By NEWSCOP | INNLIVE
From India’s commercial capital Mumbai to Pune in the industrial heartland of Maharashtra is 75 miles. An energetic crow can make the trip in five hours. A flight on Air India Regional could take longer.
“India is a country with various infrastructural constraints,” says Milind Sohoni, who specializes in operations management at the Indian School of Business (ISB) in Hyderabad. Among them: Airports are far away from city centers; it could take two hours to reach them. Check-in proceedings could account for another hour. Compared to this, the flight time of 50 minutes between Mumbai and Pune is practically negligible.
But there are more delays at the other end. Waiting for the baggage carousel could take an hour if you aren’t lucky. And then there is another two hours to town.
The airlines and airports face other challenges, too, including competition from upgraded railways and highways. Indian civil aviation has passed through a bleak half decade but, going by the results of last year, there is hope for a turnaround. Domestic passenger traffic in 2014-2015 shot up to 70.54 million, a 14.1% rise over the previous year. This was at a passenger load factor of 77.15%.
IndiGo is the most profitable airline in India and has dared at long last to file for an IPO and venture into the fickle world of investors badly scarred by the Kingfisher Airlines episode. Kingfisher went down under a mountain of debt leaving a harried promoter, Vijay Mallya, to sell his family jewels to try and pay off his dues.
New Vigor?
New airlines have also taken wing. Vistara from the Tata group, in a partnership with Singapore Airlines, started operations early this year and, though it’s too early to talk about success or failure, it has introduced a new vigor into the market. The Tatas, meanwhile, are aiming for a second major presence in the aviation sector. The company already has a 30% stake in AirAsia Berhad and is planning to buy out Arun Bhatia, one of the original promoters. This will take the Tata stake to 51%; AirAsia holds the other 49%. The airline has commenced operations in India.
A Tata Sons spokesperson notes that the civil aviation sector offers “sustainable growth.” With increasing urbanization and growth in travel across India opening up opportunities, “there is sufficient compartmentalization of demand and that is the reason for Tata Sons to enter into distinct initiatives, with AirAsia in the low cost carrier (LCC) segment and with Singapore Airlines in the full service segment.”
There are new aspiring players — Turbo Megha, Premier Airways, Air One, Air Pegasus and others are hatching plans. G. R. Gopinath, founder of Air Deccan, India’s first low-fare airline, is also planning a new airline. “My earlier plans of launching a regional airline got stuck because of some license issues. Now if I do it, it will be a regular airline. It should happen in around six months’ time,” he says.
Action Replay
After the first phase of liberalization in the civil aviation sector in 1992, there were many market entrants. Parvez Damania, a poultry farmer, started an airline, which ran into a wall of opposition from Indian Airlines and collapsed under charges of allowing its passengers to get drunk and misbehave during flights. Thakiyudeen Wahid, the promoter of East West Airlines, was shot dead outside his Mumbai office. Others went off the runway, but more quietly.
This was a replay of what happened in the 1940s. “Ad hocism has been the order of the day [since that time],” says Jitender Bhargava, former executive director of Air India and author of The Descent of Air India. “Policies have thus far been formulated depending on who — which airline or country — is seeking a benefit. This has been true since the first airline was conceptualized and J.R.D. Tata, the founding father of Indian aviation, had to convince the policymakers to allow Tata Sons to start Tata Airlines by giving them various kinds of assurances.
“As all kinds of ‘entrepreneurs’ entered the fray thereafter, and they soon began cutting corners, raising concerns on safety,” continues Bhargava. “The government had to perforce nationalize the industry and all private domestic airlines were amalgamated into one carrier, named Indian Airlines, which in 2007 merged with Air India. The economic reforms phase of 1991 once again saw numerous ‘entrepreneurs’ establishing airlines. Most collapsed because the promoters neither had deep financial pockets and nor did the policies allow a conducive environment for economically viable operations.”
Now the aviation industry faces two levels of competition. “We face intense competition from other LCCs [low-cost carriers] as well as full-service passenger airlines that operate on our routes,” notes the IndiGo Draft Red Herring Prospectus (DRHP), which has been filed for an IPO with the Securities and Exchange Board of India (SEBI). The prospectus goes on to add that competition could also come from new entrants to existing domestic markets and from “other Indian carriers that operate in the international sectors, such as Jet Airways, SpiceJet, Air India and Air India Express, along with other international airlines such as AirAsia, Vistara and potential new providers of international flight service such as GoAir.”
Today’s aviation industry suffers from a “bullwhip effect,” says Sohoni of ISB. That is a “phenomenon in forecast-driven distribution channels” and “it refers to a trend of larger and larger swings in inventory in response to changes in customer demand, as one looks at firms further back in the supply chain for a product.” One unique thing about the airlines business is that inventory has to be used up by the time a flight is set to leave. Once a flight takes off with empty seats, the fares for the unused seats are lost forever. But there is a certain glamor about aviation that keeps promoters pumping in money, even when all seems lost.
From 2004 to 2014, domestic traffic grew at a compound average growth rate (CAGR) of 14.3%, while international traffic expanded at 10.8%, according to a report by the Center for Asia Pacific Aviation (CAPA). The total number of annual passengers using Indian airports more than tripled during this period to 169 million. The report went on to note that the growth was accompanied by $30 billion of investment, including for aircraft equipment, airport modernization and development, and ancillary sectors such as ground handling, maintenance and general aviation.
“Airlines have on average been offering fares below cost, stimulating traffic above the levels that would ordinarily have resulted at sustainable pricing level.” CAPA estimates that Indian airlines will need to raise US$1.5 billion of capital in fiscal 2015 just to stabilize their operations. “The situation across the industry is quite dismal….,” the report says. “But there are bright spots.”
Room for Growth
Gopinath points out that “only about 2% to 3% of India’s population can afford to fly,” whereas in most developed countries the figure is significantly higher. “This means that with the right ecosystem both from the government and the industry, and if the right model is adopted, there is tremendous scope for the industry to grow.”
With a population of over a billion people, the Indian aviation sector should be able to sell at least a billion tickets annually, notes Gopinath. He calls for a “25-year roadmap” to reach that goal. The government, he adds, must “wake up and figure out why the aviation industry is stagnant when other industries like telecom, consumer goods, cell phones, etc. are all growing year on year by leaps and bounds….. In India what we do is try and solve the problem of individual airlines, whether it was Kingfisher earlier, or Jet or Air India. Instead, we need to look at the larger picture and see how we can boost the industry as a whole.”
Gopinath also calls the directorate general of civil aviation “out of sync with the times,” and says civil aviation is “not a focus area” for the government. “It has still not realized that aviation is integral to economic growth. Take the North East — it is cut off, there is no connectivity there and there is no economic growth. Investments will go into the remote areas, the rural areas, only when there is connectivity — connectivity not only in terms of the Internet, but roads and rail and air. I think it will happen, but the government has to wake up.”
Hope is building on the infrastructure front. A more pragmatic civil aviation policy has been in the works for more than a year and is expected to be unveiled soon. This new policy puts a premium on addressing infrastructural constraints, observers note. Particular attention is being paid to upgrades of airports, and new and faster systems of transport from city centers to the airports.
More generally, “the aviation industry globally is vulnerable to numerous extraneous factors — economic recession, war, health concerns….” says Bhargava. “The Indian aviation industry has been afflicted with additional factors — high operational costs, taxation, costly fuel, a price sensitive market and an imbalance created by government in capacity: demand through reckless grant of seats under bilateral agreements.”
Looking Ahead
So, what of the future? Says Gopinath: “I think the industry will grow in the coming years, but there will be a lot of bloodshed. The industry will not collapse just because more airlines come into the scene…. Airlines collapse because of their own accord and the inherent problems of the industry. The market is very much there — 97% to 98% of the market is still untapped.”
India’s civil aviation is a nascent market where more competition will bring more choices in fares and services, says the Tata Sons spokesperson. Adds Bhargava: “India is hoping to be the third-largest market in terms of air traffic by 2020 — after the U.S. and China.”
As for Air India, many observes think it demonstrates that the government should not be in the business. “With its huge debt, mounting losses, a management that lacks operational freedom and a promoter — the government — [that is] unclear about the role of Air India, we will continue to witness a scenario of it being there, but becoming increasingly irrelevant,” Bhargava says. The airline carries less than one in six passengers domestically and internationally, and its market share is likely to shrink as other airlines grow faster, he adds.
No comments:
Post a Comment