Clipped wings: The Aviation Industry & Recession

The fairy tale seems to be ending. The aviation sector, which witnessed a double-digit growth in the recent years, has begun resorting to rationalisation. The recession, like in other sectors, is sure to separate the mediocre from the tough in the aviation sector too.

Two events in this regard stand out. In the first instance, private Indian airlines, which in the past have experienced massive growth, have demanded a “bailout” in the form of reduction in taxes and airport charges etc from the government and even threatened to ground their planes!

And, in the second, the Air India imbroglio. The Maharaja (as it is called) has piled up accumulated losses of Rs7,000 crore and debt exceeding Rs16,000 crore. It has forced to cut salaries and cancelled order for new jets. The situation became so serious that it has to beg the government for a bailout – though the govt denied.

The backdrop

"We are bleeding. Everybody is bleeding. Giving a helping hand to the airline industry is done all over the world," Naresh Goyal of Jet Airways retorted while asking the government for a ‘rationalisation of taxes’.

Among others to join him were Kingfisher Airlines, IndiGo and SpiceJet, which have accumulated losses of Rs 2,444 crore in 2007-08 and are expected to stay in the red in 2008-09 with losses of over Rs 10,000 crore.

The recent turbulence in the Indian airline industry is in sharp contrast to the double digit growth in the past.

While 2007-08 saw sharp rise in fleet size followed by consolidation of the sector through mergers and acquisitions by major airlines, the industry has posted huge losses this year, after being hit by the global economic slowdown.

According to a research by IATA (the International Air Transport Association), air traffic in terms of passenger and cargo movement increased by an impressive 19.14% and 9.91%, respectively, during the period from 2003-04 to 2007-08.

The fleet size of the Indian aviation industry also grew 23.77% during the period from May 2005 to April 2008.

However, the year 2008 has proved to be fatal for the industry.

The grudges

All major airlines in India have complained about the exorbitant prices of Air Turbine Fuel (ATF). According to an estimate, the ATF prices in India are 60-70 percent higher than those at the international level. While in other countries fuel cost is usually 10-15 percent of an airline’s total operating cost, in India it accounts for about 40 percent.

Some argue that a solution to this crisis is to allow the airlines to buy ATF from their chosen vendors, as proposed by the Naresh Chandra Committee constituted by the government to prepare a road map for the civil aviation sector.

“Today, airlines in India are paying 60-70% higher tariff on aviation turbine fuel. Sales tax is averaging 26-30% and we are requesting that this sales tax be put in a level of which is sustainable and which is comparative to any other airline in any other part of the world. Similarly, airport charges, landing and parking fees are very high. There is a new ground handling policy, which increases the cost of aviation further. We believe that we should be in terms of cost put at the same level as airlines in other parts of the world,” Ajay Singh, director, SpiceJet, told a television channel on the day the airlines decided to go on a strike (which they eventually called off in the wake of government and public pressure).

Sanjay Datta, executive director of Jet Airways, reiterated this by saying, “What we are asking for is not a bailout but a rationalisation of taxes.”

Since 2001, following the withdrawal of ‘Administered Price Mechanism’ (APM), the price of ATF in India is calculated on the basis of International Import Parity Prices. However, ATF prices also include freight charges from the Gulf to India, customs duty, domestic transportation and other charges, excise duty, sales tax, besides the oil companies’ mark-up.

The airline industry has been demanding the government to add ATF in the declared goods category, thereby attracting a uniform duty of 4% in lieu of sales tax, which averages around 23%.

As part of measures to provide relief to the airlines, the government has already brought down customs duty from 5 to 2.5 percent.

However, the demand for rationalisation of taxes on ATF still persists, which the airlines say will result in an estimated annual savings of USD 624 million for the industry.

ATF prices had peaked to Rs 71,028.26 per kilolitre in Delhi August last year, as international crude prices touched a historic high of USD 147 a barrel. This meant airlines had to pay Rs 71 per litre in August 2008 versus Rs 36 a litre now, which is around Rs 20 less than what a car or bike owner pays for a litre of petrol!

The bloodbath

The airline industry is in tatters worldwide as the recession has squeezed the purses of people, forcing them to look into cheaper modes of travel. This has not only stung the high cost, luxury airlines but the low cost, no-frills one too.

In a recent report, IATA said that the international cargo traffic has been steadily coming down over the past 13 months. The report also predicted that an early economic recovery was still far away.

"These are extremely challenging times for airlines. There are no signs of an early economic recovery," IATA said.

World’s airlines will lose USD 9 billion in 2009 after shedding USD 8.5 billion in 2008, when high oil prices hit profits, the report stated.

"At the current pace, it will likely take several years before demand returns to early 2008 levels," IATA report comments on cargo traffic.

Major airlines around the world have only one story to tell - mayhem. While British Airways has reported a pre-tax loss of USD 245 million in the three months to the end of June this year, Air France-KLM lost 496 million euros in the second quarter. Lufthansa earned 40 million euros in the same period, compared with 337 million a year ago.

Air China suffered a net loss of 9.3 billion yuan in 2008, while China Southern and China Eastern also swung into the red last year, with net losses of 4.8 billion yuan and 15.3 billion yuan, respectively.

Singapore Airlines Ltd, the world’s second-biggest carrier by market value, had a net loss of USD 213 million in the quarter ended June 2009. Similarly, Air France-KLM, Europe’s biggest airline, and Australia’s Qantas Airways Ltd have also cut capacity and announced plans to reduce their workforce as travel slows.

Bailout

Bailout is certainly an option, though controversial, to resolve the crisis.

While China has already announced a bailout for its state carrier, British Airways has got a facelift from the UK government.

(Trustees of BA’s pension fund agreed to forgo over USD 544 million in guarantees – improving its cash balance substantially, thus allowing the cash starved airline to operate till 2010)

Talks are already on to provide a bailout to recession-hit airlines in the US and European countries.

Last time the US had given a bailout to its air carriers was in 2001 after the 9/11 tragedy.

India’s aviation sector is considered as the second biggest loser after the US.

But looking at the huge fiscal deficit and diminished tax collections, it remains to be seen whether the government here will dole out more sops for the airlines or will bring a different road map for the sector altogether.