'Crisis after crisis': Why govt won't bail out Indian aviation

Other countries have pumped in $123 billion in relief for their airlines

Although countries around the world have announced bailout packages for their airlines in the wake of lockdowns to battle the coronavirus pandemic, the Indian government’s response to its severely struggling aviation sector has been negligible.
 

Governments gave a total of $123 billion in relief to their airlines, of which $26 billion was given out in countries of the Asia Pacific region. In sharp contrast, and after dithering for weeks, the government in India finally came up with a hotch-potch of initiatives for the aviation sector, most of which had little to do with improving the financial viability of the carriers. The measures announced by the government include the decision to shorten air routes by allowing airlines to fly over previously restricted defence airspace, steps to make India into a maintenance, repair and overhaul hub and auctioning six more airports on a PPP basis.
 

The package seemed so disconnected from what airlines needed that Alexander D. Juniac, director general of International Air Transport Association, expressed surprise and urged the government to come out with measures that would help airlines raise “equity” financing rather than debt.
 

The primary reason for the Indian government’s reluctance to bail out the sector has now become clear. There’s a yawning trust deficit between the government and the airlines. This is partly on account of bad experiences with both Kingfisher Airlines and Jet Airways. Top government officials say that in both cases, the “airlines went bankrupt even as the promoters stayed rich”.

“The airline industry has been deregulated in phases in India, and despite many players coming into the sector, the country has failed to create a robust and vibrant industry. Instead, the sector is racked with crises every few years, which leaves it weaker still,” says one former aviation secretary. According to him, the main question which needs answering, and which we have been “shying away” from, is — why do India’s airlines fail?
 

In a webinar and report this month, the Center for Asia Pacific Aviation (CAPA) highlighted this key issue in some detail. Without pointing fingers at any specific players, the industry body suggested that India needs to introspect on why airlines keep failing and why they are allowed to grow without adequate surplus in their balance sheet. The report highlights “serious undercapitalisation and an inability to control costs” as two major gaps in their operation.
 

Almost all the players face serious “corporate governance” issues, as was the case with the now defunct Jet Airways. “Airlines like Go Air and SpiceJet have weak boards (very few can even name the board members) and an equally weak management,” says a senior DGCA official, on condition of anonymity.
 

Kapil Kaul, CEO at CAPA India, says that in most airlines, “the business model appears more operationally rather than strategically driven”. India’s airlines need to look within if the industry is to break out of the cycle of “profitless growth punctuated by period of crisis,” he adds.
 

Experts also say that there is a lack of transparency and a lot of “skimmimg” off the top and bottom line that goes on. This leaves very little money in the carrier’s books while its founders appear to sit pretty.

CFOs who have worked with leading airlines in the past say that the usual “tricks of the trade” deployed by airlines include asking vendors to over-invoice (this reflects in the inability to control costs) and keeping aircraft purchase and discounts offered by manufacturers outside the company’s books. The sale and lease back arrangements are often quite opaque, too.
 

Another former aviation secretary argues that it is “illogical” for the airlines to expect a bailout as by the same token, hotels or tourism related businesses should be bailed out as well. Then the government should also bail out companies like MakeMyTrip, ClearTrip or Oyo hotels, he says. “This (COVID) crisis will hasten the move towards a three player industry,” he argues. The way he sees it, IndiGo, a crippled Air India and a third private player will rule the Indian skies in the near future.

As the country’s airlines find themselves in the skies once more, a few clear trends are emerging. First, traffic is picking up. Despite fears that traffic would dry up after the pent up demand for travel was met, bookings and loads have shown a spike. This has happened despite the fact that airlines are deploying more capacity.
 

Second, a uni-directionality has crept in, with many routes showing good one-way traffic. Routes to the North East, in particular, have been showing a robust demand. Traffic out of some cities like Mumbai and Bengaluru has also been busy. However, leisure and business travel is yet to pick up in any convincing manner.
 

Whether that picks up or not will depend on how soon the country is able to contain the pandemic. Experts say that the real test will begin in July.