• News
  • Columns
  • Interviews
  • BW Communities
  • Events
  • BW TV
  • Subscribe to Print
  • Editorial Calendar 19-20

Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

More From The Author >>
BW Businessworld

Indian Aviation In Crisis

A fine balance will need to be maintained between pricing and costs to ensure the industry returns to profit and lives up to its potential as the world’s third largest market in the next decade

Photo Credit : Shutterstock


First, the good news: India is set to become the third largest aviation market in the world by 2025, behind China and the United States, according to a report by the International Air Transport Association (IATA).

The bad news? India’s airlines are facing an existential crisis, buffetted by high fuel costs, low ticket prices and clogged airport infrastructure. India’s current annual airline passenger traffic is over 150 million. It is expected to double by 2025 and more than triple to 478 million passengers by 2036. 

According to a Bloomberg report by David Fickling, “For all the disagreement in the industry about the future of aviation, there’s perfect accord on one point: there’s going to be a lot more of it. The world’s air passengers flew a combined 7.64 trillion kilometers (4.75 trillion miles) in 2017, according to Boeing Co’s latest 20-year market outlook. By 2037, that will rise to 18.97 trillion kilometers, with about 40 per cent of the increase happening within five intra-regional markets: China, India, North America, Europe and Southeast Asia. 

“That’s sparking a battle over the biggest bottleneck holding back this growth: airports. The governments that still own many of them should be more open to privatisation to cover a $78 billion funding gap in needed capital investments, the Airports Council International, an industry group, argued in a report earlier this year.” 

The aborted sale of Air India and the financial crisis in Jet Airways symbolise the mismatch in the country’s aviation sector: great potential but poor planning. In the 25th year of its operations, Jet Airways is bleeding. Pilots are being allowed to leave the airline with just 48 hours notice rather than the normal six months period. The airline has 2,000 pilots (including foreign pilots) and 16,000 employees. Clearly, it is overstaffed but the rising cost of aviation turbine fuel (ATF) and a weak rupee have made matters worse. Caught in a low-priced ticket environment, Jet’s ability to increase revenue is limited. 

The acquisition of Jet by the Tata group, which owns Vistara Airlines (along with Singapore Airlines) and AirAsia India, is the most viable outcome. The initial obstacle in the way of a deal was Jet Airways’ founder Naresh Goyal’s reluctance to give up control of the airline – an immutable condition for a Tata buyout. Jet’s huge second quarter loss has added a sense of urgency to resolving the airline’s problems. Once the board of Tata Sons clears it, the acquisition of Jet will take several months to conclude, given the complexity of the transaction. 

For the Tatas buying Jet makes economic sense. It is a relative bargain at its depleted market capitalisation. A majority stake in Jet would cost the Tatas very little, apart from taking over the airline’s significant gross debt of nearly Rs. 10,000 crore. That would still be worthwhile given Jet’s legacy airport slots at Heathrow, Brussels, Amsterdam and other global hubs. Jet has a fleet of 124 aircraft (though several leased planes are being returned) and a good domestic route network (though here too routes have been cut in the winter schedule in order to reduce costs). 

Tatas were initially keen to buy Air India but quickly lost interest once the civil aviation ministry announced onerous conditionalities to the privatisation process. Air India is a drag on government finances but its sale to the private sector has been sabotaged by mandarins in the civil aviation and finance ministries who regard Air India as a government fief. It provides free upgrades and frequent junkets to bureaucrats and ministers at taxpayers’ expense. There is little appetite in the government to let go off a milch cow. 

After the failed attempt to sell Air India in May 2018 and alarmed by mounting losses, the airline commissioned yet another report to revive its sell-off effort. The report was submitted recently to the government by Air India’s chairman Pradeep Singh Kharola. It suggested selling Air India in disaggregated bits. Like earlier reports this too is likely to see a quiet burial in the fullness of time. A burden on the exchequer though it is, the government is loath to give up its white elephant. Whenever a serious sale proposal is made, usurious conditions will be attached by the bureaucracy, as they were last May, to make the sale unviable for a private buyer.  

Despite the financial crisis in the aviation sector, most private airlines like Jet, Indigo, Vistara, Go and SpiceJet have a good record of safety. That cannot be taken for granted. Recent incidents involving problems with Pratt & Whitney engines are a concern. Pilot indiscipline too is chronic. A senior Air India commander recently failing a breathalyser test for elevated levels of alcohol. The DGCA has suspended his flying licence for three years. AI has removed him as director, operations. 

Apart from a cost-revenue mismatch, poor airport infrastructure is the other big hurdle to safety as well as to faster revenue growth and a return to profit. India’s second busiest airport, Mumbai is bursting at the seams. A second nodal airport at Navi Mumbai has been bogged down by land acquisition and environmental issues. The government’s private-public partnership model to build world-class airports in major cities has, however, been a notable success. In less than a decade, shabby airports in Delhi, Mumbai, Hyderabad, Bengaluru and elsewhere have been transformed into world class terminals. The problem is capacity. Air passenger traffic is growing at double digits. With 300 million Indian and foreign passengers likely to use Indian airports by 2025, capacity enhancement is critical at metro airports as well as at mid-level cities like Chandigarh, Ahmedabad, Nagpur, Lucknow and Bhubhaneswar. 

In the expected upsurge in passenger air traffic too could lie succour for troubled private sector airlines. As volumes rise, economies of scale will increase profitability. The danger though lurks in predatory pricing of the kind that has severely damaged the telecom industry. A fine balance will need to be maintained between pricing and costs to ensure the industry returns to profit and lives up to its potential as the world’s third largest market in the next decade.

Tags assigned to this article: