“The aviation market needs structural changes to fly high”

The past few weeks have seen Indian airlines face significant turbulence. Labor actions, consequential security incidents, abnormal increase in input costs, late payments and credit constraints are all at the forefront. Despite packed airports with around 68 million domestic passengers and 19 million international passengers since January, the losses are mounting. And security incidents, when viewed in this context, are cause for concern. The aviation regulator has stepped up its scrutiny, and rightly so. The overall situation is one that calls for an immediate course correction.

For industry watchers, the Indian aviation market is a paradise and a paradox. A market with immense potential but with structural challenges; a market with a growing traveler base but also a changing nature of demand; and a market where multiple airlines fly in a sea of ​​similarities – all pretending to be different. It is a market of contrasts. Where opportunities abound and so do challenges.

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Unfortunately, the challenges couldn’t have come at a worse time. After the pandemic decimated demand, travelers slowly but surely began to return to the skies. At the beginning of the year, yields remained at a high level and the preliminary picture looked pleasant. Forecasts predicted an additional 135-140 million domestic passengers and an additional 30 million international passengers in Indian skies in 2022. But supply-side challenges were not anticipated. The challenges of limited credit, unconstrained capacity, and input costs went awry.

Traditionally, input costs have been bludgeoned as a troika of fuel, foreign exchange and financing. Fuel, especially jet fuel, as it is taxed as a luxury with some of the highest tax rates in the world; FX because the rupee-dollar spread has gradually widened, and funding because the cost of capital remains extremely high. This time all three have reached alarming levels and are creating a perfect storm.

The results are reflected in profitability. Unstable EBITDA, fragile balance sheets and very low cash levels bear witness to this. From the numbers, it’s clear that for the industry as a whole, undercapitalization is widespread and collective losses for the coming fiscal year will be north of $1.3 billion. Funding is simply not available and most airlines fall back on support from the parent company. When this support is weak or non-existent, the risks of failure are high. Costs are reduced in every possible way. And that began to reflect on and in operations.

For airlines in India, the events of the past few weeks should not be taken lightly. Because these have ripple effects and will change the nature of the airlines themselves. Not to mention that the sector will see new capacity added with the launch of start-up airline Akasa, the revival of the old Jet Airways and the new Air India under Tata ownership.

Overall, while the country’s aviation potential continues to be immense, it will not be realized without deliberate and decisive action. Structural change is the need of the hour – through more rational fiscal policy, letting market failures take their own course, and through carefully coordinated measures that free up credit for industry.

The sky is the limit, but getting there requires navigating through turbulence.

(The author is the managing partner of the aviation consulting firm AT-TV)