Can India's aviation sector withstand pandemic-induced turbulence?

Privatisation of state-owned Air India is on track, Jet Airways plans a comeback and a new budget airline is being launched in a difficult market

A jeep goes past an Air India aircraft parked at Chattrapati Shivaji International airport in Mumbai on May 8, 2012. At least 100 pilots from India's debt-laden national carrier Air India failed to turn up to work in a move the civil aviation minister described as an "illegal" strike.  The airline, which loses nearly USD 2 million a day, is facing mounting problems due to rising fuel prices, competition from low-cost rivals and a record of labour disputes. AFP PHOTO/Indranil MUKHERJEE

India’s aviation sector is no exception when it comes to navigating pandemic-induced turbulence.

But what sets it apart from others around the world is the rising interest of investors.

Despite the challenges faced by the market – already in a precarious state before Covid-19 owing to fierce competition and high costs – some investors in Asia’s third-largest economy are undeterred.

Air India, the debt-laden national carrier, has received bids in its privatisation process and Jet Airways is poised to return to the skies. Even the launch of a new airline is on the cards.

Jet Airways stopped flying in April 2019 when it ran out of cash. It plans to resume operations in the first quarter of 2022, according to a statement on Monday from the consortium of London-based Kalrock Capital and UAE-based businessman Murari Lal Jalan, whose plan for the airline revival was approved by India’s bankruptcy court this year.

An "ultra low-cost carrier” called Akasa Air is also preparing to start operations. To be run by former Jet Airways chief executive Vinay Dube and backed by billionaire Rakesh Jhunjhunwala, the airline is said to be eyeing a launch in the first half of 2022.

“The Indian aviation sector may emerge from Covid with more airlines than it went in with, given the planned resumption of Jet Airways and the launch of Akasa, resulting in eight to nine carriers in total,” says Vivek Keerthy, sector lead at Capa India, an aviation advisory. “Akasa and Jet Airways’ plans reflect strong confidence in India’s long-term fundamentals.”

But Capa “believes that there will be strategic consolidation in the Indian airline sector once the Covid umbrella has lifted”, and there is a possible scenario of mergers or exits, which could result in India’s aviation sector being left with three to four carriers, Mr Keerthy said.

As far as the current situation is concerned, industry experts say the aviation sector is nowhere near a recovery.

“The aviation sector has faced the worst-case scenario during the pandemic,” said Nitin Shahi, executive director at Findoc Financial Services Group. “Even after strict lockdowns coming to an end and some restrictions on travel easing, the sector hasn’t been able to recover.”

The major factor that could help end the downward spiral in the market is the planned privatisation of Air India.

Mr Keerthy said this “could positively and structurally reset the sector”.

The long-awaited privatisation would lead to a more market-based approach, with the government expected to address policy and regulatory distortions that have plagued Indian carriers for decades once it relinquishes its ownership. The move will create a more favourable environment for the industry as a whole, Capa said in research published last month.

On Wednesday, the bidding process for Air India concluded. The line-up of potential investors in the loss-making airline includes Tata Sons, which has confirmed its participation in the bidding process. A group led by Ajay Singh, the chairman of budget airline SpiceJet, has also reportedly made an offer.

The interest this time around is a complete turnaround. The Indian government has failed in its earlier attempts to sell the carrier to private sector investors.

An attempt in 2018 to sell a majority stake in Air India did not attract a single bid. Since then, the privatisation process has been delayed repeatedly, partly by the pandemic. With the airline bleeding taxpayers’ money as the government focuses on an economic revival, selling the airline is critical for the government finances.

“It’s a bold and necessary step taken by the government to privatise this airline,” Mr Shahi said. “A private company is more efficient in technology [and] resources, and the government does not have the required resources to compete with them.”

To generate interest, the Indian government sweetened the deal by offering a 100 per cent stake in the airline and reducing its debt burden, which currently stands at more than $3 billion.

Analysts say relaxations from the government, along with factors including the airline’s coveted international landing slots at destinations such as London’s Heathrow Airport and New York’s JFK, make it an attractive proposition for a group that is willing to invest in long-term prospects of the business.

“The interested parties could be looking at significant tangible and intangible assets including airport slots and potential to improve efficiencies with better management,” said Richa Agarwal, an analyst at Equitymaster. “Some of the successful low-cost airlines have proved that with better management and cost and operational efficiencies, profits can be made in the sector,” she said.

Air India has a fleet of 128 aircraft. Before the pandemic, it flew to more than 100 domestic and international destinations, according to its website. Like other carriers globally, the airline was forced to temporarily halt flights to many destinations and significantly reduce its capacity.

Among the current line up of bidders, Tata, one of the biggest conglomerates in India, is widely seen as the frontrunner to take ownership of the ailing airline.

It already has a significant presence in India’s aviation sector. It is a joint partner with Singapore Airlines in the Indian carrier Vistara and also with Malaysia’s Air Asia in the low-cost carrier Air Asia India.

If Tata takes over the flag carrier, it will be history turning full circle. Air India was founded by JRD Tata, the group’s former chairman, in the 1930s when it was known as Tata Airlines before nationalisation more than 20 years later.

The near-term challenges may be massive, but analysts say that the longer term potential for airlines is huge in the country of 1.3 billion people, which is set to overtake China as the world’s most populous nation by 2027.

By 2030, India’s international air traffic is projected to increase by 50 million to 60 million passengers a year compared with pre-Covid levels, to reach 115 million to 125 million, according to Capa. It is then expected to double again by 2040, to 240 million.

Within the country, there is also enormous scope for growth, as only a single-digit percentage of the population currently travels by air.

The aviation sector in India is now showing some signs of improvement as restrictions on travelling were eased after the deadly second wave of Covid-19 this year and the government has increased the pace of vaccination.

Quote
The Indian aviation sector may emerge from Covid with more airlines than it went in with, given the planned resumption of Jet Airways and the launch of Akasa, resulting in eight to nine carriers in total
Vivek Keerthy, Practice Lead, CAPA India

Capa forecasts domestic traffic of 80 million to 95 million passengers during the current financial year to the end of March compared with 52.5 million in the past fiscal year. But this level is well below the almost 140 million passengers seen in the financial year from April 2019 to March 2020.

The overall picture is likely to improve as more restrictions are removed and passengers’ confidence in air travel increases, but some of the challenges that predate the pandemic will remain in place for some time, analysts say.

Despite the size and scope of the market, “even pre-pandemic, Indian aviation had been a tough industry to operate in”, Ms Agarwal said. “Both government and private players have struggled for survival [despite growth potential].”

The scope of challenges and the tough operating environment before the pandemic was underscored by Jet Airways’ financial failure over two years ago that followed Kingfisher Airlines’ demise in 2012.

“High fuel prices, heavy taxes, low demand and cut-throat competition are some of the problems, which the sector had already been battling,” said Gaurav Garg, head of research at CapitalVia Global Research. “The pandemic only made the situation worse for the sector”, resulting in steeper losses and mass lay-offs, he said.

“The situation is getting better now ... on the whole as the demand is improving but it's still significantly lower [than pre-pandemic levels],” he said.

The planned revival of Jet Airways, which is expected to start with domestic operations, followed by short-haul international routes towards the end of 2022, and the proposed entry of new carrier, Akasa, means that India would still be a tough market to operate in, analysts said.

“If the number of players increases, only customers will benefit while the [overall situation] will remain difficult,” Ms Agrawal said. “With more players planning to come in, the cut-throat competition might be damaging for incumbents.”

With so many developments happening simultaneously, it is difficult to predict where the Indian aviation industry is heading and 2022 may prove to be “a defining period”, Mr Keerthy said.

“The next few months will be key to determining the long-term outlook,” he said.

Updated: September 19th 2021, 8:18 AM
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