Aviation Industry heading for a crisis

New Delhi, India. (SANEPR.com) February 6, 2007 -- Industries either boom or turn sick with red ink covering the balance sheets of the companies indicating mounting losses. But Indian aviation industry is a case in contrast which is experiencing boom as well as sickness at the same time. Growing passenger traffic and even faster growing capacity have created conditions in which not only the existing players are expanding but new players are also entering the field. Players are setting a new record in terms of number of plane ordered and grand plans announced by them.

While plane manufacturers are laughing all the way to banks with their inventories being cleaned up fast and new planes ordered to keep them going for next few years. It has made India as the as the preferred choice of all manufacturers. They are not only taking back order books filled with new orders but are also announcing plans for starting training schools for pilots and new facilities for maintenance of planes. This is happening when the airlines will be atleast in red by a huge margin of Rs 2000 crores. The prospects are not better for next year in which losses are expected to climb up further to Rs 2,500 crores.

This clearly indicates that conditions this time are different as compared to nineties when a large number of airlines like East West, Modi and Damania folded up in matters of few months leaving behind huge debts. The players this time have deep pockets and established as industrialists in a variety of fields. Players like promoters of King Fisher airline, Indigo are established players and have not joined the aviation business to loose money. Even if one were to believe that old players like Jet and Sahara have no option but to carry on having invested so much money and time in industry, one also cannot dismiss players like Deccan air who have joined the race with a definite plan and model and want to make money in aviation when economy in general is booming.

Every player including old warhorse like Indian, believes that current conditions cannot continue indefinitely and soon the market will turn around. But how soon it will change is not known as some serious mismatch has taken place in the aviation industry in which capacity is growing much faster as compared to demand. True that demand for air travel is growing with a booming economy growing at nine per cent and it has a direct bearing on the growth of air traffic.

The entry of too many new players and sudden increase in capacity has created problems, which could not have been anticipated by anyone. For instance a 30 per cent growth in traffic is like a dream for aviation industry in any country but problems comes when capacity increases by a much higher percentage. To this many more problems were added when the fuel prices started climbing, and salaries touch new heights with shortage of pilots and trained staff. The other contributing factors were inadequate infrastructure which forces the planes to circle over metro airports like Delhi and Mumbai for 30 to 45 minutes before they are allowed to land. This leads to loss of costly fuel and is also a safety hazard.

The problems of airlines further multiplied when they were made to hire foreign pilots who demand higher salaries but also pose a safety risk being unable to communicate with traffic control. The regulator has also created problems by relaxing the age limits for retiring pilots and reducing the mandatory hours that a pilot has to fly before being given the command. All these factors are known and probably will be addressed in future but in the meantime one is witnessing a situation in aviation, which can explode any time.

The Government is aware of the situation, which is partly a result of their policies and to some extent lack of professionalism in airline management. It is difficult to understand why all airlines are deploying new capacity in metro towns only where all instead of opening new routes knows excess capacity. With 80 flights deployed on Delhi-Mumbai route no airline can hope to make money but every airline is trying to serve the route with the result that occupancy is declining.

There was a time when with sixty per cent load a service airline could break even and a low cost carrier could break even with 80 per cent load factor. These figures are no longer relevant as all airlines have been forced to reduce fares to attract passengers and how low they will go before the airlines start bursting is not known.

Airlines world over thrive on slender margins but are attractive because of heavy cash flow. The type of growth has left behind many dead bodies making easy picking for strong players and we are close to witnessing such a scene in near future. Some steps like allowing a hike in limits of Foreign Direct investment in domestic airlines can only postpone the day of reckoning but will not make the industry healthy.