between the full service carriers and the low cost carriers as well.
    You are absolutely right because yields also continue to be on a downward trajectory and we are now seeing interest cost, the currency depreciate and oil prices surge. Given that, what is the government’s plan of action, is there anything that you can do beyond trying to engage with the goods and services tax (GST) council on Aviation Turbine Fuel (ATF), which has been a longstanding demand but we haven’t seen any forward movement. So what can the government do to provide any kind of relief to the sector?
    Sinha: As you know, the petroleum ministry and the ministry of civil aviation has recommended multiple times to the GST council, which includes not just the central government but all the state governments and where all decisions are done on a consensus basis, that ATF should be included in GST and that full input credit should be given for goods and services. So we have petitioned to the GST council multiple times. We are hopeful that at some point, they will recognise that we should of course do that for the industry and that will obviously benefit the industry as well.
    In addition, we are trying to ensure that we bring down cost across the board in the industry and that of course goes to airport charges, it goes to maintenance, repair and overhaul (MRO) facilities, trying to ensure that they are as cost effective as possible. If there are things that we can do to assist in financing, for the airline industry, we are trying to assist there as well. So there is a variety of measures that we are undertaking as policymakers to create as supportive a policy environment as possible.
    Of course as you know, growth is very strong, the demand for air travel among our travelling public is very high and of course a lot of capacity is coming into the system because of the large order books that our airlines have right now. So with capacity coming in, demand continuing to be very strong, we are seeing that fares and yields as a result of that have not gone up either. So it is very intensely competitive environment, it is very competitive for everyone right now but it is up to each of the individual players to be able to figure out through this very difficult competitive environment what their strategy should be.
    We as government have to make sure that the industry is supported with appropriate policies, after that it is for each individual player to figure out for themselves what their strategy should be, what their financing plan should be.
    Since you are talking about individual players traversing these difficult times, let me ask you specifically about Jet Airways. Have you had any conversation with the management of Jet Airways on the current situation? We understand that there are multiple probes on, that is what reports suggest-whether it is the income tax department or its even the ministry of corporate affairs looking into the company’s affairs, what is the update that you can give us with respect to the government taking cognisance of the affairs at Jet Airways?
    Sinha: Those matters are handled by different departments of the government, different ministries of the government, so I cannot speak to that. I personally have not had any conversations with Jet Airways. They have met with the officials in the ministry and again as I said, the goal of the ministry is to be able to create a supportive policy environment for all the industry players.
    Let me then ask you about Air India because we are awaiting clarity from the government on financial package for Air India at this point in time. We understand that perhaps it could be in its final stages, there have been several SOSs that had been sent out by Air India to the Civil Aviation Ministry, to the government. What can we expect?
    A: We have made a very honest attempt to be able to privatise Air India and we think the terms and conditions that we had set out through that disinvestment process were very fair and balanced relative to all the different stakeholders that government has to take into consideration. Unfortunately, despite our honest attempt, we were not able to go through the strategic disinvestment process and of course as you can see from the industry conditions, the timing turned out to be quite awkward. So we couldn’t move forward there.
    Post that, our goal is to be able to ensure that Air India becomes a strong competitive global airline and as part of that, we are working on a revival plan, which includes not just the financial package that you spoke about but it also includes set of organisational restructuring efforts, refresh strategy for Air India and then finally a variety of measures to be able to ensure that our very talented workforce is as motivated and as willing to be able to make this airline successful as possible.
    So we are working on all four of those dimensions as I said, the financial package, the strategy, the organisational reforms as well as the HR package and we are working on all of those different dimensions to be able to put in place a robust plan for Air India’s future.
    When do you expect the ministry of finance to sign off on the financial package, when can we expect the fund infusion to take place into Air India and on the larger revival package, what is the timeline that you are putting in place for that to be put into execution? You had a board meeting recently where the new members who have been inducted or brought on board YC Deveshwar, Kumar Mangalam Birla were also part of that meeting, are they part of this revival strategy, revival plan, when does that get into action?
    Sinha: We have had many rounds of discussions with the ministry of finance, at the Prime Minister’s Office (PMO) level and among a number of ministers that are examining this whole set of issues. So we have had many rounds of discussions, we have taken some steps forward. We have had the very good fortune of having Shri Yogi Deveshwarji and Shri Kumar Mangalam Birlaji to join the board. It shows you that we are very committed to making sure that Air India is running in a very professional way. We are of course working on the financial package and hopefully we will have that resolved that relatively soon.
    So we are moving forward on all of those different dimensions but again let me emphasise that our objective is to ensure that Air India is a strong competitive global airline. India does need very high quality global connectivity to all the major cities of the world and it is Air India that is uniquely positioned to be able to provide those direct services whether it is to Tokyo, Sydney, Melbourne, London, New York, Chicago, San Francisco-all of these cities deserve direct connections not just from Delhi but from Mumbai, Bangalore and other major cities of India and we need a domestic network that will feed that international network as well. So that I think is a great competitive position for air India to undertake but in the meanwhile, we have got a number of legacy issues that we inherited.
    ... so we want to free Air India from those challenges, enable it to be positioned well for the future and really give India what it deserves, which is a great global airline that can match the best in the world.
    Let me ask you about a policy that is just been unveiled by your ministry and that is a drone policy and the reaction from the industry is largely positive. Now the question is what about Drone 2.0 which will allow for delivery. When is that expected?
    Sinha: That is going to depend on the consultations that we have with the industry stakeholder. We are very excited about the drone ecosystem in India and India has shown that we have the ability to be able to take technology and develop these mass services platform that will enable us to deliver services to our mass markets at very affordable prices and whether we look at delivering, precision logistics, precision agriculture, monitoring, there are just so many different applications that drone technology can be used for. So it is very exciting to see India becoming a leader in this space and we have been acknowledged across the world for, in fact the policies that we put in place, not just for drone regulation 1.0 which we announced right now but the manner in which we are moving forward to establish drone regulations 2.0.
    The 2.0 regulations are going to be a watershed, not just for India but globally and by that I mean that we have to look at two very serious issues there, which as I said we have to resolve in consultation with industry stakeholders as well as global regulators and those two very serious issues are - one, beyond-line-of-sight which means that you can send off a drone, the drone operates autonomously and gets to wherever it has to get to 5-10-15 kilometers from where it took off. So that is beyond-line-of-sight. Second is payload and as far as payloads are concerned around the world people are experimenting, nobody has in place a well-defined set of regulation. So here we are working with industry in India to come up with these affordable solutions as well as with global regulators to be able to formulate what this 2.0 regulations will be.
    It is hard to put a timeline on those because we will have to make sure that the entire technology stack, all the way from the most sophisticated software that is required to manage and navigate with those drones to the actual hardware and then to the firm where microcode itself, all of that is something that can be trusted because as you can understand if a drone goes rogue it’s a very serious matter, not just for India, globally. So we have to put in place the framework that enable us to manage these rogues, have bimodal control so that not just the drone pilot but government authorities can control these drones if they feel they are moving out of their flights. So all that by the way is something that has been worked on globally. I am an engineer and I have done a lot of work in technology so this is something I am very much enjoying because we are developing regulations that I think will be world leading.
    I want to also ask you for an update on A320neo and the grounding of the A320neo on engine issues. Your minister Mr Prabhu has asked for a probe by the Directorate General of Civil Aviation (DGCA) into this matter. How worried should we be?
    Sinha: Not at all. There is no safety issue at all and you should be absolutely sure as should the traveling public that if there was even an iota of concern as far as safety is concerned, we would have grounded all those engines and we have done that in the past as well.
    Remember that all of these planes can fly very easily with one engine. So even if we have problem with one engine we can continue to operate with the second engine as well, but it has not ever come to that because we are doing very preemptive inspections, we are looking at these jet engines very carefully. If we think if there is any risk or any snag in engine or any problems with the engine, we get the engine to be taken off the aircraft and either the aircraft gets grounded till a second engine comes in or a new engine is put in. So we are monitoring the situation very carefully. We have taken corrective action in advance to what other regulators have done but this is a problem that we are monitoring very carefully right now and of course we are working closely with the equipment manufacturers as well as with the airlines.
    Going back to the first question on how concerned you would be as the minister of state for civil aviation on the state of play currently with several factors which are significant from a cost structure not in favour of airlines today. This is a market where we have seen several airlines go bust. We have just seen one airline come back from the verge of bankruptcy which is SpiceJet. Kingfisher out of the market. Jet Airways tethering on the brink of bankruptcy. Air India in trouble. This is one of our fastest growing sectors but what can you do because as you pointed out ATF prices continue to move and the GST council has not taken any decision so far. How concerned are you today about what is the likely implication of all of these extraneous factors on the health of the sector?
    Sinha: We want the industry to be competitive of course but we also want it to be stable and we want it to be in good shape financially. And that being said the airline industry is cyclical, there are times when companies do very well, they make very solid profits and there are times when they do not make such good profits. In all of this and we have to look across the cycle, we have to make sure that safety and security are not compromised in anyway and of course we are monitoring that very closely and at the same time we have to make sure that – and this is now speaking as an investor, as a financial analyst that the balance sheets of these companies are strong enough because you can have a spell when profitability goes down but then you will have times when profitability is very strong and so if you strengthen your balance sheet, if you do not take on too much debt, if you have enough cash reserves you can get through the downturn. So our concern should be for all of us just to ensure that the balance sheet of these companies is strong enough to weather some turbulence and there again different players are in different positions and so we will have to just make sure that whatever happens everybody is able to get through it.
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