Indian aviation in need of urgent doctoring: Report

$8 billion cumulative debt and huge losses mark operations of the top three airlines, Air India, Kingfisher Airlines and Jet Airways.

The huge interest burden on the aviation industry and the highly overleveraged position of Indian carriers are reflected in the fact that the combined debt of the top three airlines, Air India, Kingfisher Airlines and Jet Airways, is $8 billion (bn). That is equivalent to the total losses of all global carriers, which stands at $8-8.5 billion.

In its May report on the Indian aviation sector, the Centre for Asia Pacific Aviation (CAPA) says the combined debt of the big three could reach $10 bn by the end of this financial year, which is a full per cent of gross domestic product.

The projected debt figure is also more than five times the total losses of $1.3-1.4 bn that Indian aviation industry is expected to incur in 2008-09. And almost 17 per cent of the total losses of $8-8.5 bn projected for the global airline industry by the International Air Transport Association (IATA).

Incidentally, while Indian aviation industry accounts for 17 per cent of global losses, it only accounts for 2 per cent of global traffic.

Even as the slowdown in the industry and rising losses have made equity investment currently impossible, Indian carriers’ cash flow has been maintained through largescale loans from financial institutions. Which, say industry experts, have made these some of the most overleveraged companies in the world.

The most recent development has been Kingfisher’s negotiations with State Bank of India for loans worth Rs 2,000 crore. Company officials said that once secured, these loans would be used to repay large debts to oil companies and Airports Authority of India (AAI).

“The over-aggressive expansion of the big three carriers is partly responsible for the fiscal demise of the sector...CAPA believes the Indian market is not large enough to support three large full-service carriers operating and competing on similar footprints, and that rationalisation is inevitable and desirable for the health of the industry,” said the report.

The report said while some carriers, led by Jet Airways, had reduced domestic capacity, others, especially IndiGo, had filled that space. So, net capacity deduction from May 2008 to May 2009 had only been about 2-3 per cent.

Statistics from the report showed that Jet had reduced capacity by 20 per cent and Kingfisher by 15 per cent, followed by Paramount and JetLite which had decreased capacity by around 5 per cent. IndiGo had, however, increased its capacity by 20 per cent during that period, followed by Air India, which increased its domestic capacity by 5 per cent.