Why Indian Airlines Keep Shutting Down🛬
Exploring the Turbulent Skies of India's Aviation Industry: The Challenges and Causes Behind the Continual Shutdown of Indian Airlines
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Go Airlines India Ltd. this week became the latest victim in the battle of the skies over India. It isn’t the first high-profile carrier to fail and it won’t be the last.
With an emerging middle class eager to fly, Indian airlines have ordered billions of dollars in planes in recent years, creating a frenzy of competition in what is now the world's most populous country. The fight for survival was fierce even before the pandemic hit the industry.
The allure of aviation has proven especially appealing — and brutal — for wealthy entrepreneurs eager to enter a burgeoning sector and enticed by the prestige of owning an airline. Go, run by Nusli Wadia's group, is the third high-profile carrier majority owned by a billionaire that has ceased operations in the last 11 years.
Here are the factors that make India one of the fastest-growing and most difficult markets for operators and suppliers like Airbus SE and Boeing Co.
Why did Go stop?
Go, once the country's third-largest carrier, sought insolvency protection, claiming that Pratt & Whitney had failed to supply parts and replacement engines for the Airbus A320neo jets that form the backbone of its fleet, despite being ordered to do so by an arbitration court, forcing it to ground roughly half of its planes. The engine manufacturer, a subsidiary of Raytheon Technologies Corp., has denied the claim.
However, Go has struggled in the past, growing more slowly than rival IndiGo, which now controls more than half of the domestic market, and borrowing heavily to pay lease rentals, airport dues, and salaries during the pandemic when its planes were grounded.
Last year, the airline was forced to postpone a 36-billion-rupee ($440 million) initial share sale while many of its planes remained idle, and it is now facing imminent creditor defaults, with liabilities totaling 114.6 billion rupees ($1.4 billion).
An Indian court reserved judgment on Thursday, delaying a verdict in response to the carrier's request for relief from lessors who want their planes returned.
Who else has given up?
Kingfisher Airlines, which was founded by fugitive beer magnate Vijay Mallya, ceased operations in 2012 after failing to pay its debts to banks, employees, lessors, and airports.
Jet Airways India Ltd., owned by billionaire Naresh Goyal, has not flown since declaring bankruptcy in 2019.
Smaller regional carriers have also gone bankrupt in recent years, including Air Costa, which surprised the aviation world in 2014 with a $2.9 billion order for 50 Embraer SA jets before going bankrupt in 2017.
Why so many failures?
The reasons Indian airlines fail vary, but they all boil down to a combination of dirt-cheap fares, high fuel taxes, and cutthroat competition, which has recently been exacerbated by Covid's disruption. On Booking.com, a one-way ticket for a 90-minute flight from New Delhi to Mumbai on Sunday was $79, compared to $199 for a similar-length flight from New York to Atlanta.
Some Indian states levy up to 30% provincial taxes on jet fuel. This is the single highest cost for airlines, accounting for more than half of their expenses for some low-cost carriers. Big players like IndiGo offer ultra-low fares on routes flown by competitors, recouping costs on less-competitive legs and leveraging economies of scale to reduce overheads.
In addition, the Indian rupee has fallen almost 20% against the dollar since the beginning of 2019, raising the cost of leasing planes abroad.
Does the government help?
Successive populist governments have shied away from directly assisting struggling airlines. Indeed, the government has occasionally pushed carriers to lower their fares even further. The previous administration encouraged states to reduce taxes and allowed foreign airlines to invest in domestic carriers.
During the pandemic, Narendra Modi's government offered credit lines but avoided outright bailouts. Modi has pledged to steer the state away from business, and he demonstrated his commitment by selling the perennially losing flag carrier Air India Ltd. to Tata Group last year. However, with Modi seeking a third term in office next year, more airline failures could tarnish his reputation as an industry champion.
So, why do new airlines keep appearing?
The simple answer is the allure of the market. Half India's population is under 30, and the country may soon become the world's fastest-growing major economy.
In 2016, the country surpassed Japan as the third-largest domestic aviation market, and more domestic airlines are expanding into international markets.
According to the Sydney-based CAPA Centre for Aviation, India may have to deal with more than 1.3 billion passengers per year in the next 20 years, up from less than 200 million now. Within 40 years, the Indian market will grow from the size of Las Vegas to the size of the United States.
Owning a carrier has a certain cachet for rising Indian industrialists. Mallya aided in glamorizing the business by handpicking flight attendants and hiring top models for marketing campaigns through Kingfisher — a namesake of his best-selling beer brand.
Naresh Goyal's Jet Airways had Bollywood celebrities on its board, and its annual general meetings were filled with poetry and praise for Goyal and his family.
Only a year ago, now-deceased billionaire Rakesh Jhunjhunwala assembled a team of aviation veterans to launch the country's newest airline, Akasa Air.
Can failed carriers recoup their losses?
While cash-strapped airlines rarely return, there is precedent. SpiceJet Ltd., which was owned by billionaire Kalanithi Maran at the time, was forced to ground its entire fleet after local oil companies refused to fuel the company's planes on credit. Nonetheless, SpiceJet has managed to stay afloat under the new ownership of its original co-founder Ajay Singh by renegotiating contracts and cutting loss-making routes.
What comes next?
The privatization of Air India has paved the way for further consolidation. Tata Group, which already owns a majority stake in two other local joint ventures — Singapore Airlines Ltd. and Capital A Bhd.'s AirAsia — has begun to consolidate all brands under one roof. In India, that is no guarantee of survival. Both Jet Airways, which acquired budget carrier Air Sahara, and Kingfisher Airlines, which acquired Air Deccan, declared bankruptcy.
In the case of Go, the court may appoint an official to oversee the airline while terms with lenders and lessors are renegotiated. The airline insists it will recover, but all flights have been canceled until at least May 9. Meanwhile, the airline risks losing its trained employees and crew to competitors scrambling to fill vacancies created by the pandemic.
Source: ET, Mint, HT
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