Economics
Varun Sanghi MDI - Gurgaon Will FDI provide a safe landing to the Indian Aviation Sector?
On September 14, 2012, Indian government opened its skies for Foreign Direct Investment (FDI) in the Aviation sector. Among other policy initiatives, the measure was announced by the government as it went into overdrive mode as far as reforms are considered. While FDI was already allowed in the sector, the current regulation was directed at the foreign airlines who are interested in buying stakes in the Indian Airlines, a measure which was previously prohibited. Though the announcement came late in the day, the listed companies in the aviation sector had already factored in the reform in their stock prices as they saw a significant increase in anticipation of the reform. The reforms look good, especially when players in the industry are deep in the red and there are hardly any players that have posted profits in the near past. They would help these beleaguered firms to raise capital by selling equity to foreign airlines. But is this the complete story that is hurting the Indian aviation sector? It remains to be seen as the companies battle countless issues, both in the short term and the long term is battling with. While no one can deny the immense potential growth in the sector, a close look suggests a mismatch between capacity addition and growth in the sector. In the period from January 2011 to January 2012, while the passenger traffic witnessed a growth of 12%, the capacity addition lagged behind at 3%. In recent times, the situation has been aggravated further from the cut down in operations by Kingfisher airlines. Another problem with the capacity addition is that, while certain trunk routes have capacity shortage, some other off beat routes have idle capacity. Due diligence in the allotment of route and fleet operation would go a long way in optimizing the operations. Along with the capacity load factor, many airlines struggle to meet the tight flight schedules and thus have a poor on time performance record.
Capacity addition is something that takes time to build up and is fixed in nature, but the operating aspect that is hurting the industry the most, is the high Aviation Turbine Fuel (ATF) charges. ATF forms close to 40% of the operating costs of the carriers and is thus hurting While the government in its capacity has allowed the them the most. The above data highlights the issue of entry of FDI into the sector, there is still a lot more that domestic carriers at loss as they are being charged the needs to be done to uplift the sentiment. To have a better view, let’s look at some of the problems that the industry highest for ATF. The Indian ATF prices are generally among the highest in the world, making operation of aircrafts all the more costly. The taxes Figure 1: Stock Prices and duties further imposed by state 60 450 Increase in the stock price governments compound the problem. 400 50 350 The price of ATF for International 40 300 airlines is cheaper as the fuel supplied is 250 30 200 deemed export and thus escape the 20 150 myriad of taxes imposed on fuel for 100 10 domestic consumption. Though the 50 0 0 Indian government has given a go ahead to the airlines for direct fuel import, the issues related to the handling and storage Spicejet King?sher Jet Airways of fuel have done little good as the Sources: www.bseindia.com airlines will have to rely on the existing oil
iNM - Magazine Vol. 4
Jet Airways
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