Two of the three full-service carriers are in significant financial distress and there is increasing pressure on the low-cost airlines. Collectively, the airline industry will register a loss in the range of $1.5– 1.7 billion dollars for 2018-19. There has been much debate about structural changes but these are yet to happen. In such a situation, leading an airline in India requires unique capabilities. Some of these are highlighted below:
Towards predictable cash outflows by managing the largest expense item — fuel
The largest operational expense item for any airline is aviation turbine fuel (ATF). For Indian carriers, ATF constitutes 35-40 percent of an airline cost base. Unfortunately, the pricing of ATF in India is based on import parity rather than on the basis of actual cost (including refining and marketing). The industry has long demanded that ATF taxation is rationalised but no such move has been initiated yet.
In spite of the goods and service tax (GST) implemented in 2017, ATF continues to be out of its purview, leading to incredibly thin margins of 2-4 percent in the industry. Compare this to putting one’s money in fixed deposits, which are yielding 7-8 percent and the gravity of the situation can be gauged.
Hedging via financial instruments is not an option as that requires expertise and carries additional risk. However, there are other aspects of hedging that can be initiated. Specifically, volume discounts from the oil marketing companies; pre-payment commitments towards an even higher discount; leveraging lower tax rates in states towards fuel uplift (known as tankering); efficiency procedures both on the ground and in the air; and creating a cost focussed culture. Other more complex measures include the direct import of fuel, network optimisation.
The goal is not only to minimise cost but also to have a more predictable cash outflow which then can be addressed via tactical interventions.
Collaborating with stakeholders to drive airport efficiency
From 44 million domestic passengers in 2008 to 121 million domestic passengers in 2018, Indian aviation has come a long way. This growth is forecast to continue with India becoming the 3rd largest aviation market by 2030. But to sustain this growth, airport capacity is required. And airport expansion is lagging far behind.
Airport capacity now poses an imminent threat to Indian airlines. The country has a total of 449 airports but metro airports continue to be key to aviation traffic with about 61 percent of the domestic traffic and about 73 percent of international traffic still originating from the 6 metro cities of Delhi, Mumbai, Bengaluru, Hyderabad, Kolkata and Chennai. With the exception of Bengaluru which will see the addition of an additional runway this year, the capacity expansion at other airports lags or is non-existent. Airlines are wanting for peak slots to fly aircraft and for parking infrastructure. Use of dynamic parking on a network basis is not sustainable.
For airlines, this means: optimising existing slot portfolios towards generating yield premiums from prime-time slots. Additionally, a re-evaluation and rethink of simply flying unviable routes. Airlines that do not have the required marketstrength will be forced to pull out of some markets completely or move towards a more connected network to generate traffic. Larger aircraft may also be an option but the challenge is filling these up during non-peak hours, which is not done is a cash-drain (think of filling up 22 percent more capacity with a marginally higher cost base but without an uptick in fare levels).
Above all airlines have to work collaboratively with stakeholders including airports, air traffic control and government to see how more capacity can be delivered from the existing resources.
02/04/19 Satyendra Pandey/CNBC TV18
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Towards predictable cash outflows by managing the largest expense item — fuel
The largest operational expense item for any airline is aviation turbine fuel (ATF). For Indian carriers, ATF constitutes 35-40 percent of an airline cost base. Unfortunately, the pricing of ATF in India is based on import parity rather than on the basis of actual cost (including refining and marketing). The industry has long demanded that ATF taxation is rationalised but no such move has been initiated yet.
In spite of the goods and service tax (GST) implemented in 2017, ATF continues to be out of its purview, leading to incredibly thin margins of 2-4 percent in the industry. Compare this to putting one’s money in fixed deposits, which are yielding 7-8 percent and the gravity of the situation can be gauged.
Hedging via financial instruments is not an option as that requires expertise and carries additional risk. However, there are other aspects of hedging that can be initiated. Specifically, volume discounts from the oil marketing companies; pre-payment commitments towards an even higher discount; leveraging lower tax rates in states towards fuel uplift (known as tankering); efficiency procedures both on the ground and in the air; and creating a cost focussed culture. Other more complex measures include the direct import of fuel, network optimisation.
The goal is not only to minimise cost but also to have a more predictable cash outflow which then can be addressed via tactical interventions.
Collaborating with stakeholders to drive airport efficiency
From 44 million domestic passengers in 2008 to 121 million domestic passengers in 2018, Indian aviation has come a long way. This growth is forecast to continue with India becoming the 3rd largest aviation market by 2030. But to sustain this growth, airport capacity is required. And airport expansion is lagging far behind.
Airport capacity now poses an imminent threat to Indian airlines. The country has a total of 449 airports but metro airports continue to be key to aviation traffic with about 61 percent of the domestic traffic and about 73 percent of international traffic still originating from the 6 metro cities of Delhi, Mumbai, Bengaluru, Hyderabad, Kolkata and Chennai. With the exception of Bengaluru which will see the addition of an additional runway this year, the capacity expansion at other airports lags or is non-existent. Airlines are wanting for peak slots to fly aircraft and for parking infrastructure. Use of dynamic parking on a network basis is not sustainable.
For airlines, this means: optimising existing slot portfolios towards generating yield premiums from prime-time slots. Additionally, a re-evaluation and rethink of simply flying unviable routes. Airlines that do not have the required marketstrength will be forced to pull out of some markets completely or move towards a more connected network to generate traffic. Larger aircraft may also be an option but the challenge is filling these up during non-peak hours, which is not done is a cash-drain (think of filling up 22 percent more capacity with a marginally higher cost base but without an uptick in fare levels).
Above all airlines have to work collaboratively with stakeholders including airports, air traffic control and government to see how more capacity can be delivered from the existing resources.
02/04/19 Satyendra Pandey/CNBC TV18
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