Explained: India's Grounded Aviation Sector

Defunct airlines and oppressive amounts of debt are only symptoms of an ailing aviation industry.

Since suspending operations, nearly 22,000 Jet Airways employees have been left unemployed. Further, employees’ salaries are pending since January, and the airline’s union, the National Aviator’s Guild, has taken legal recourse against the airline’s management over unpaid dues. With the airline over Rs 8,000 crore in debt, the airline’s founder, Naresh Goyal, was recently stopped from leaving the country, and made to disembark an international flight.

Despite the severity of the Jet Airways crisis, grounded airlines are not new to India’s aviation sector: in 2012, a shortage of funds led to the Vijay Mallya–owned Kingfisher Airlines suspending its operations, while the government–owned Air India is also in financial jeopardy, with pending dues at nearly Rs. 33,000 crore. Potential investors are also unwilling to entertain the financial risk involved with the airline, despite the government’s willingness to privatise the airline carrier.

Why do airlines in India fail to make a profit? Estimates put Indian airfares at 15% below the break–even point. Other domestic airlines, such as SpiceJet and Indigo, are also reporting losses. Vistara, which entered the market in 2015, is yet to report a profit. When the airline industry was opened to private players post economic liberalisation, increased services and lower fares were expected to promote the industry’s growth and generate employment. However, price–sensitive consumers meant ticket prices remaining perennially low, while high government taxes on aviation fuel—which makes up around 50% of operational costs—and an appreciating dollar impacts airlines’ growth.

This reading list assesses the health of India’s aviation sector, and looks at impediments to its growth and sustainability.

1) How has Economic Liberalisation Affected the Indian Aviation Industry?

M N Khan, S C Bansal and V R Dutt write that the civil aviation sector witnessed a boom post liberalisation, as domestic passenger flights, cargo movement and international air traffic saw exponential growth. This boom was largely due to the government’s open sky policy, which allowed Indian and foreign carriers to operate from any airport in India, subject to operational and safety requirements.

The number of civilian aircrafts in the country is estimated to swell from 350 to 1,000 by 2020. Domestic passengers for the industry are forecasted to rise from 35 million (currently) to 182 million by 2020 … Private airlines have changed rules of the game in the Indian civil aviation sector in recent years. The entry of budget airlines like Deccan, introduction of cheap airfares by other domestic carriers, rising levels of income and growing aspirations of people have created a new paradigm: air travel is no longer reserved for the elite. It is estimated that in the future there will be two or three FSCs [Full Service Carriers] , three or four LCCs [Low-Cost Carriers] and a small number of regional airlines. There has been a switch from the volume-driven to a yield-driven approach, which in the long run signals a positive development for the industry.

2) What is the Major Challenge Currently Faced by the Aviation Industry?

In 2019, aviation turbine fuel (ATF) prices increased by 8.15%, to Rs 62,795.12 per kilolitre in India. Further, domestic airlines in the country regularly pay 35% to 40% more for fuel, as compared to foreign aircraft carriers. M N Khan, S C Bansal and V R Dutt write that ATF prices are abnormally high in India, due to fluctuating crude oil prices and taxes imposed by both, the central and state governments.

Higher ATF prices are largely responsible for the red ink on the books of airlines in India. ATF, which used to constitute around 40 per cent of the operating cost for airlines, now accounts for up to 60 per cent … Sales tax on ATF varies from 20 to 30 per cent in most states … Against the backdrop of high jet fuel costs and excess capacity in the market, most of the full service carriers are significantly cutting costs by slashing employee allowances, reducing in-flight catering expenses on short-haul flights, cutting maintenance costs, restructuring their processes and increasing dependency on the internet as a sales channel.

3) How Has the Government Attempted to Solve Problems in the Aviation Industry?

The Indian government has, on different occasions, accepted that only democratisation will help the aviation sector to become one of the country’s main industries, which will thus aid the promotion of business. Sujan Kumar Saraswati writes that to make the aviation sector dynamic, government control needs to be minimised.

Airlines need strict commercial discipline to succeed, which government intervention is unable to provide. If it is not possible to move the airlines from government control then unprofitable and social service routes must be subsidised by government. Similarly, Airports Authority of India should be compensated for handling the government and defence aircraft. Private sector participation will give major thrust to the civil aviation sector for promoting investment, improving quality, efficiency and increasing competition … Air India is not profitable because [the] government is not allowing the board to manage the airline in the right way, a charge which was pointed out by former Air India chairman Russi Modi. The longer the situation continues the more difficult it will become to come back.

4) How Has Privatisation Affected the Aviation Industry?
Post liberalisation, the airline industry has witnessed numerous scams. Private and public sector banks who lent large amounts to various airlines now face the problem of “bad loans,” where lenders default in repaying banks. As Nihar Gokhale writes, this not only harms the banking sector, but the economy as a whole.

Fourteen banks, 13 of which are public sector banks, stand to lose nearly ₹4,300 crore on account of the loans they have advanced to the grounded Kingfisher Airlines (KFA). Of this amount, the State Bank of India (SBI), India's largest bank and the biggest lender to the KFA, expects to make a loss of over ₹900 crore. This was revealed in an internal assessment prepared by a senior SBI official in December 2016.

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