The clamour for India

In February 2014, CAPA Aviation (a consulting firm) projected a combined annual loss of USD 1.2 billion for the three Indian carriers, Air India, Jet Airways and Spicejet. Go Air was expected to break even and Indigo would still be in profit but lower than what it earned last year. This has been the situation for the past many years. The government has poured money into Air India to keep it going, Spicejet saw new investors and Jet Airways sold stake to Abu Dhabi Based Etihad Airways. In an extremely price sensitive market losses of over a billion dollars can spell doom for the industry. But this has not deterred new entrant. Air Asia India and yet to be named TATA – Singapore Airlines joint venture will start operations this year. Apart from granting licenses to the new entrants the Ministry of Civil Aviation (MoCA) was also busy discussing requests from Etihad, Emirates and Qatar Airways to increase the seat allocation in their respective bilateral air service agreements (ASA).

This might seem contradictory, on one hand the Indian airlines are suffering losses of over a billion dollar and on the other hand there are new airlines starting operations and foreign airlines want a larger share of seats. Why would someone invest money and efforts in a loss making market? The answer is simple. Despite the losses India remains an attractive market, thanks to its demography. In 2013, Indian airports processed approximately 97.67 million passengers, generating total revenue of USD 17 billion. And that’s when the total air passengers were only 8% of India’s population. Emerging economies like India have huge potential for air travel and it is obvious that airlines see this opportunity. What is then the reason for losses of Indian carriers is another story and has been told many times over by many people.

The interesting bit is the clamour for Indian market by the three Middle Eastern airlines. Etihad, after buying out 24% stake in Jet Airways managed to get its seat entitlement increased from 13,700 to 50,000 seats per week under a new ASA.  The increase will happen gradually over a period of three years. Emirates pushed for a 37% increase in its share but the government allowed only a 20% increase of 11,000 seats per week. Another Gulf carrier, Qatar Airways wants a 200% increase. Decisions on Qatar airways is pending, but likely to be considered at some stage.

It is no secrete that the Gulf carriers have been carrying fifth freedom traffic from India and hubbing them through Dubai, Abu Dhabi and more recently Doha. And that is precisely the reason why all three are so eagerly pursuing the matter with MoCA. A quick glance at the passenger numbers will give us an idea of the scale of the market these airlines are trying to tap into.

As mentioned above the 2013 saw total passenger traffic of 97.67 million. Out of this 55.67 million (57%) were domestic passengers and 42 million (43%) passengers flew to international destinations. The total revenue contribution of domestic passengers was USD 3.7 billion, a mere 22% of the total revenue of USD 17.1 billion.

Just a tiny bit more

Out of the 42 million international passengers, 66% or 27.51 million flew to destinations in the Middle East, Europe and North America. These passengers contributed USD 9 billion (67% of total) in revenues on these sectors. The Middle East is the largest of these three markets with a passenger share of 40% and a revenue share of 22%.

The geographic location of the Middle Eastern carriers gives them an advantage of having a one stop connection to markets in the Gulf Cooperation Council (GCC) countries, Europe and North America. This is not only handy in offering cheap fares but also helps to develop their respective airports as international hubs. These airlines are in effect eyeing the huge intercontinental traffic that India offers. There are 27.5 million passengers, willing to pay USD 9 billion in fares to fly out of India.

The matter is not just restricted to the airlines. All the three airports are part of the larger government owned enterprise which owns them together with their respective airlines. A passenger is counted twice by an airline on a return flight, but counted four times by the airport, if he is changing planes. A transit passenger not only increases the passenger count but also spends anything between two to four hours in the transit lounge at the airport. Four hours is enough time to entice passengers to spend on snacks, drinks and high margin products in the Duty Free. In 2013 Dubai Duty Free posted total sales of USD 1.8 billion.

This is the reason the three airlines are clamouring for Indian passengers. However, it does not mean that the Indian aviation industry is doomed and foreign airlines will sabotage the market. The two new entrants will possibly have the options of going international without any cooling off period. The enhanced seat limits to the Middle East will benefit them. Air India will hopefully be privatized in the tenure of the next parliament and would end up in professional hands. The other low cost airlines would probably expand their international network or find their niche and allow the full service carriers to serve the long haul markets. All this is a lot of hope and probability, but a realistic one. Until then the passengers will keep on flying via the GCC hubs and contribute to their retail and passenger revenues. 

Waiting for the connecting flight

Kingfisher Airlines’ license has been suspended and Mr. Mallya is nowhere to be found. Newspapers are pouring in a lot of ink to cover how the mighty falls. To be fair it was inevitable. There was too much capacity in the skies and irrational fares were the norm. Fares were not cost based but Air India based (Air India offered unrealistically low fares to grab market share unleashing a fare war). These are perks of a developing aviation market. What is strange however is the unwise use of the excess capacity.

Ever since the Delhi and Mumbai airports were privatized the media and the ministry of civil aviation (MoCA) rubbed two words deep in our minds. So deep that we used them without thinking what they really mean. The words were, “world class” and “hub”. Every one promised world class infrastructure, we all expected world class infrastructure, the ministry talked about turning India into a world class hub, a global hub and sometimes just a hub. India did get a lot of modern looking terminals in the past couple of years, I will leave it for the passengers to decide whether they are world class or not. But the other word, “hub” seems to elude India even after the modern terminals became operational.

Where is my hub?

A hub is an airport where people fly in from different corners of the world, change the aircraft and fly on to their destinations. A good example would be Dubai in the Middle East or Frankfurt in Europe. MoCA (irrespective of the minister in charge) always propagated the idea of turning Delhi and Mumbai into a hub. Before commissioning of the integrated terminal three at Delhi, hub operations were difficult due to two separate locations for international and domestic operations. This has been taken care of now by terminal three. Still Delhi is nothing close to a hub. Currently Delhi airport has close to 10% of its total traffic as transfer traffic. A large chunk of which is international to domestic transfer. The trend will not be much different for Mumbai either. Compared to 10% transfers at Delhi/Mumbai Dubai and Frankfurt have close to 50% transfer traffic.

City pair	Air India	Jet Airways	Emirates	Qatar Airways
LHR – HKG	0	1/1.5/BOM	2/1.5/DXB	4/1-2/DOH
LHR – SIN	0	2/12-23/BOM	4/2-3/DXB	4/1-6/DOH
LHR – SIN	-	1/12/DEL	-	-
LHR – PEK	0	0	5/3-5/DXB	4/1.5/DOH
LHR – TYO	1/10/DEL	0	2/2.5/DXB	4/2-7/DOH
LHR = London; HKG; HKG = Hong Kong; SIN = Singapore; PEK; Beijing: TYO = Tokyo; BOM = Mumbai; DEL = Delhi; DXB = Dubai; DOH = Doha
Source: Availability display from Galileo for 12 November 2012

Waiting for my connecting flight

The above table is a snapshot of connections between popular business destinations in Asia and Europe. Air India, the national carrier offers only one connection between London and Tokyo with an extremely long layover of ten hours. Jet Airways, a private airline offers four but only one with a practical connecting time. On the contrary the Middle Eastern carriers offer multiple choices with extremely convenient connecting times at their respective hub. This is how poor the hub connectivity at Indian airports is.

So what is stopping Indian carriers from taking the plunge? Well the answer lies in the poor connectivity offered by Indian carriers (as shown in the table) and a lack of stakeholder coordination (airports, airlines and MoCA). For a very long time MoCA protected Air India by holding back flying rights for private airlines, not letting them fly on profitable routes, onerous process of approvals for fleet acquisition, high taxation, etc. There is no point in discussing what benefits Air India got from all this protectionism. After several strikes and routine operational delays the airline is surviving on taxpayer’s money.

Lets do the obvious

Protection of Air India is however just one of the reasons. Indian carriers can be a bit more enterprising when it comes to network planning. As shown in the table they lack connectivity between the most obvious destinations. London-Hong Kong market for example is big enough with seven direct flights and more than 20 indirect flights, all operated with wide body aircraft. Add to this a strong origin and destination market from India (both London – India and Hong Kong – India) and the Indian carriers can easily ensure high load factors. London – Hong Kong route might look over crowded but there are other less crowded markets to be connected and Indian carriers can use the geographical location of India to their advantage. A collaborative effort of airlines, airports and the government agencies is needed, where the airline is supported by the airport in its ambition of network expansion and the government provides a level playing field minus the bureaucracy.

There is no reason why Indian carriers cannot connect Jakarta to London or Manila to Riyadh via Delhi/Mumbai. A huge political change is unfolding in India’s backyard. Myanmar is opening up and businesses all over the world are eagerly waiting to set shops there. Consultants, bankers, politicians, project managers, and their teams will swarm in once the sanctions are lifted from Myanmar. This is a great opportunity, which needs to be assessed and seized at the right time. It will be too late once Qatar Airways or Flydubai start flying there twice a day. Some of the excess capacity can definitely shifted to routes outside India.

The great turn around – case of a maharaja

During the British rule India used to be a land of maharajas, one every few hundred kilometres. Operating their own small princely state, they were a happy lot. With the demise of the Raj in 1947 the princely states were gobbled up by the dominion of India. The maharajas were now living on state pensions. Three decades later the iron fisted Mrs Gandhi put a stop to the state pensions and left the maharajas to fend for themselves. Many of them were lost in the oblivion, while many managed to adapt. The many heritage hotels (modified castles and forts) dotting northern India today is testimony to the turnaround. The case of Air India is a similar one. Once a true maharaja under the TATAs, it was made a state owned enterprise in 1953. In the last six decades Air India saw many changes including many years of perpetual losses. The current loans and outstanding for Air India is Rs 67,520 crore (USD 13.1 billion). The ministry of civil aviation has cleared a proposal to bail out Air India by infusing a total of Rs 30,000 crore (USD 5.8 billion) over the next nine years. However the airline has to follow a turnaround plan and achieve milestones to get the money. The question is will the maharaja of skies turnaround like the ones who own heritage hotels?

Little is known of the turnaround plan of Air India; with the information available in public domain it seems that the plan is more about financial restructuring than operational restructuring. The airline will issue non convertible debentures worth Rs 7,400 crore (USD 1.4 billion) to its lenders to pay for its working capital loans. A short term working capital loan of Rs 11,000 crore (USD 2.1 billion) will be converted into a long term loan. Information on operational issues is available in bits and pieces. The ministry has now agreed to pay for the induction of 27 dreamliner Boeing 787 aircraft on sell and lease back option (Air India will sell the aircraft to a leasing company, which will lease them back to Air India). This will take the assets and related depreciation off the books while still utilising the benefits. Another bit of information is on “On Time Performance” (OTP) of 90% and a seat load factor of 73% to get the money. The ministry also decided to hive off the engineering and ground handling units of Air India into wholly owned subsidiaries. A total of 19,000 staff will be moved from Air India to these subsidiaries. This will leave Air India with around 9,000 staff, bringing down aircraft to employee ratio to 101 per aircraft from the current 315. The subsidiaries are also expected to run as independent profit centres, competing for business form not just Air India but other airlines as well. A leaner Air India might be more attractive for investors in a future divestment plan.

With this infusion of money, Air India seems to be able to pay for its costs for some time, but much more needs to be done on the apron to keep it flying. At present Air India has a total fleet of 121 aircraft, out of which only 27 (22%) are long haul. It operates a total of 34 international destinations, out of which 12 (35%) are highly price sensitive and fiercely competed destinations in the Middle East and South East Asia (Bangkok & Singapore). In the year 2009-10 Air India flew a total of 11.7 million passengers out of which 41% were international. Of the total passengers flown only a fraction was transfer traffic (passengers connecting at an airport for their onward journey). For the sake of comparison let’s look at Qatar Airways. The airline with a fleet of 96 aircraft carried 12 million passengers in 2011 across 115 destinations worldwide. Nearly 45% of traffic on Qatar Airways is transfer traffic. Air India has a lot to achieve even with its current fleet and network.

Keep them flying

How can Air India make use of this turnaround plan? First of all Air India should see the current situation as an opportunity. With 19,000 employees off its shoulders there are huge savings to be made in the years to come. Another blessing is the induction of ultra long haul 787 aircraft. These are highly fuel efficient and can seat up to 290 passengers (depending on seat configuration). The 27 aircraft to be inducted over the next few years can be used to realign its network in a smart way. Hiving off of the engineering and ground services unit will also give Air India the much needed freedom to shop for the best offer in market, again helping it to save money.

The next step is to come up with a well planned hub strategy. At present Air India is more of an O & D carrier than a hub carrier. It needs to evolve as a mature network carrier to improve its efficiency and seat load factor. While O & D traffic has its own premium, transfer traffic gives the much needed support to fill up seats. The two logical options for a hub in India are Delhi and Mumbai. While Mumbai will take a while to get ready with the infrastructure required to have hub operations, Delhi is ready since 2010. Integrated terminal with seamless transfers will reduce turnaround time at the tarmac and provide convenient connections for the passengers. Large volume of traffic moves between South East Asia and the Middle East, East Asia and Europe. Air India can tap into these markets utilising its position as a hub carrier at Delhi/Mumbai. Majority of the traffic is being hubbed through the Middle East at the moment. Competing with the established carriers like Emirates, Etihad and Qatar Airways is not easy but on the other side there is the advantage of a mature market which can be tapped.

A hub is no good if the network is not diversified enough. As mentioned earlier, one third of the international destination of Air India are in the highly competitive market of Middle East. Between India and three large airports in the Middle East (Dubai, Doha and Abu Dhabi) there are 550 weekly flights (this figure will be higher if other airports like Muscat, Kuwait, Bahrain and Jeddah are included). The traffic consists of mostly guest workers from India and is extremely price sensitive. While seat load factors might be high, yields are low due to competition. To diversify its network Air India needs to use its 787s on starting new routes. Europe is under served with only three cities on its network. South East Asia is another underutilised market, Malaysia and Indonesia are completely absent from its network. These two countries offer a huge potential of carrying transfer traffic through India to the Middle East (mostly on pilgrimage to Saudi Arabia).

A hub strategy and a diversified network will give Air India the much needed opportunity to perform well. However, this will not happen without investing in human resources. Extensive training and consistency in service quality is the key to successful operations. Air India might have to renegotiate the current employment contracts to introduce performance based pay. This might prove a difficult task, but to turnaround Air India a lot of difficult decisions have to be taken. 

Clearing the turbulence – Need for a contemporary civil aviation policy

The last two decades of economic growth have also lead to exponential growth in air traffic in India. In the financial year ending 2001 India counted 30 million passengers per annum (mppa) on domestic routes, which went up to 106 mppa in year ended 2011. Total passenger traffic (international and domestic traffic put together) grew from 42.5 mppa to 106 mppa during the same period. The two large aircraft manufacturers, Airbus and Boeing have both projected a demand of around 1,000 aircraft for India in a twenty year period ending 2028. Indigo, India’s largest low cost airline created history by ordering 100 Airbus A320 aircraft and recreated history by adding another 180 recently. On top of the growth in aviation, the sector creates jobs directly and in related sectors like airports, ground handling, airport retail, public transport, cargo and warehousing, etc. According to International Air Transport Association (IATA) aviation in Singapore contributes 5.4% to the national GDP and supports over 100,000 jobs. In India the figure is 0.5%. What is wrong with Indian aviation?

There is more than one leak in the tub, the biggest being absence of a comprehensive and relevant civil aviation policy. The delayed civil aviation policy along with rules like a “minimum of five years” experience of continuous operation of domestic scheduled air transport services; and at least a twenty aircraft fleet” are suffocating the growth potential of Indian carriers. Such restrictions not only stifle the competitiveness of the industry, but also give an unfair advantage to foreign carriers. A case in point is the Middle Eastern carriers. From full service carriers like Emirates to low cost carriers like FlyDubai, all started as small companies with a handful of aircraft and took their maiden flights to Indian subcontinent. Indian carriers on the other hand have to wait for a period of five years.

Second area is ground infrastructure. Barring the five private airports (Delhi, Mumbai, Bangalore, Hyderabad and Cochin) most Indian airports are struggling for better management and expansion. The government started the process of privatising thirty five non metro airports in 2008, but the process was cancelled without any explanation. The most likely reason was immense pressure from labour unions that rightly feared for job losses. A handful of Greenfield projects were awarded but progress has been slow due to land acquisition issues. The latest approach of the Airports Economic Regulatory Authority (AERA) to shift towards a single till model (where airfield operations are subsidised by commercial revenues) has made airport investments unattractive. Such arrangement will deter investors from putting their money in airports.  

The third area where the civil aviation policy can help is Maintenance Repair and Overhaul (MRO) business. The large fleet orders placed by Air India, Indigo, Jet Airways and others will need MRO facilities to service their fleets. At present Air India is the only airline to have its own MRO centre in India. All other airlines send their aircraft to neighbouring countries like UAE, Singapore and Sri Lanka for the maintenance works. This results in major loss of revenue, which could have been added to the GDP. A major reason for lack of MRO facilities in India is high tax and import duties on original equipments. The low labour cost advantage in India is offset by the high taxes and duties. This is true for both scheduled airlines like Air India, Jet Airways, Indigo and business aviation companies.

Fourth, aviation as such is not considered as a priority sector. Long standing demands like allowing Foreign Direct Investment in airline by foreign airlines, standardising aviation fuel taxes and a liberalised air service agreement regime (which allows airlines to operate flights between two countries) have not been addressed. Troubled airlines like Kingfisher can benefit from FDI and other airlines too can gain expertise and know how.

Fifth, painfully slow procedures for air freight clearance. Singapore and Hong Kong process air freight shipments within hours; In India it takes a couple of days. Countries which have a thriving aviation sector like that of Dubai or Singapore have given a priority status to aviation and accordingly framed policies. India needs to think of aviation as a sunrise sector and lay down policies to facilitate the business. The policy framework should provide a level playing field to all stakeholders and should not discriminate.