India’s airline industry is bleeding and the blame for the current state of affairs must be shared by the industry and the government.
Airlines are not willing to raise fares while the government seems helpless in easing taxation on jet fuel. Ironically, the airline industry is in doldrums despite passenger growth being in double digits for more than 50 months in a row. In any other market, this sort of trend should have taken airlines laughing all the way to the bank. But airlines themselves have adopted a policy of adding capacity like never before and
keeping fares artificially low.
So while passengers are increasingly opting for air travel, airline balance sheets are splashed with red ink as yields – revenue from each passenger – plunge and seats are being sold at a lesser cost while costs continue to spiral.
The government has been saying all the right things as far as the aviation industry is concerned but not much action is visible on the ground. Aviation turbine fuel (ATF) or jet fuel accounts for over 40 percent of the cost of operations for airlines and the travesty is that despite India being one of the fastest growing markets for domestic air travel, the government continues to levy one of the highest rates of total taxation anywhere in the world on jet fuel.
An analyst with a Mumbai-based brokerage pointed out that jet fuel continues to attract taxation “in the range of 35-40 percent” while in other countries, the total taxation on the fuel is much lower. The analyst also said that a long pending demand of the industry – bringing some airline services like repairs, where aircraft or parts have to be flown in from abroad, under GST - has also fallen on deaf ears till now. The industry gets no input tax relief on these services.So when Minister of State for Civil Aviation,
Jayant Sinha, told CNBCTV18 in an interview that the government has petitioned the GST Council multiple times for bringing jet fuel under GST, he was probably expressing his helplessness at the situation. “The Petroleum and Civil Aviation ministries have recommended multiple times to the GST Council (which includes reps of the state governments) that ATF should be included in GST and full input credit given for goods and services. We remain hopeful that at some point the council would that for the industry,” Minister of State for Civil Aviation Jayant Sinha said.
The airline industry has been battered by the oil price surge in recent months and a falling rupee as a lot of what an airline does is financed by forex. A note to clients from brokerage Kotak Institutional Equities said earlier this month that the spreads (RASK less CASK) of the leading Indian airline companies (Indigo, Jet Airways and SpiceJet) have collapsed over the past two quarters resulting in very weak financials for the companies. RASK and CASK refer to revenue and costs per available seat kilometer.
For all these three listed airlines, the revenue earned for each seat per kilometer went below cost in the March quarter of 2017-18 and stayed negative for the next quarter too, a note by Kotak showed. In simple terms, airlines are selling seats below cost.
There have been frequent statements from airline managements expressing their unhappiness about the lack of pricing power, but not one among them have taken the bull by the horns and raised prices.
IndiGo, which is the market leader with more than 40 percent share of domestic passengers, has seen yields (what it earns from each passenger) remaining stagnant now for nine straight quarters. Second largest airline, Jet Aiways has seen yields decline successively in each of the last eight quarters while SpiceJet has also seen staganation in yields during the period.
Overall, this means, none of these airlines made any more money than it was making almost two years back on selling seats. Analysts at Kotak said that the combined EBITDAR (earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs) of the three listed aviation companies dropped 46 percent in 12 months, between the fourth quarter of FY17 and FY18.
And the situation is even worse at the state-owned Air India, which continues to survive on taxpayers’ money. Sources confirmed that the airline’s net loss for 2017-18 would be above Rs 5,000 crore, laying the blame of high fuel prices through the last fiscal and continued low fares. The airline’s debt also rose to Rs 55,000 crore from Rs 47,000 crore at the end of 2017-18, sources said.
Air India has just been provided a Rs 2,000 crore guarantee by the government and it has already raised Rs 1,500 crore against this guarantee to pay off vendor dues and employees. All the funds’ infusion is directly related to escalated costs and rising fuel prices. But while the government is looking at infusing fresh capital in Air India, the private airlines need to fight for themselves in a hostile market.
With margins slipping, fuel prices not showing any signs of coming down and little likelihood of the government lowering taxation on jet fuel, the only option with airlines is to raise fares.
According to global aviation consultancy CAPA, India’s airlines have the second biggest order book globally for narrow body jets, just behind the U.S. and ahead of China. Overall Indian airlines total order book is the third largest in the world.Indian airlines are adding capacity ahead of demand, anticipating continued healthy passenger growth but unless fares keep pace with capacity addition and passenger surge, the industry will continue to face stronger headwinds in the coming months.