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Lessons from Go First crisis — setback temporary, but cash-guzzling sector unforgiving to airlines

Go First’s bankruptcy and SpiceJet's troubles highlight challenges faced by airlines in maintaining sustainable operations in India's highly competitive and cost-sensitive market.

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New Delhi: India’s aviation industry has seen contrasting developments in the past few weeks. Towards the end of April, it soared to new heights, achieving the highest-ever single-day domestic air traffic. Just a few days later, budget airline Go First filed for insolvency in a surprise move.

While experts feel that the Go First insolvency will not hinder the country’s aviation growth story, thanks to the robust demand and strength of the Indian economy, the industry continues to battle numerous hurdles.

For airlines, one significant challenge is striking the right balance in ticket prices. They must ensure that their costs are covered without burdening flyers with exorbitant fares, as this could potentially drive price-conscious Indians towards alternative modes of travel. This delicate balancing act will be crucial for airlines to maintain profitability, experts say.

Go First, significantly, is the third airline to go bankrupt in the past decade after Vijay Mallya’s Kingfisher and Naresh Goyal-founded Jet Airways.

Budget carrier SpiceJet, too, is grappling with widening losses and grounded airplanes, although its chairman and managing Director Ajay Singh last week refuted rumours that the low-cost carrier will be filing for insolvency as “baseless”.  In a statement, he also claimed that the company is focusing on reviving its grounded fleet and getting more planes back in the air.

These travails of various airlines serve as a stark reminder of the challenges they face in maintaining sustainable operations in a highly competitive and cost-sensitive market.

Jagannarayan Padmanabhan, senior director-consulting, CRISIL Market Intelligence and Analytics, predicted that the domestic aviation market is bracing for a duopoly of sorts.

“With Go First filing for insolvency, we could see a market share gain for IndiGo and the Tata group of Airlines. We can see some upward pressure as far as fares are concerned in the medium term,” he said.

Taken together, the Tata group of airlines — Air India (9 per cent), Vistara (8.8 per cent), and Air Asia (7.3 per cent) — had a combined share of more than one-fourth of the domestic market in January-March 2023 quarter, according to data of the Ministry of Civil Aviation. IndiGo accounted for 55.7 per cent of the market during the period.

“Running an airline is indeed a capital-intensive business, and it requires a significant amount of investment to keep the operations going. Vistara has strong backing from Singapore Airlines and TATA Group, while Go First and SpiceJet were struggling financially before the pandemic and are having difficulty finding new investors,” said Waseem Ahmed Khan, senior industry analyst, aerospace & defense, Frost & Sullivan.

Nevertheless, despite these challenges, domestic air traffic has been on a recovery path from the impact of the Covid pandemic, achieving a record high of over 4.56 lakh passengers in a single day on 30 April.

 

“The domestic passenger air traffic in India has grown at a healthy compounded annual growth rate of 11 per cent over the past decade (i.e. FY 2011-20) to reach 141 million passengers in FY 2020 (pre-Covid),” Suprio Banerjee, vice president & sector head (corporate ratings) of ICRA Limited, told ThePrint.

“The penetration level for airlines as a mode of travel was just close to 10 per cent in calendar year 2022 for India. Given this backdrop, one can easily infer the favourable long-term potential of the Indian aviation sector aided by improving airport infrastructure development and rising aspiration levels to travel by air,” he added.

‘Highest costs, lowest fares’

While the insolvency of Go First may not prove to be a dampener for India’s aviation growth story as the demand for air travel continues to be strong, prices of tickets will be an important monitorable as price-conscious Indians could shift to other modes of travel if there is a continuous upward revision, cautioned CRISIL’s Padmanabhan.

In a recent interaction with reporters, Dave Schulte, managing director, regional marketing, at Boeing Commercial Airplanes, pointed out that there are three challenges that are unique to the Indian aviation market, particularly on the domestic side.

The first reason, he said, was that India has the highest fuel costs in the world. “We’re seeing that the global cost per barrel of fuel is down about 30 per cent since the beginning of the year, while Indian domestic fuel has increased 11 per cent,” he said.

The second issue was that about 70 per cent of all aviation-related operating expenses are priced in US dollars, which means that the changing exchange rates were adding another layer of complexity to the market.

However, he said that India continues to have the lowest fares in the world.

“So, highest costs, lowest fares,” he said. “It’s a very challenging market. There will be some ups and downs as we go through this… However, it is the third-largest aviation market in the world. We’re very bullish on the market.”


Also Read: India needs a law allowing lessors to repossess aircraft leased by defaulting airlines, says Boeing


Factors driving aviation costs

Aviation turbine fuel (ATF) represents the single largest cost element for airlines, accounting for 30-40 per cent of their total operating expenses, and hence is a significant factor in profitability of the airline.

According to data shared by Banerjee, the average ATF price was Rs 1,21,013 per kilo-litre (KL) in FY2023 and Rs 99,506 per KL in April 2023 compared to Rs 64,715 per KL in FY2020.

“Any rise in ATF prices impacts the profitability metrics of the airlines, if not proportionately passed on to the customers,” he explained.

“While the ATF prices have witnessed a sequential decline over the past four months, they still remain at elevated levels as compared to the pre-Covid era. The airlines’ efforts to ensure fare hikes proportionate to their input cost increases will be key to expanding their profitability margins,” he added.

He further said that supply-chain challenges, including the availability of spare parts and engine issues, have hit the sector, resulting in the grounding of certain aircraft for some airlines, thus impacting their overall capacities.

“This also negatively impacts the cash-flow generation of the airlines, given the high fixed-cost nature of the business,” Banerjee said.

“While some airlines have adequate liquidity and/or financial support from a strong parent, which can help them sustain over the near term, for others, the credit metrics and liquidity profile will remain under stress over the near term, till there is meaningful turn around in operations or adequate liquidity injection to sail through difficult times,” he added.

Blue skies ahead

Conceding that there have been short-term challenges for select airlines, in the past as well as currently, Banerjee said the growth in air travel going forward will be aided by improving affordability and rising aspiration levels, besides growing demand for tourism.

Echoing similar views, Khan said India’s airline industry showcased a strong recovery in passenger traffic, and despite the high ticket price, the demand for air travel remained high.

The government, he said, also aims to enhance regional connectivity under the UDAN scheme. Therefore, the civil aviation sector is expected to witness a high growth rate due to increasing investment in airport infrastructure, tourism, and favourable demographics.

“We don’t see a major bottleneck or regulatory issue that could hinder the operations of airlines in the country. If that is the case, then IndiGo wouldn’t be making profits,” Khan pointed out.

At a press interaction last week, Boeing India president Salil Gupte asserted that India is the fastest-growing civil aviation market, and will be one the fastest growing-economies in the world for the foreseeable future. He emphasised that this is going to be the ultimate driver of aviation.

“So, yes, these challenges occur and it is sad when they do, when you have an airline stop operating, when you have an airline go through financial challenges,” he noted. “And it shapes how people view that market, but progress will never cease here because the macro trend of the growth for India is very well-known and it’s very clear.”

(Edited by Tony Rai)


Also Read: Go First crisis could drive up airfares, be ‘silver lining’ for rival airlines


 

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