Silver Lining in India's Aviation Cloud
|Sep 4, 2012|
The business community last week raised its collective eyebrows when Gorur Ramaswamy Gopinath, better known as the pioneer of India’s low-cost carriers, launched his freshly-minted regional airline Deccan Shuttle in India’s western state of Gujarat.
Gopinath’s Deccan Shuttle is one of more than a half dozen regional carriers seeking to cash in on India’s growing tier-2 and tier 3 prosperity, as the country’s economic development spreads away from New Delhi, Mumbai and other cities despite the fact that the economy remains bedeviled by severe economic turbulence.
This optimism is in the face of the combined debt load of India’s six large aviation companies, at US$20 billion. The majors also confront US$2 billion in annual losses, according to the industry think tank the Centre for Asia Pacific Aviation (CAPA). Furthermore, New Delhi’s plans to allow foreign carriers to invest in domestic airlines, which could resuscitate the ailing sector, have been bottlenecked by regulatory hurdles and a policy gridlock.
Consequently, of India's six domestic airlines only one, IndiGo, is profitable and two, Kingfisher and Air India, face bankruptcy. Other woes bedevil the sector. Aviation fuel in India is among the most taxed in the world, with levies at the national and state level touching 30 percent, accounting for a huge proportion of the airlines’ operating costs. Airports remain choked and under-equipped and the landing fees to pay for the construction are expensive.
Nonetheless, analysts feel the long-term prospects for Asia's third-biggest economy appear bright. Indian airlines will be ordering more than 1,000 new passenger planes, worth $145bn, by 2030 CAPA estimates, while the domestic market will reach a billion-plus passengers by 2040. Meanwhile the scheduled airline fleet will grow from 430 to 1,030 aircraft, and general aviation could see even faster growth from 750 to over 2,000 aircraft.
In Gopinath’s case, the skepticism had as much to do with the launch’s timing as with his previous record as entrepreneur. Both of his earlier ventures – the no-frills airlines Air Deccan and Deccan 360 – ran into capitalization issues. Air Deccan, which promised to change the face of Indian aviation industry with its one-rupee tickets in 2003, and it did to some extent to be fair, had to be sold off to Kingfisher Airlines in 2006 due to non-infusion of funds.
Despite the problems, Gopinath now sees an “enormous opportunity” for his reentry into the sector. “This is an unfinished story, and I see a huge opportunity still there,” he told an online publication recently. “My idea is to open up a new market. I am passionate about providing easy access and connectivity.”
Gopinath’s strategy is to cash in on the vacuum that exists in the country’s interstate connectivity. His logic is that apart from the big cities and towns, which are connected by the Airbuses and the ATRs, India has more than 500 small airstrips that need to be connected. And this, he believes, is where a goldmine awaits him.
Nor is Gopinath alone. Other ambitious players too, are eyeing the new frontiers of growth in India’s aviation space. Despite the country’s notoriously adverse investment climate, airline analysts experts say exponential growth waits in the regional customer base.
“There’s new money here, people have disposable cash and are getting increasingly aspirational. Rich farmers, who draw tax-free agricultural incomes, have specially taken to flying in a big way on leisure and business trips in the northern agri belts of Punjab and around Delhi,” said Prakash Jamval, a Chandigarh-based aviation analyst, formerly with Air India, in an interview.
This is the reason why Air Mantra, a unit of financial services conglomerate Religare Group, started daily flights connecting Amritsar and Chandigarh in Punjab state in July.
The vast Indian diaspora – non-resident Indians estimated to be over a 25 million-strong demographic spread across the globe, is another growth driver. To cater to this traffic traveling between the southern state of Kerala and the Gulf states, for instance, the state is launching its own airline, Air Kerala.
Air Pegasus, promoted by Decor Aviation, an airport ground-handling agency, is similarly looking to become south India’s first regional airline in October. Spirit Air, Karina Airlines, Volk Air, RAir, Air Freedom and Akashganga Airlines are similarly waiting to take to the skies.
Market analyst say there is a successful business case for smaller airlines, either operating independently, serving markets, possibly local, that are too small for large carriers to service. This is the space the ambitious new carriers are fighting for.
Besides, as analysts point out, only 3 percent of India is now traveling by air. In a country of 1.2 billion, the potential of the airline industry is therefore mind-boggling. But though this huge consumer base is attractive for investors, insiders acknowledge that a toxic cocktail of deep structural problems and flawed state policies makes translating this environment into a viable business venture a Herculean endeavor.
Meanwhile, scenting competition from smaller players, the existing majors are upping the ante. Low-cost airline IndiGo has further expanded its international network, launching its third route to Dubai on Aug. 7, complementing the airline’s flights from Delhi and Mumbai. IndiGo is planning to further routes to Dubai from Kochi and Chennai later this month.
However, officials at both companies acknowledge that to turn this opportunity into good business for all stakeholders, state governments must buttress such growth with good infrastructure and policies. The companies, on their part, must be ready with viable business models by way of routes and pricing strategy.
Lack of such vital preparation has resulted in crash landings earlier. Many airlines – like Trans India Aviation, Star Aviation, Air Dravida and Avicore -- appeared on the radar with ambitious plans a couple of years ago but are nowhere to be found today. Gurgaon-based MDLR Airlines’ founder Gopal Kanda is ensnared in a protracted lawsuit for abetting the suicide of a former employee and Jagson Airlines, a helicopter operator, also took off without much success.
Analysts point out that though the aviation sector is extremely challenging, it isn’t impossible to make money. AirAsia and RyanAir have been profitable for the last 15 years. Budget airline Southwest Airlines in the US has made profits without missing a single quarter for the last 38 years.
However, in India there is no tangible progress on developing a comprehensive and robust new civil aviation policy. The pace is likely to slacken further with the ruling Congress-led government getting into election mode for 2014. Aviation requires bold and pragmatic leadership at this time of crisis, say experts, but it is missing at the level of the Government of India. Under the 2007-2011 Five Year Plan, total infrastructure investment of US$500 billion fell short at US$425bn. Then, just months into the 2012-2017 Five Year Plan, the infrastructure budget was whittled down by US$200 billion due to a short-term slowing GDP growth.
But ensuring a bright future also means giving the industry urgent attention now, warns Jamval. "The civil aviation ministry and the government of India must get their act together. Otherwise we’ll be wasting the amazing potential this industry offers and the Indian economy will be much the poorer for it.”
(Neeta Lal, email@example.com, is a New Delhi-based journalist)
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