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Indian airlines struggle in a turbulent aviation market

Indian airlines struggle in a turbulent market

2018 08 31

2018 08 31

High fuel prices, fare wars and a depreciating rupee are making it difficult for Indian airlines to stay aloft. Despite increased passenger numbers, observers say operating models have to change.

Jet Airways, India's second-largest airline, reported a massive first-quarter loss on Monday, blaming high fuel prices and a weak rupee.  

There is speculation over the airline's future as Jet said it recorded a loss of 13.23 billion rupees (€161 million, $188.27 million) for a period of three months that ended on June 30. 

"The rise in the price of Brent fuel, a depreciating rupee and a resulting mismatch between high fuel prices and low fares have adversely impacted the Indian aviation industry, including Jet Airways," the company's CEO Vinay Dube said in a statement.

The carrier's chairman Naresh Goyal announced austerity measures and a turnaround plan to reduce €244 million in costs over two years.

 

Growth that creates loss 

India's commercial aviation boom is having unexpected negative consequences. Many aviation experts say that the major problem facing the sector is a protracted fare war that is driving ticket prices unrealistically low, even to such an extent that airlines cannot cover their operating costs.

The woes faced by Jet Airways are similar to those faced by other Indian carriers that are struggling to remain profitable. This is despite filling nearly 90 percent of their seats and recording a sharp increase in domestic passenger numbers over the last four years.

According to the rating agency ICRA, India is poised to be the world's third-largest aviation market by 2025, remaining behind China and the USA.  

Despite the growing market, Indian airlines are positioned to lose money. The ICRA warns that the aggregate losses sustained by the Indian aviation sector will be around €437 million in 2018-19, an increase from around €303 million in the previous year. 

Jet Airways isn't the only Indian carrier that's under pressure. Profits for IndiGo, Asia's biggest budget airline by market capitalization, fell almost 97 percent in the financial quarter that ended in June. IndiGo accounts for 40 percent of domestic air travel in India.

"We do not believe that these fare levels are sustainable, especially given the increase in input costs," said IndiGo co-founder and CEO, Rahul Bhatia. 

"Yet there's no choice but to keep offering them," he added. 

"Ticket prices on key and popular routes are always under sustained pressure from various carriers," Jagat Puri, a pilot, told DW. 

"Some of the prices are unreasonable and this leads to an unhealthy fare war," said Puri, adding that airlines cannot transfer rising operating costs to cost-conscious customers.

India's airlines have particularly suffered because passengers are highly price-sensitive despite spiraling jet-fuel prices and high local taxes that reach as much as 30 percent. 

India's aviation sector, experts argue, is heading for tougher times as the business environment becomes more difficult, particularly against the backdrop of rising crude prices.  

"When you see crude oil prices in the $75 to $80 a barrel range for next 18 months and the rupee falling, the cost of running an airline in India is not adequately compensated by fare inputs," Kapil Kaul, chief executive officer for South Asia at the Centre for Asia Pacific Aviation, told DW.

"Much of the fault lies in selling seats at below the cost of producing a seat," Jitender Bhargava, a former executive director at Air India, told DW.

"It is stupidity. Costs are rising but fares aren't going up. What we need is calibrated growth. Otherwise there will be turbulence all the way," Bhargava said. 

The Indian government also has had to prop up its loss-making national carrier Air India, pouring in taxpayer money to keep planes in the air. Last month, the government infused about €261 million to keep Air India operating. 

For years now, the state carrier has been surviving on bailouts and no bidder emerged when the government wanted to dispose of some of its Air India assets this year.

The sale was supposed to be the cornerstone of a wider effort to raise $12 billion by selling state-owned companies, but not one private player was interested.

Air India has found itself in dire financial straits over the past decade, saddled by a gigantic debt amounting to around €7 billion and having to beg the government for bailouts. 

With no bidder coming upfront, Air India will continue to bleed the coffers unless the government pursues divestment with even greater determination.

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