Indian aviation: A conundrum

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The CAPA India Aviation Summit 2012 held in Mumbai recently saw industry leaders engage in dynamic discussions on the existing challenges, future of the Indian aviation sector and investment opportunities. The CAPA India Aviation Summit 2012 held in Mumbai recently saw industry leaders engage in dynamic discussions on the existing challenges, future of the Indian aviation sector and investment opportunities.
SummaryThe CAPA India Aviation Summit 2012 held in Mumbai recently saw industry leaders engage in dynamic discussions on the existing challenges, future of the Indian aviation sector and investment opportunities.

The CAPA India Aviation Summit 2012 held in Mumbai recently saw industry leaders engage in dynamic discussions on the existing challenges, future of the Indian aviation sector and investment opportunities.

CAPA India Aviation Summit 2012 saw stakeholders from the industry voice their forthright opinion on the various issues that make the sector such a challenge despite being a market of high growth rate. Highlighting the various problems afflicting the industry, Peter Harbison, executive chairman, CAPA rued the fact that India is getting replaced as the 'I' from BRIC countries by Indonesia. “And that goes straight to the bottomline of foreign investment in India. However, there is light ahead – there are world class airlines here, the airports are improving, Air Traffic Control (ATC) has improved, and other factors,” he said.

With problems that range from underdeveloped infrastructure to legislative and bureaucratic mindset resting on inertia, the question remains that does India actually care about its aviation industry? The panel discussion focused on doing a reality check on the state of the industry and was moderated by BBC World's Nik Gowing. Talking about the golden years of India aviation, from 2003 to 2008, Cyrus Guzder, chairman, AFL stated, “Airlines started discounting fares heavily though costs went up. There were three mega mergers, then came the oil shock and the mega mergers did not work out. The rupee went weak and still continues, airline profitability slid.” Stressing on the need to have a new airline policy Guzder advocated the need for a transparent policy. “There is a Greek tragedy unfolding on Indian aviation, we have to work with the government behind the scenes to tweak the policy. We need an open and transparent policy.” Joining the discussion, Kapil Kaul, CEO- South Asia, CAPA however felt that regulatory framework will not change. “We are open in air but closed on the ground. We'd like to see the government take aviation very seriously. We need the right skill sets and competency in place,” he

mentioned.

The country needs an aviation policy that focuses on the sector as core infrastructure. Captain Gopinath, chairman, Deccan Charters emphasised, “On regulatory side the government made rules for Air India the first fifty years followed by Jet Airways and Kingfisher Airlines, and then for airport operators. We need strong aviation policy for the country than an airline or an operator. We know that airlines lobbied with the government so that FDI does not happen and Kingfisher Airlines collapses. Had FDI come three years earlier Kingfisher Airlines might have survived. We businessmen are to blame as we cozy up to politicians and do not think long term for the industry. There is no future for any of us if we do not expand our customer base as then we will cannibalise each other's passengers.”

Low cost not low fares

The only positive picture emerged from the LCC success story, is the fact that in India low cost airline does not necessarily mean low fares. Aditya Ghosh, president, IndiGo Airlines stated, “We have seen massive improvement in airport infrastructure. Today no one talks about parking issues. The market has rewarded us for being a carrier that offers low fares. However, I still feel that the fares are too high. The cost of operating an airline in India is excruciating. However I'd prefer to be in the world's fastest growing market than one that shows zero growth though other factors might be positive.”

According to Sudheer Raghavan, COO, Jet Airways, the term 'low cost' does not exist in India and it was only because of 'survival' that Jet Airways plunged into JetKonnect. “Seventy per cent of the customers wanted low fares. It took us three days to make a decision,” he pointed out. The airline has also developed a capacity for large inventory as 'swing capacity' depending on season. “While we fight for revenue there is a big opportunity to collaborate on cost reduction,” he added. Neil Mills, CEO, SpiceJet believes that low cost anywhere around the world has to be changed to suit the environment. “Low cost is more about efficiency, about management, about how you run the business, how many staff you have, etc,” he

stated.

India also sees the absence of of flexible fare structure. The concept of non-refundable fare is absent. Deepak Brara, director commercial, Air India averred, “We've not had the courage to experiment. Everybody has burnt their fingers terribly the last few years that they are afraid to take risks.”

Looking beyond full service

Delving on the issues, challenges and opportunities and an action plan needed for running full service airlines in the Indian market, the unanimous opinion was that of the cost structure as principally it is (aviation) a price elastic market. Hence cost and tax structure to certain destinations which are not viable are pulled back in three months of operations. Brara said, “As it is a price elastic market, we at Air India sometimes find it difficult to offer stimulating fares. Hence we need to have a unique structure, besides we also have a taxation regime. Our government does not look at the aviation industry as a principal economic sector and the absence of airport infrastructure poses as a deterrent to the connectivity growth. Full services carriers are looking beyond offering point to point service. And we would like to relate capacity increases from these services. And in the future this scenario will still remain the same.”

Adding to Brara's point, Raghavan said, “If the Indian carriers become financially strong then we can take on the world. Surely the government has opened FDI up to 49 per cent in the aviation industry, but viability of certain routes also comes at the cost of growth. Hence fleet planning should follow network planning and we see East Asia as a lot more attractive market.”

Putting forth his opinion on the session on ‘LCC Stories from the Frontline: Success, Mistakes, Learnings and Next Steps’, Amitabh Malhotra, managing director, Rothschild India said, “The year 2004-05 was a favourable period for all transactions in aviation markets for LCC model airlines. Capitalisation leads to tremendous changes and timing is another aspect. For instance, IndiGo has performed well by running a low cost carrier with appropriate investment and good timing. Besides this, another good step from the government to enhance the segment was to increase the FDI margin, but, except an airline from Gulf countries, there are not many international airlines interested in investing in India. But given a chance for flying with code-share agreement, there will be several airlines that will look forward to join Indian carriers.”

After giving a brief presentation on the airport operations experiences in India, V P Agarwal, chairman, Airports Authority of India mentioned that currently the traffic has been constrained. In the future, land acquisition and costing would become difficult as earlier it was five per cent but now due to skyrocketing prices the project cost would also increase by 30 per cent. The issue which needs immediate attention is that of providing benefits to the ground handling staff as most of the companies today are looking at opting for low cost options.

Lessor perspective

Addressing the session on 'Lessor Perspectives in the South Asia Market', Ashish Sonawala, VP, GECAS (tbc) said, “One has to have the risk addressing capacity. We will be able to access our risk once the current structural issues are resolved and opportunities will be opened automatically. Certainly there is segmentation in the industry but ultimately airlines want to be profitable. Due to inconsistency in the overall market, focusing on analysing on the comparative risk structure becomes imperative.”

While Tony Ramage, executive VP airlines- Sales and Leasing, BOC Aviation added, “Airline demand, aircraft supply and financial structure are the prime focus. The Indian market has grown significantly and I see a lot of opportunities in the market to provide financial assistance. We have also become comfortable with low cost carriers and full service carriers in India. The lessor speculative base of an airline's forward orders is reducing over a period of time, and this gives a chance for our balance sheet to grow. Currently, we are in dialogue with several Indian carriers for sale and lease of aircraft, and deals are still being done, despite the hard times.” Nirvan Veerasamy, managing director, Veling opined, “Leasing will always be an important part of the aviation sector. However, as the worldwide economy is moving towards a direction where financing is moving away from risks, it has become more difficult to finance aircraft. India, though, is still an important market for us and, that is why we adopted an India-centric strategy during our inception.”

Investing in Indian

aviation

On the concluding session of the summit on 'Investing in Indian aviation, where will the funding come from?' the panelist discussed their views on the opportunities in the Indian market, their risk appetite and strategies. James Muldowney, partner, Irelandia Aviation said, “We are looking at market opportunities and there has been a rise of the middle class who are taking to more travelling. India has been traditionally a market of big promoters, hence it is important to keep costs low so that there is affordability.” While Suresh Goyal, CEO, SBI Macquarie Infrastructure, ICICI Venture said, “Assets are required for gradual incremental value. Hence the key points needed to be reviewed include: opportunity returns should be risk free as this risk has cropped up due to macro economic conditions. And as stability of regime sector is not geared to handle this, hence investment opportunities in aircraft side is not much in India.”

Adding to that, Manikkan Sangameswaram, president-Infrastructure, ICICI Venture opined, “For opportunities in the future, the issue will be how active is the government in supporting privatisation in India. With regard to airport funding, the airport model in India is different from the rest of the world as most Indian airports are greenfield airports. Additionally, equity is available for airport operators. The challenge is for them to earn a profit. Traffic allocation needs to be discussed before the bidding process. With debt and equity available, it is important for the operators to show that they can make a profitable business as it is important to keep a balance between them.”

Even though the Indian government has opened foreign direct investment of upto 49 per cent in the aviation industry, the panelist, for the session on 'Developing common aviation vision for South Asia- and strategies for achieving it', were of the opinion that the region should come together to develop common goals and supply training in order to tap the potential that the aviation sector holds. The main reasons for connectivity issues highlighted were due to political and visa constraints which are seen overshadowing the sector. The emphasis was on having more open sky policies in the future for growth.

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