Traffic boom, but airline gloom

Government bails out Air India – again; Kingfisher grounds its international fleet

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

May 1st 2012

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Government-owned Air India needed some good news. Last month it finally arrived when the government announced the flag carrier would receive another massive, life saving cash injection to keep it afloat. New Delhi will pump $5.8 billion into the troubled airline through to 2020, including $1.3 billion in its current financial year. Read More »

IndiGo: the only Indian carrier making a profit

“We all know India’s aviation sector has been under financial stress for some time,” said aviation minister, Ajit Singh. “Air India hasn’t been able to pay salaries for a long time. They haven’t paid the airport authorities. Some other airlines are also in trouble.”

In addition, Air India, which merged with largely-domestic carrier, Indian Airlines, in 2007, still carries the burden of a $15 billion, 111-plane purchase from Boeing and Airbus, including 27 B787 Dreamliners.

Despite the boost for Air India there was bad news – or rather no news – on another critical front.

A decision on whether direct foreign investment will be allowed in Indian domestic carriers by foreign airlines, expected last month, has again been delayed. Mired in debt, a number of local airlines are desperate to attract offshore airline partners willing to pump money into their operations.

At present, while foreign investors are allowed to hold up to 49% of an Indian carrier, overseas airlines are not allowed to take any stake.

Orient Aviation understands the hold-up is because the ruling Congress party’s biggest ally - Trinamool Congress - is opposing the proposal and Cabinet can’t approve the move until it gets its backing. A decision is now not expected until late this month at the earliest.

Only one of the country’s six major airlines, budget carrier IndiGo, is making money.

Whether that decision will come in time to save India’s worst hit carrier, Kingfisher Airlines, remains to be seen. It has not made a profit since its launch in 2005. With more than $1.3 billion in debt it stopped flying internationally in April.

Chairman and founder, Vijay Mallya, said there had been some interest from overseas investors in Kingfisher, but he gave no specifics. And while some foreign airlines, such as Gulf carriers Emirates Airline and Qatar Airways, have signalled they may look at Indian investment, there are grave doubts amongst analysts that Kingfisher would be a prime target for them given its financial plight.

According to consultants CAPA, Indian carriers overall are carrying US$20 billion in debt and have probably lost US$2.5 billion in the fiscal year that ended in March.

CAPA’s India-based South Asia head, Kapil Kaul, said without an urgent injection of at least $600 million Kingfisher’s future is “challenging”. The carrier owes millions of dollars to suppliers, lenders and other creditors.

Last month it began paying staff salaries, which had been due for months, after its bank accounts were unfrozen. It still owes huge taxes as well as millions to airports and fuel suppliers.

The turmoil at Indian carriers continues despite a boom in passenger numbers. In February, India experienced the second strongest domestic air traffic growth in the world after Brazil, with growth soaring by 12.3% and airlines filling 75.4% of their seats.

But the expansion can’t be converted into profits because of crippling taxes imposed by the Indian government at both state and local level on jet fuel, as well as high airport charges and intense competition that has depressed fares.

Airlines had been hoping for some major initiatives to ease their woes in the government’s March budget, but they were largely disappointed.

While the government did allow operators to raise working capital through external commercial borrowings (ECBs) and exempted imported aircraft spare parts from basic custom duty, it also increased taxes elsewhere, including 12% in service taxes.

Worse still, there was no sign that New Delhi was doing anything positive to force state governments to reduce taxes on aviation turbine fuel (ATF), which are as high as 30% in some states.

It adds to the already high price of fuel which accounts for up to 50% of airlines’ operating costs. While the government, earlier this year, allowed airlines to import ATF, many observers believe it is not a practicable alternative. Kaul said importing fuel would amount to a “logistical nightmare”.

For Air India, however, the future looks far brighter. India’s Cabinet Committee on Economic Affairs (CCEA) already has approved the turnaround plan (TAP) and financial restructuring plan (FRP).

The restructure means it will take delivery of 27 B787s, although they will now be taken under sale-leaseback arrangements, according to aviation minister Singh. The first will arrive later this year.

Air India will spin off two of its divisions, maintenance, repair and overhaul (MRO) and ground handling. The airline will transfer 7,000 employees to the new MRO company, Air India Engineering Services Ltd, and 12,000 to the ground handling company, Air India Transport Services. They will be run as profit centres.

“These separate companies will be able to work not only for Air India, but for other airlines. Hiving off maintenance, repair and overhaul will help Air India tap the potential of the nearly $1.5 billion MRO business in the Asia-Pacific region,” said Singh.

A government “committee of officers” will monitor the restructure. The airline will have to meet “milestones” before money is released to its operations.

The turnaround plan foresees Air India becoming profitable in 10 to 15 years. Singh stressed the airline would remain a government-owned airline.

India’s aviation industry will require 1,043 new aircraft, valued at $145 billion, between now and 2030, according to Airbus’s latest forecast. Of these, 1,020 will be passenger aircraft while the other 23 will be freighters. Of the passenger aircraft, some 860 will be for growth and 160 will replace older aircraft.

By 2030, India’s passenger fleet will more than triple to around 1,180 aircraft. The new passenger aircraft include 646 single aisle, 308 twin aisle and 66 very large aircraft such as the A380, according to Airbus.