The Indian airline industry has grown significantly over the years. While the Regional Connectivity Scheme is propelling many small airlines to enter the market, existing airlines are focusing on fleet expansion to increase operations. Financially, the airline segment fared better in 2015-16 than in the previous fiscal year, when most of the airlines had remained in the red. However, the continued laggard performance of Air India, has led to the government approving its divestment.
Low-cost carriers (LCCs) continue to dominate the market, with IndiGo in the lead. As of July 2017, the share of LCCs was around 68 per cent. Jet Airways and JetLite accounted for about 15.8 per cent and 2.4 per cent, respectively, of the domestic market share, while national carrier Air India held only 13.5 per cent.
Most of the capital expenditure of an airline pertains to fleet acquisition. While some players go in for fresh purchases, sale-leaseback mechanisms have also become quite common. The country’s aviation industry’s total fleet deployment grew from 355 in 2012 to 464 in 2017 (as of March). Jet Airways, Air India and IndiGo are the major fleet holders, accounting for over 75 per cent of the total fleet count.
Divestment of Air India
One of the biggest developments in the airline segment during 2017-18 has been the Union cabinet’s decision to allow divestment of stakes in Air India. The cabinet has formed a group under the Ministry of Finance to work out the modalities of the strategic sale of the airline. Besides this, the group will also decide the quantum of divestment to be undertaken.
The divestment process will be piloted by the Air India Specific Alternative Mechanism committee comprising members of the finance, civil aviation, transport, railways, and power ministries. The committee will be responsible for laying a roadmap to deal with the national carrier’s massive debt and deciding the assets to be incorporated in the “shell companies”.
Further, the cabinet has also approved the strategic disinvestment in five of Air India’s subsidiaries – Air India Engineering Services, Air India Transport Services, Air India Charters (which operates Air India Express), Airline Allied Services (which operates Alliance Air and the Hotel Corporation of India), along with a joint venture (JV) with SATS Limited (AISATS). The government has appointed a transactions adviser for the divestment.
The divestment of Air India gathered pace after the government think tank NITI Aayog recommended an up to 100 per cent stake sale, along with writing off of the airline’s debt. NITI Aayog has suggested three possible stake sale options – 24 per cent, 49 per cent and 74 per cent. The options are based on studies of revival plans of global carriers in which governments exited, such as British Airways, Japan Airlines and Austrian Airlines.
Air India has a total debt of around Rs 520 billion, of which Rs 220 billion is in the form of loans for aircraft purchase and the remaining comprises working capital loans and other liabilities. The Cabinet Committee on Economic Affairs has finalised a three-pronged strategy for Air India’s disinvestment. This involves the demerger and strategic disinvestment of three profit-making subsidiaries, hiving off of certain assets into a special purpose vehicle and the treatment of unsustainable debts of the ailing carrier. The three profit-making subsidiaries of the national carrier are Air India Express Limited, Air India Air Transport Services Limited and AISATS for ground handling activities in Delhi, Mumbai, Trivandrum and Bengaluru.
Some overseas companies including airlines have expressed an interest in buying the national carrier; however, the government has reportedly indicated a preference towards a domestic buyer.
The year 2015-16 was financially a good one for the airline segment, with five major carriers, including Air India, reporting operating profits. While IndiGo and GoAir have been consistently reporting profits over the past few years, Air India, Jet Airways and SpiceJet reported operating profits for the first time since 2012-13. The new entrants, Air Asia and Vistara, are yet to become profitable. The trend of reporting a profit has been observed for 2016-17 as well, with Jet Airways reporting a profit of Rs 1.8 billion for October-December 2016, and IndiGo reporting a profit of Rs 4.9 billion for the same period.
During 2016-17, three domestic airlines – Air Costa, Air Carnival and Air Pegasus – ceased operations. Vijayawada-based Air Costa stopped operations in February 2017, after the Directorate General of Civil Aviation (DGCA) suspended its flying licence due to its failure to pay three months’ lease amount to GE Capital Aviation Services from which it had leased two Embraer (EMB-190) aircraft. The airline had reported a loss of Rs 1.3 billion on revenues of Rs 3.3 billion for the year 2015-16. The airline cited the lack of service hangars for its aircraft as the main reason for unsustainable costs, which forced the airline to shut operations.
Air Pegasus temporarily suspended services in January 2017. In April, the airline submitted a proposal to the Ministry of Civil Aviation (MoCA) and the DGCA with plans to restart operations with an ATR-72 aircraft, which was once operated by Kingfisher Airlines. Reportedly, the airline has invested Rs 330 million in restarting operations, of which the promoters have infused Rs 130 million while Rs 200 million has come from a 30 per cent stake sale to a Bengaluru-based investor.
Air Carnival ceased operations in April 2017 owing to cash flow constraints which prevented it from paying the leasing fees to Elix Aviation Capital and Nordic Aviation Capital from which it had leased three ATR72-500s.
On a positive note, regional airline Zoom Air took wing with its inaugural flight from Delhi to Durgapur via Kolkata on February 15, 2017. The airline is currently the twelfth operational domestic carrier. The airline is promoted by Zexus Air Services, and intends to operate flights to Amritsar, Surat and Bhavnagar from Delhi in the first phase of operations, with a fleet of three dry-leased CRJ 200LR aircraft.
In addition, the MoCA has reportedly received proposals from four entities for setting up new airlines in the country. These are – Ghodawat Enterprises Private Limited, GSEC Limited, Aviation Connectivity and Infrastructure Developers Private Limited and Ravindra Purushottam Deshmukh.
Most LCCs are planning to aggressively expand regional and international services from the summer schedule of 2018.
GoAir has confirmed its order for 72 A320 neo aircraft at an estimated cost of Rs 520 billion, doubling its order size from Airbus to 144. The move is in line with the airline’s strategy to expand its fleet and prepare for overseas operations. Further, the airline is considering upgrading to the 200-plus-seater A321 aircraft in the future.
Meanwhile, SpiceJet has placed an order for 205 aircraft from Boeing in a deal valued at $22 billion, based on list prices. Of the 205 aircraft, 155 are firm orders of B737-8 MAX, and delivery of these is expected between 2018 and 2024.
AirAsia has signed an agreement with Airbus for the purchase of 100 single-aisle A321 neo aircraft at $12.5 billion (at list prices). The deal has taken the total number of the A320 aircraft ordered by the airline to 575, of which over 170 aircraft have been delivered. Meanwhile, Jet Airways has announced plans to dry-lease 11 additional B737s by end-2017.
Going forward, safety is being given greater emphasis. The DGCA has mandated that all aircraft being registered in India from January 2019 onwards be equipped with indigenous navigation system GAGAN (Global Positioning System [GPS] Aided GEO Augmented Navigation).
The RCS is likely to bring in more business for existing airlines and pave the way for potential players looking to enter the market. Under the first round of RCS bidding, the MoCA awarded 128 regional routes to five airlines – Alliance Air, SpiceJet, Turbo Megha, Air Odisha and Air Deccan. The second round of bidding is currently under way.
Overall, the airline segment is poised for massive growth on the back of high traffic projections. As per CAPA estimates, over the next 18-24 months, Indian airlines are expected to add 100-120 aircraft, thereby changing the supply dynamics of the sector.