What could you expect when there is more spending than earning? Even a kid can answer this spontaneously!
Let us see the earnings for airline carriers
Revenue based
omestic revenues are largely INR denominated; Robust pax traffic growth, but yields out of sync with cost structures due to intense competition, government support to national carrier and customer preference for LCC models .Airlines with international operations generate part of revenues in foreign currency; foreign carriers dominate in the longer haulage and premium service offerings
Other income based: Earnings from aircraft sub-leases (dry or wet) are mostly in $ terms, helps rationalize capacities. Low contributions from cargo and auxiliary revenue due to their modest adoption level
Non-operating income::With capacity constraints at global aircraft manufacturers & rising commodity prices, market value of successful aircraft models often exceed book values making sale and lease back (conversion of Financial Lease to Operating Lease) an attractive option to book non-operating incomes, generate free cash flows and deleverage the balance sheet
Now let us see the expenditure
ATF costs contributes 30-45% of overall operating costs for Full Service Carriers (FSCs) & 40-55% for Low cost carriers (LCCs) Domestic ATF prices are linked to fluctuation in crude oil prices and movement in INR vs. $ High central and state levies translates into a 60-70% higher ATF prices in India over the global average Significant congestion at major domestic airports increases fuel costs considerably Given the fact that Indian airlines have been in aggressive expansion phase, dearth of experienced pilots require airlines to employee foreign pilots which command higher salaries and are often paid in foreign currency Most airlines follow an operating lease model for large part of their capacity; Lease rentals are also denominated in foreign currency thereby exposed to fluctuation in forex movement; Depreciation costs mainly for owned aircrafts (Financial Lease)Significant rise in interest expenses due to deterioration in the capital structure, cash losses and increased working capital requirements besides overall rise in interest rates
Hence, With combined impact of 1) moderating pax growth 2) lower yields due to excessive competitive 3) rising ATF prices 4) steep rupee depreciation and 5) rising debt levels and interest costs, the profitability margins of the airlines industry have been severely impacted.
Origin of the FDI plan by government
With Banks unwilling to enhance their exposure to the industry, recast their loans or pick up equity stakes without viable business plans, industry needs to come out with strong equity infusion plans. Hence, the government is mulling allowing foreign carriers to pick strategic stakes in domestic airlines to help them stay afloat in these difficult times, besides bringing global expertise and best industry practices over the medium term.
How will FDI improve the overall scenario of the weakened Indian aviation industry?
1) The FDI would directly relieve the weakened domestic airlines with flush of liquidity and help bring global expertise and best industry practices over the medium term.
2) It will not just provide entry into one of the fastest growing aviation market globally but also an opportunity to establish India as their hub for connections between US/Europe and South-East Asian countries.
Difficulty in attracting FDI though allowed by the government makes the sale stake chances a low probability thing.
The Global Airline industry is itself currently going through a tough phase (Bloomberg World Airline index down 22%, Asia-Pacific Airline index down 25% in last one year), due to below trend economic growth across advanced economies and high crude oil prices ($100-125/Barrel). Besides, aviation economics currently remain unfavorable in India due to intense competition, mandatory route dispersal guidelines, higher taxes on ATF, airport related charges and inadequate airport infrastructure. For example, airlines like Air Asia (citing high infrastructure costs) & American Airlines (parent facing financial stress) have recently withdrawn from India. Lastly, foreign carriers already enjoy significant market share of profitable international routes and have wide domestic access through code sharing agreements. Given these considerations, I believe, attracting investments from foreign airlines may not be easy.