Indian budget airlines on a high

India Dispatch: A huge boom in Indian tourism has not helped the nation's aviation industry, which is struggling with the price of fuel.

Rising oil prices have hit the profitability of full-service carriers such as Kingfisher Airlines. Brent Lewin / Bloomberg News

MUMBAI // With the huge boom in tourism and rising disposable incomes, India's crowded aviation industry has experienced a sharp rebound in travel demand in recent months.

Between January and May, the number of passengers carried by domestic carriers climbed 17.6 per cent to 24.5 million from 21 million in the same period last year, says India's Directorate General of Civil Aviation.

But full-service carriers are struggling to convert into profits the growing demand because of rising operating costs.

"Our business plan can sustain US$90 a barrel of crude or less," Dr Vijay Mallya, the chairman of Kingfisher Airlines, India's second-largest private carrier, said last month. "We can't afford more than that. But it is not just a question of the price of fuel. It is the huge sales tax on fuel that really hurts us as oil prices go up."

State governments in India charge airlines a sales tax of between 24 per cent and 35 per cent on aviation turbine fuel, which typically constitutes about 40 per cent to 50 per cent of an airline's operating costs.

Rising oil prices has burnt a huge hole in Kingfisher's pockets. Two of the airline's 27 French-built ATR aircraft were grounded recently, reportedly because of a cash crunch.

This week, 10 Kingfisher flights were delayed by several hours after Hindustan Petroleum, an oil marketing company, refused to supply fuel to the airline citing non-payment of pending oil dues. Kingfisher reportedly owes 5 billion rupees (Dh412.8 million) to oil companies.

Rising operating costs are also hurting other full-service airlines.

Jet Airways, the largest private carrier in India, slipped into a loss after tax of 2bn rupees in the January to March quarter on the back of rising fuel prices, compared with a profit of 2.2bn in the same quarter last year.

The government-owned Air India, reeling under a debt load of 400bn rupees, reported a net loss of 60bn rupees in the fiscal year that ended on March 31. This week, the government announced equity infusion of 12bn rupees into the airline.

That came after Pranab Mukherjee, the Indian finance minister, announced an equity injection of another 12bn rupees in the airline in February. Last year the government pumped in 20bn rupees.

But the financial stimulus has not helped to turn around the airline. Vayalar Ravi, India's civil aviation minister, says Air India earns 360m rupees a day from its operations but spends 570m rupees daily.

"Fundamentally, the airline has reached a dead end," says Kapil Kaul, the chief executive for the South Asian region at the Centre for Asia Pacific Aviation, an aviation research group based in New Delhi. Mr Kaul, like many other analysts, points out Air India's problems are more a result of gross mismanagement than the economic climate.

India is the ninth-largest - and currently the fastest-growing - commercial aviation market in the world. Passenger numbers grew 20 per cent to 52 million last year compared with 2009. It is expected to rise fourfold to 180 million by 2020.

Airbus estimates that with the current explosion in passenger growth, India would need 1,032 new aircraft,costing about US$138bn (Dh506.88bn), by 2028.

There are 120 airports across the country, but the top five handle 50 per cent of the domestic passenger load and 85 per cent of the international load. With a low-penetration market, analysts say the scope for expansion is enormous.

India's low-cost carriers, which began operating since 2004, have weathered problems related to rising operating costs better than full-service carriers.

Spice Jet, the second-largest budget airline in India with a market share of 14 per cent, has the "best business model" among the country's carriers, says Vikram Suryavanshi, a research analyst with Antique Stock Broking based in Mumbai.

Its fleet, he expects, will increase 96 per cent to 55 aircraft by 2014. Most of its large aircraft are on lease. And it is a debt-free company, which enables it to expand more aggressively.

Mr Suryavanshi says he expects the annual passenger numbers for the airline to climb from 8.6 million to 12 million by 2013.

Last year, IndiGo placed an order for 180 A320 single-aisle aircraft for $15bn. It was at the time the biggest order in the world's aviation history. Last month, GoAir, a low-cost carrier promoted by India's Wadia group, placed an order for 72 A320s with Airbus in a deal valued at $7bn.