After challenging 2019, will 2020 be jet, set and go for Indian aviation

From good times, India's airlines flew into hard times last year, with cut-throat competition ensuring cheap tickets but also pushing some companies in the red. Here is what 2020 might hold for them

India’s aviation and telecom sectors looked alike in 2019, with cut-throat competition ensuring cheap deals for customers but pushing companies in the red. State-run companies bled in both sectors — national carrier Air India needs to be privatised, and telcos BSNL and MTNL need to be revived.

SpiceJet Chairman Ajay Singh once said both aviation and telecom sectors had “monopolistic” players. Though he did not take names, he was hinting at privately-owned budget carrier IndiGo, which has a 50 per cent share of the country’s domestic passenger market, and Reliance Jio, which emerged on the scene three years ago and became the largest telecom player with a 35 per cent revenue share. Jio continued to grow, even as its rivals posted record losses in 2019.

For airlines, too, 2019 was a year they would like to forget — despite opportunities being created by Jet Airways discontinuing flight operations in July 2019, and the price of aviation turbine fuel (ATF), which accounts for over 40 per cent of their operating costs, remaining low.

To grab the slots vacated by Jet, some Indian airlines, especially low-cost ones like SpiceJet and IndiGo, went on an aircraft-leasing overdrive. However, within five months, domestic seat capacity not only filled the void created by Jet’s exit but was 3.5 per cent higher than a year earlier. Since Jet’s grounding did not create a real seat shortage, airlines could not jack up ticket prices.

Worse, as the Indian economy slowed and they had to keep tariffs low to fill up seats, airlines’ yields came down. Forecasters had expected a passenger growth of 14 per cent — with Jet in business — but they were clearly off the mark. They now predict FY20 passenger growth to be 5 per cent or less. According to research organisation Centre for Aviation (Capa), private airlines could incur a loss of over $600 million this financial year.

Smoother skies?

In December 2019, the three-year-long telecom price war ended with the three top operators raising tariffs. Airline tariffs had also seen some increase a month earlier. Now, will 2020 turn the tide for India’s aviation industry? It will take much more than tariff hikes to get the industry back in the black, say airline executives.

“We saw tariffs going up by 10-12 per cent in November, after falling in the previous quarter. That is a good sign, but airlines have to rationalise their prices to sustainable levels. Zero- to seven-day prices need to go up by 15-20 per cent, and average price by 10-15 per cent higher to bring viability back to the business in 2020,” says Sanjay Kumar, formerly the chief operating officer of Air Asia and chief commercial officer of IndiGo.

Rivals accuse market leader IndiGo of stifling competition by keeping prices low to fill up its new planes. This sounds like telecom operators Bharti Airtel and Vodafone-Idea’s predatory pricing accusation against Reliance Jio. Just like Jio, IndiGo executives rubbish these allegations and instead say they have no choice except matching low-cost carriers’ fares.

A positive trend in 2020 will be slow capacity additions, even contraction according to Capa. Sanjay Kumar (quoted earlier) sees the pressure on yields easing, with no more than 60 planes being added by all airlines put together.

Last November, regulator Directorate General of Civil Aviation (DGCA) asked IndiGo to replace Pratt & Whitney engines on its fleet of almost 100 Airbus A320 and A321neo aircraft by January 31. Analysts see this deadline forcing the airline to cancel flights and reduce capacity for at least two quarters. IndiGo has already lowered its capacity growth projections for 2019-20 from 30 per cent to 25 per cent, and it hopes to maintain the same level next financial year, too.

Boeing suspended production of 737 Max planes last December, making SpiceJet’s expansion programme uncertain. Awaiting a word on new deliveries, the airline has had to ground 17 of these aircraft.

AirAsia India, the Tata group’s joint venture with Malaysia’s AirAsia, which was earlier considering doubling its fleet to 40, now seems to have scaled back.

The good, the bad, and what might lie ahead

Airlines also hope to get a relief from the government, like the two-year moratorium on payment of pending spectrum dues given to telecom companies. They are also pushing for ATF’s inclusion in the list of items on which Goods and Services Tax (GST) is levied. If that happens, airlines’ operating cost would come down by 10 per cent.

What does the different carriers’ future look like in 2020?

IndiGo: Despite its grounded planes and uncertainty over P&W engines, IndiGo is expected to relentlessly push for capacity and market share. Irrespective of consolidation, the airline should be able to increase its market share beyond 50 per cent this year.

In August 2019, IndiGo quietly overtook Air India to become the largest Indian carrier in terms of international seats deployed. As much as 30 per cent of its additional seat capacity in the first half of 2019-20 was for the international market. However, its foray into mid-distance routes like Istanbul, and new routes like Vietnam’s Ho Chi Minh City and China’s Chengdu, has had a mixed result. This year, IndiGo, which flies only narrow-bodied aircraft on international routes at present, will induct wide-bodied aircraft and also start mid-haul flights.

SpiceJet: India’s second-largest airline, which overtook IndiGo in adding seats in the first half of 2019, SpiceJet has looked to grab the opportunity created by Jet’s closure. It leased more than 30 Boeing 737 planes that Jet Airways operated previously — to make up for its grounded Max planes — and got valuable slots at saturated airports like Mumbai. But inducting Jet’s planes also increased its cost of operations, as Max planes were more fuel-efficient. That, according to analysts, has been showing in SpiceJet’s growing losses.

SpiceJet will have to relook at its fleet portfolio in 2020, considering the suspension of Max planes by Boeing. The airline is reportedly in talks with Airbus, but it has not placed any orders yet. It has denied reports that it is looking to raise over Rs 750 crore via qualified institutional placement (QIP) of shares in order to tide over its financial pressure.

Vistara: The Tata group, which runs AirAsia India as an LCC, is accelerating the expansion of its other airline, Vistara, which is a full service carrier. It plans to double Vistara’s fleet of over 40 planes in FY20 to boost its international business. Vistara will get two wide-bodied aircraft by March 2020. That will enable its entry into long-haul and mid-haul markets, where it will have no local competition if you discount the tottering Air India.

AirAsia India: The Tata group has held back the expansion of AirAsia India, especially as the government has not permitted it to fly overseas despite meeting the condition of a 20-aircraft fleet. However, Tatas’ cautious approach might change as they take over more operational control of the airline from partner Air Asia. The group’s strategy for the domestic aviation market needs ironing out, say experts. “Sometimes, the two airlines (AirAsia and Vistara) are seen competing with each other in in pricing, despite their costs being different. There has been no attempt to build a synergy; there is room for some cost reduction, since both have A320 aircraft,” says an aviation expert.

Air India’s fate

A much-awaited event for the aviation industry this year will be the proposed privatisation of Air India. The national carrier was unable to leverage the closure of Jet, as 26 of its aircraft were grounded, and it had no money for maintenance checks. Capa has increased its estimates for Air India’s 2019-20 losses to $600 million from $150 million earlier.

The government has agreed to halve Air India’s total debt to Rs 28,000 crore — a large portion of that aircraft loans — by transferring some of it to a separate company. The government has also decided to fully exit the carrier and allow a new buyer to cut its workforce.

But will anyone want to buy Air India? The decision will depend on two factors, say prospective bidders. First, the reserve price that the government sets for bidders. And second, whether or not the investor will be ring-fenced against past dues, legal cases, and other potential disruptions, with a legal framework. Even so, given its shrinking market share and financial losses, selling Air India is not going to be easy for the government.