Bailout
or No Bailout: Has Indian Aviation had enough?
Hardik Dhiman. IInd Year, PGDM- Infrastructure Management, Adani Institute of Infrastructure Management, Ahmedabad, Gujarat
The
Indian Aviation industry is now the third largest and fastest growing aviation
market in terms of domestic tickets sold. India has been projected to be the
second fastest growing country in the world for passenger traffic by the
Airports Council International (ACI) in its traffic forecasts between
2017-2040. The aviation sector alone contributing $72 Billion to the GDP. With
these numbers in mind we now understand what the industry has to offer in
coming times with its huge potential for growth and spill over opportunities in
the form of higher employment, retail etc.
Although
the above data presents a very optimistic view for the industry but things if
not worse haven’t been good recently. What we know and come across through news
channels is that Jet Airways is on the brink of shutting its doors permanently
just like Kingfisher did few years back, but did you know that in past 21 years
12 airlines have gone bust in spite of Indian skies seeing huge growth in
passenger traffic.
There have been problems at various levels from policies, infrastructure, taxes to price sensitive market of India, some of them are discussed below.
§ Crippling
cost efficiencies
Indian
airlines operate in a highly cost hostile environment. The share of low to
medium income group dominates the market whose prime concern is cost of travel
over anything. This leads to pressure on airlines to operate in a highly cost-
effective manner and adapt economies of scale and scope to the fullest to avoid
disparity in revenue and expenses.
§ Freaking
fuel prices
Airlines
have been struggling to breathe under the current taxation on jet fuel prices.
The exorbitant levels of taxes mounting to as much as 30% and the weakening
rupee adds to the pain. The currency has fallen nearly 10% against the dollar
over the past year, the weakest in Asia, which hurts Indian airlines as their
costs are mostly dollar-denominated.
§ Competition
The
intense competition among the airlines to gain larger market share has led to
non-viable low-cost fares which has led to a situation of profitless growth. One
of the examples is Air India which got buried in debt and is now waiting for a
possible new owner.
The
virus that took the world by storm: COVID-19
Source: Forbes
As
if these alarming issues weren’t enough to test the Aviation Industry, the
pandemic arrived on a whim. The already hurt industry started bleeding. The
global spread of COVID-19 has had a widespread and devastating impact on the
aviation industry. The aviation industry supports $2.7
Trillion of the world’s GDP. This represents 3.6% of global gross domestic
product, and if aviation were a country, it would rank 20th in size by GDP.
As
per a report by IATA, the global industry will lose $252 billion in 2020. Air
passenger volumes will decline by 50 per cent, and recovery to the 2019 levels
is expected to happen only by 2023. The domestic revenue passenger kilometres
(RPKs) are likely to fall by 40 percent and international RPKs will decline by
60 per cent.
With
border restrictions coming into play across the world numerous airlines have
cancelled majority of international flights. Nationwide lockdown preventing the
flow of domestic traffic further restricted the movement of airlines and
brought them to halt for two months in India. Being the third largest aviation
market, close to 3 million jobs in aviation and related industries are at risk
and more than $11 billion in revenue according to the International Air
Transport Association.
In
these extreme times, private operators are left with no choice but to ask for
bailouts to the government. Bailouts have happened in past, take for example
the 09/11 attack in US where a $15 billion airline bailout was sanctioned to
help the crippled airline industry. History repeated and US this time too came
up with a $50 billion bailout aid for its airlines. Not only US but many
countries this time have stood up for their aviation industry and provided
humongous packages to help the hugely impacted sector.
Source: Bloomberg
Now
although the nationwide lockdown has been lifted but the airlines are only
allowed to fly in limited capacity with price caps. Demand revival being the
other major concern remains a topic of debate.
Steps
taken
In
March 2020, Finance Minister Nirmala Sitharaman had announced bailout packages
for the Civil Aviation industry. As part of the measures, the government aims
to ease restrictions on the utilisation of Indian airspace. Currently, aircraft
take longer routes as only 60 per cent of airspace is freely available. The
longer flying time burns more fuel and leads to long journeys for passengers.
This move will benefit the industry by ₹1,000
crore per annum.
The
other measure announced by the Finance Minister was to have a rationalised tax
regime for an MRO (maintenance, repair and overhaul) ecosystem. Most Indian
airline companies send their planes abroad for component repair and aircraft
maintenance, which increases the cost of the airline companies. This measure
aims to encourage major engine manufacturers in the world to set up repair
shops in India. It also aims to benefit both Defence and civil MRO by bringing
down maintenance costs.
These
steps although will be very helpful for the airlines in long term but what they
fail to address is the liquidity crunch currently faced by the airlines.
Airlines are in dire need of liquidity injection as they are suffering a loss
of Rs 75-90 crore per day. For airlines to be profitable they need to run all
fleets with none of them grounded. Besides this, there is need of cash to pay
employee salaries and other cash expenses. The aim should be to reduce the
costs of airlines so that lesser burden is laid onto the passengers in the form
of higher airfares.
Conclusion
So,
coming back to our main question “Should the government bailout the airlines?”
In my opinion, Yes, the Government should bailout the airlines even at the cost
of already stretched fiscal deficit. The sector has been under a lot of
pressure since many years and with this unsolicited global crisis, it is on the
brink of a collapse. Lastly, the bailout has to be in the form of liquidity
injection which shall support the airlines on urgent basis.
References
1.
https://bloncampus.thehindubusinessline.com/
2.
https://www.investindia.gov.in/
5.
https://www.businessinsider.in/
6.
https://timesofindia.indiatimes.com/
Comments
Post a Comment