The booming Indian aviation industry, among the fastest growing sectors in the world, is projected to be valued at $40 billion by 2027. But, despite robust demand for air travel across the country, more than 50 airlines have closed down in the last decade in India and most private airlines have closed within five years of operation. With legacy airlines like Kingfisher and Jet and more recently Go Air shutting down, the list of failed airlines is getting longer.

Aviation is a highly capital intensive business with a long haul. It requires deep pockets and profitability besides good management practices. Running an airline has high fixed costs like payment of lease charges or against repayment of loans taken for purchase of aircraft along with variable costs like fuel, oil and maintenance costs.    

With reports emerging of more airlines hitting financial turbulence, in this episode of Checks & Balances, Geetanjali Minhas spoke to aviation experts some major structural issues plaguing airlines in India as well as the reasons behind the congestion at major airports.

You can watch the episode here: https://www.youtube.com/watch?v=5QZmaHaQ5q0

The cost of aviation turbine fuel (ATF) constitutes around 35%-40% of an airlines’ cost structure, except for the smaller highly efficient aircraft. ATF costs have risen from around $20 a barrel earlier to around $85 a barrel today. In India ATF does not come under GST and this does not allow airlines to avail input tax credit. This has been a cause of concern for airlines, particularly small airlines as they cannot hedge the bet.  

“Even a 5% difference in the pricing will give the airlines a huge benefit and help in mitigating the cost structure of an airline. When I was the CEO of Alliance Air, we had taken up this matter with the MCA [ministry of civil aviation] as well as the finance ministry. They investigated the issue threadbare and were very supportive. It is only a matter of time now and going to be the most important agenda of the new government,” says CS Subbiah, aviation consultant and former CEO, Alliance Air as well as executive director (R) Air India.

Kaushik Khona, former CEO, Go Airlines, says that indirect tax component by way of excise duty or VAT on fuel is almost 20%-25% and not viable for airlines. It has to either go zero or allowed to be set off. Even if it is brought on par with international price, a margin of 7%-8% will flow into the Indian aviation market and give enough muscle to withstand any fluctuations happening quarter on quarter basis in the business.

Pankaj Srivastava, former director, commercial and board member, Air India, too concurs that airlines operate on paper thin margins. Fuel cost uncertainty and geopolitical developments can affect airlines’ operations. “Even with a 1% increase in fuel costs, erodes all the possible margins the airlines would be expecting.”

Second major cost for airlines is MRO (maintenance, repairs, overhaul) for major components like engine (except for some series engines), fuselage, landing gears, auxiliary power units etc. Most of the times for major maintenance and checks have to be done abroad.

“This is foreign exchange and, most importantly, it takes a lot of time. In the airline industry parlance, it is called ‘downtime’ of an aircraft and it has killed many an airline. Some airlines have gone down because of large overheads, some due to Covid and most airlines due to MRO and downtime issues,” says Subbiah.

While the Modi government has taken a lot of steps to bring in MROs in India, major players like Safran and CFM have not set up facility here with all the equipment. “Without an MRO in the country and with around 1,000 aircraft orders coming in, for an industry trying to grow exponentially, this problem will become huge in the coming five to seven years,” he adds.

He says that as the airline expands and brings in more fleet, it needs also more revenue. At the same time the aircraft also need cyclical maintenance. All components are not available in India and are being cycled from abroad which is the huge cost for the airlines. To set up an inventory in India costs billions of rupees which is a major problem being faced by all new airlines coming in.

Some 95% of India’s narrow body planes (except for smaller ATRs) are supplied by two OEMs –Airbus and Boeing. They also manufacture 80%-85% of the world’s supplies. Same is the case with regards to engines, with only two major engine manufacturers – CFM and Pratt &Whitney. The third is Rolls-Royce, with very small capacities.

“This is global monopoly. The entire world is being supplied on an average 1,300 to 1,500 aircraft in a year. There are only two aircraft manufacturers and only two engine manufacturers. Perhaps they made kind-of shortcuts to achieve more production than to the quality and that has affected 200-300 aircraft a year and we are left with nothing. It is failure on the part of OEMs to be more meticulous in their production plan, which has led to the present situation and we have to live with that,” says Khona, adding that airlines are also charged custom duty for parts sent for repairs within the warranty period for which they have to shell out between Rs 500 crore and Rs 1,000 crore.

Pankaj Srivastava here says that with almost 57%-60% market share controlled by IndiGo Airlines and 20%-25% market share with Air India and subsidiary companies, we are heading towards a very strong duopoly market.

He adds that due to the geopolitical situation and sanctions imposed on certain countries, supply/manufacturing of engines or components has stopped, resulting in delayed delivery of aircraft orders. ‘When the market is increasing rapidly and airlines had made provisions to utilise increased opportunities by ordering more aircraft delay in delivery has resulted in missing that opportunity,” he says.

What led Kingfisher, Jet Air and Go Air to graveyard  
Go Air bit the dust due to Pratt &Whitney engine failure. “The OEM (engine) on which we relied the maximum made us suffer for three years… SIAC also gave an emergency application award in our favour. Pratt & Whitney knew the problems were deep inside their own environment. If they recognised the problem they would have to honour almost 67 of their airlines customers. Today, almost 200 P&W powered engine aircraft are grounded and likely to stay till 2026.” says Khona.

“You can imagine a situation where you have 3 years of aircraft grounded with 37% of the fleet grounded on an average and you are paying a substantial amount of lease rent per month, only because we are relying on few OEM’S to supply the inventory,” he adds.   

On Kingfisher, he says that a key reasons leading to its collapse was that its V-2500 engines started failing, leading to almost 25% to 30% of its fleet being grounded. “Its biggest problem started after Kingfisher absorbed the LCC (low cost carrier) by taking over Deccan Airways. For a premier airline with a clear line of demarcation and a high cost structure providing high-end services, when you dilute your own brand by bringing an LCC into your fold you are going to get fares of LCC, but you have to spend for a full service carrier. They diluted their brand and fares without understanding the cost structure,” says Khona.

Jet was the best airline and made the same mistakes as Kingfisher, says Khona. Jet absorbed Sahara and became Jet Lite, an LCC. It created another subset called Jet Connect. Within Jet Airways they had a full service carrier and also LCC. “In spite of being good brands, both Kingfisher and Jet devalued themselves by absorbing LCC and eventually failed, coupled with the fact that both were affected by engine failures. Jet was affected by Boeing and Kingfisher was affected by PW500 engines, crumbling their entire structure.

However, contrary to the common belief of airline promoters diverting funds, he says he has not come across any report with such findings. “If you look at Kingfisher, I have not seen any report from the government saying there was diversion of funds or any airline which went bankrupt … Yes, there could be a possibility of not having a proper business model.”

Infrastructure challenges
Subbiah says that of the more than 1,000 aircraft expected to be delivered in the coming years, almost 20% will be for replacement of aircrafts and the remaining 80% will be additional aircrafts. “There is no place to park those aircrafts. Secondly, if they park at one place they will have to operate profitably on some routes. Which means there will be dead leg for the airline which is going to cost money.  

“While many small airports are coming in, they are not capable of handling the bigger A320  or 737.  Fundamentally, this is going to create a lot of issues for the airlines. I'm not sure except for Navi Mumbai and the new airport near Delhi, any other new airports coming up in a big way.”

Pankaj Srivastava too says that with fragmented airspace there are multiple air traffic controls (ATCs) in India which leads to suboptimal utilisation of airspace. With a lot of congestion issues, busy airports do not have any more slots either for landing or for parking, and the demand is actually from that side.

Ramping up resources   
The aviation industry lacks skilled workforce of pilots, engineers, technicians and needs to ramp up these resources along with cabin crew, ground staff, have more training schools and training academies, which so far have not kept pace with growth in the civil aviation. When management lacks discipline it also compromises training and safety in airline operations.

Pointing out further structural imbalances in industry, Subbiah says the most important part in aviation is training and safety which go hand in hand. Especially when the pilots go for training there are so many checks and balances. India does not have the necessary number of pilots, examiners and trainers. With more than 1,000 aircrafts coming they will need close to 8,000 pilots. Tata is setting up a huge training academy, but it will take some time for them to establish the simulators.

Subbiah says that costing has to be managed effectively which includes governance and governance largely comes down from the board. Operationally stable airlines with financial power have the wherewithal to get good people on board who are responsible to deliver results. It is a business that requires a good balance sheet and funds at disposal.

“Airline companies are mostly privately held and not limited by public shareholding. Their board members are already known to the company and many things go under the carpet. Financial prudence is part of governance of airlines will cut down any safety issues. It's not good to start an airline with some money. For the growth of the airline, sufficient funds will have to be infused from time to time so that the CEO or the CFO or the head of engineering does not have to struggle for funds to run the airline and cut corners,” he says.

Aviation experts says that directorate general of civil aviation (DGCA), the regulatory body under the ministry of civil aviation, proactively ensures that technical failures reported elsewhere in the world are not allowed, unfortunately it is not present everywhere.

Importantly, it is headed by a bureaucrat and not a technocrat. The body does not have required technically professional managers heading divisions and engineers to monitor and hold surprise checks and inspections for all aircraft. It needs to have much more independence and autonomy and bring in professionals to make it vibrant.

Congestion at busy airports like Mumbai; huge delays in flight take offs and landing  
“We are still burning fossil fuels and generating carbon emissions. The European Union has come up very strongly… they have set norms which would be followed by all the airlines using European airspace and in case airlines don't follow that particular norm, heavy penalties are imposed,” says Pankaj Srivastava .

RK Srivastava, former chairman, Airports Authority of India, while explaining reasons for congestion at Mumbai airport, says that Mumbai being the financial capital there is huge demand to connect with the city. However, Mumbai airport has a unique problem of many constraints. It is located in a densely populated area with slums and buildings around it, with limited space of around 2,000 acres. Airport infrastructure has not kept pace with time and is not able to cope up with the gap in demand and supply.  

With two runways that cross diagonally, simultaneous operations cannot happen as there should be a minimum space required between two runways. So, only one runway is operational at a time and mostly it is the main runway number 27. The rated capacity is only 46 flights in peak hours – 23 for departure 23 for arrivals in case of 1-1 scenarios. “Many times the Airport Authority and particularly those controlling air space and managing the take-offs have crossed 50 take-offs and 50 arrivals in an hour … even Gatwick Airport of London … all the departures and all the arrivals can't be accommodated in a given time frame. This is the major reason of delay during peak hours particularly,” he says.

At other times, due to weather and maintenance issues the airport needs to be shut for flight landings and take-offs. “Average delay estimated is about 6 to 7 minutes and maximum delay between 21 and 23 minutes. Estimated departure delays are difficult to determine as the TSAT generated by ACDM ... (coordination done by the airport authorities) is not recorded,” says RK Srivastava.

Another reason for congestion is the cut-throat competition in the business to win customers and airlines resort to increasing block time and claim to have arrived before time. This leads to discrepancies in allocation of slots and reasons for the delay in flight landings and take offs, says RK Srivastava.  

When Navi Mumbai airport, with around 3,000 acres of land, becomes operational, many of these issues will be addressed. It will have two properly planned runways and enough space between the two with more infrastructure, connectivity, and cargo movement. With this, if the airlines follow regulations issued by the government of India , work in  tandem and not go beyond allowed capacity it will give ease to travellers, he says.
 
As an option to decongest Mumbai airport, Pankaj Srivastava suggests moving smaller, fixed wing aircraft that do not require a longer runway to Juhu airport.

Subbiah calls for using AI in the airline industry and says, “It says it can do wonders in flight safety. It can go into the data and give you good ideas because optimisation tool is one of the major things in an airline especially in scheduling and all … at the same time it can also warn you about the safety issues which can crop up … It can be used in the in aviation … not in the aircraft perhaps but in the ground it can do a lot more wonders.”