Context: The article is discussing the recent insolvency filing of GoFirst, a low-cost carrier in India, and the subsequent directive by the Directorate General of Civil Aviation (DGCA) to stop selling air tickets immediately. The article explores the impact of GoFirst’s distress call on the aviation sector, and raises concerns about the health of the Indian aviation industry, which has been struggling due to pandemic losses. It also discusses the reasons behind GoFirst’s grounding of a major section of its aircraft since last year, the challenges faced by airlines to survive, and the factors contributing to high operating costs. Additionally, it explores the policy and regulatory factors affecting the aviation industry in India.
The Troubles of India’s Aviation Industry Background
Why did Go First File for Voluntary Insolvency?
- Impact of COVID Pandemic: The Covid crisis has had a massive impact on the aviation industry and air traffic in India. Indian airlines and airports incurred an estimated loss of Rs 19,564 crore and Rs 5,116 crore, respectively, in 2020-21 due to severe disruption caused by the pandemic.
- Import Dependency: India is among the top importers of crude oil, depending on foreign fuels to meet 85% of its requirements. Aviation Turbine Fuel (ATF) is one of the major petroleum products produced from processing crude oil. ATF forms 40% of the overall cost of airline companies in India. A higher price of crude oil in the international market will directly hike the ATF rates and consequently lead to high ticket prices.
- Depreciation of Indian Rupee: Indian rupee emerged as Asia’s worst performing currency in 2022 depreciating around 11.5% against the US Dollar. The rupee has been declining especially after supply chain disruptions in view of the Russia-Ukraine war, global economic challenges, inflation, and high crude oil prices.
- Such depreciation puts considerable pressure on the already high import prices of crude and raw materials, paving the path for higher imported inflation and production costs besides higher retail inflation.
- Consequently, the ATF prices also witness tremendous hikes. High fuel costs and a weak rupee make the cost of operations unsustainable for the airline industry. The airlines raise the fares to counter the same.
- Lack of Funds Through IPO: An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company.
- Go First wanted to raise ₹3,600 crore since 2015 through an IPO to meet its debt repayment and working capital requirements.
- But weak market sentiment and the cold response of owners on infusing funds gave a blow to its prospects.
- Later, the pandemic hit the company hard. Consequently, the airline has been unable to raise funds from the primary market.
- Unavailability of Aircrafts: The Go First is facing financial crunch also due to non-supply of engines by US-based jet engines manufacturer Pratt and Whitney (P&W) that has forced grounding more than 50 planes.
- Dip in Market Share: Go First had 6.9% market share in March 2023, slipping from 8.9% in 2022.
Implications of Insolvency:
- Bad Omen for Indian Aviation Sector: Go First’s bankruptcy filing would be the second in five years after Jet Airways failure in April 2019 in the aviation industry. This trend of insolvency is not a very good sign for the Indian Aviation market.
- Shares of Aviation Stocks Rise: Go First’s bankruptcy means lower competition for peers. The shares of InterGlobe Aviation hiked 8%, SpiceJet surged about 6% while defunct airlines Jet Airways’ shares also surged 5%. This is seen as an opportunity for other Indian airliners to grab the airline’s market share.
- Fares to Soar: With Go First’s bankruptcy filing, it is expected that other airlines will benefit, leading to a 10-15% increase in air fares on domestic leisure routes.
- Opportunity for Slots: Go First’s grounding of Aircrafts also offers a chance to competitors to grab precious airport slots. Market leader IndiGo is also expected to mount additional flights on routes where Go First had a significant presence.
- Impact on Airlines Personnel: The Go First bankruptcy will have an impact on the airline stakeholders, cabin crew, pilots, passengers and many more. However, the Indian aviation space, since it is already battling with a high demand for pilots, may soon see a viable workforce to fill these positions, in a rather positive light. However, the management of air traffic, or a possible shortage of flights on domestic routes may be a concern as well.
Decoding the Editorial
The Article discusses the size and importance of India’s Aviation industry and the challenges faced by it.
- India’s Aviation Industry:
- The country has a large domestic air traffic market that has been recovering from the impact of the COVID-19 pandemic.
- In March 2023, domestic carriers in India flew 13 million passengers, which was 11% more than the same month in the pre-pandemic years of 2018 and 2019.
- The Civil Aviation Ministry predicts that India will have more than 140 million passengers in FY2024 alone, and the CAPA-Centre for Aviation projects that India will handle over 1.3 billion passengers annually in the next 20 years.
- The country currently has 148 airports, and it is the third-largest domestic market in the world in terms of seat capacity.
- With respect to the market share of the major Aviation players, IndiGo is the market leader with 56.8% of the market share as of March 2023.
- Financial Viability of the Sector:
- The Indian aviation sector has struggled to remain financially viable, despite being a fast-growing market.
- Even before the COVID-19 pandemic, airlines in India were posting losses, with only IndiGo making a profit in the financial year 2019-2020.
- The pandemic has worsened the financial situation for airlines in India, with a cumulative loss of ₹15,000 crore in the financial year 2020-2021.
- Financial trouble has led to the exit of 17 domestic and regional airlines from the market over the past few decades.
- Furthermore, the consolidation of four carriers, including Air India and Vistara, under one umbrella by the Tatas, is expected to make it even tougher for smaller airlines to capture the market.
- According to CAPA, 75-80% of the market will be captured by IndiGo and Air India combined, leaving just about 20% for players like SpiceJet, GoFirst (if it revives), and the newest entrant Akasa.
- Legal and Regulatory Framework:
- The legal and regulatory framework of the Indian aviation sector, is dealt with by the Ministry of Civil Aviation under the Aircraft Act 1934 and Aircraft Rules 1937, with the DGCA serving as the regulatory authority for safety, licensing, and airworthiness.
- Despite frequent modifications to the mother Act and Rules, experts believe that India has not kept up with modern technology in aerospace, resulting in increasing costs to the industry and potentially affecting passenger growth.
- High Taxes and Impact:
- After liberalisation reforms in the 1990s, the sector saw a boom.
- However, by the early 2000s, only two major airlines, Jet Airways and Sahara, survived.
- To promote industry growth, low-cost carriers entered the market in 2003, but they faced intense competition to keep prices low, and the government levied high taxes on Aviation Turbine Fuel (ATF).
- These factors contributed to the challenges faced by the sector, including the struggle of airlines to survive and the high operating costs.
- Impacts: The high taxes on Aviation Turbine Fuel (ATF) had deep impacts on the financial viability of Indian airlines. This is because:
- ATF contributes to 40-50% of their operational expenses.
- Some Indian states impose taxes as high as 30% on jet fuel, making it difficult for smaller airlines to sustain shorter flight routes.
- This has led to a situation where larger carriers such as IndiGo can offer ultra-cheap fares on popular routes and use their scale to lower overhead costs, while recouping the costs on less-competitive legs.
- Barriers posed by Indian Aviation Policy:
- Indian aviation policy has created barriers to entry and growth, affecting players differently.
- Earlier, new airlines in India were required to have a fleet of at least 20 aircraft and five years of domestic experience to fly internationally.
- This rule was later amended in the National Civil Aviation Policy (NCAP) in 2016, which removed the five-year domestic experience requirement but maintained the 20 aircraft fleet requirement for domestic operations.
- This requirement favours legacy carriers that had to meet the earlier requirements to go international, while newer entrants like Vistara and AirAsia India lobbied for the removal of the 5/20 rule, citing the need for competition.
- Leases and Financial constraints:
- The majority of Indian airlines lease their aircraft as they cannot afford to purchase them outright due to financial constraints.
- About 80% of India’s total commercial fleet is leased, with leasing adding high costs to operations as they are denominated in US dollars.
- Airlines have to pay annual lease rents of about ₹10,000 crore to lessors, making up nearly 15% of the revenues of Indian airlines, except Air India which owns a large part of its fleet.
- The costs of these leases go up further when the Indian rupee depreciates, which can happen due to global financial developments such as an oil price shock, which simultaneously increases the cost of ATF, compounding the carrier’s expenses.
- Although the government plans to make India a leasing hub by getting leasing companies to set up shop in India, this plan is not yet fully operational. Therefore, until this plan takes off fully, expensive lease rents for airlines and repayment feuds with lessors will continue to be a challenge for the Indian aviation industry.
- Costs that Airlines should Bear:
- Airlines have to bear various costs associated with the use of airport facilities such as landing charges, freight charges, and other charges related to airport infrastructure.
- In India, airlines have to keep their ticket fares low to remain competitive, which makes it difficult for them to pass on these charges to passengers.
- State-run airports have regulated charges, but there are concerns about further fee hikes due to the privatization of airport operations.
- Additionally, there are costs associated with training airline crew, and the shortage of pilots is reflective of the inadequate number of Flight Training Organisations.
- Reasons for the grounding of Indian Aircrafts: There are various reasons behind the grounding (refers to the situation where an aircraft is taken out of service and not used for flying due to various reasons, such as technical issues, lack of maintenance, or financial constraints) of several aircraft at Indian airports, including those of GoFirst, which recently filed for bankruptcy.
- GoFirst has grounded 28 out of its 54 aircraft due to engine failures of Pratt & Whitney, which it claims led to losses of over ₹10,000 crore for the airline.
- However, Pratt & Whitney disputes this claim and alleges that GoFirst has a history of missing financial obligations.
- SpiceJet has also faced aircraft grounding due to non-payment of dues, and IndiGo and Air India have had to ground some of their fleets due to engine and spare part issues.
- Industry experts suggest that the establishment of the Maintenance, Repair and Overhaul (MRO) segment domestically could address some of the supply chain issues affecting the viability of airlines.
Thus policies such as labyrinthine taxes, customs, other duties, and infrastructural incapacity that have a large impact on the competitiveness of airlines that hinder the import and repair of aircraft parts must be taken care of by deploying efficient policy framework.
Beyond the Editorial
Government Schemes for Aviation Sector:
- Emergency Credit Line Guarantee Scheme (ECLGS): It is a part of Aatmanirbhar Bharat Abhiyaan to support eligible Micro, Small and Medium Enterprises (MSMEs) and business enterprises in meeting their operational liabilities and restarting their businesses in the context of the disruption caused by the COVID-19 pandemic. This scheme covers all the sectors of the economy. Go First had availed Rs 600 crore under this scheme.
- Digi Yatra: Digi Yatra policy is the Union Government’s initiative for providing passengers seamless and hassle-free experience at airports without the need for verification of ticket and ID at multiple touch points.
- UDAN: Union Government’s flagship program Regional Connectivity Scheme UDAN (UdeDesh ka Aam Nagrik) has the objective to fulfil the aspirations of the common citizen with an enhanced aviation infrastructure and air connectivity in tier II and tier III cities. The Government has allocated Rs. 1,244 crore (2023-24) for this scheme, aiming to operationalise unserved and underserved airports, heliports and undertake development of water aerodromes. The government has also planned to develop 100 airports by 2024 under this scheme.
- Greenfield Airport Policy: The greenfield airports are those which are being constructed from scratch on undeveloped ground or a new site. Government of India had accorded ‘In-Principle’ approval for setting up of 21 Greenfield Airports. Out of these, 11 Greenfield have been operationalised.
- Better Policies: The Ministry of Civil Aviation in India has been encouraging States to reduce their VAT on ATF and vouched for ATF to be brought under GST. 28 States charge VAT on air turbine fuel (ATF) of only 1-4%. Reduction in ATF tax rates across key States has helped airlines keep their cost in check.
- Maintenance, Repair and Overhaul (MRO) Policy: The Union Government had in 2021 introduced an MRO policy that aims to turn India into a global hub for aircraft maintenance and overhaul, which now largely happens abroad. Accordingly, the Noida international airport shall be a major MRO hub. Under the MRO policy, companies will be entitled to subsidies for setting up operations at the Noida airport. These will be – 5% capital subsidy for those spending Rs 500 crore, 8% for investment of Rs 1,000 crore and 12% for over Rs 1,000 crore.
- NABH (Nextgen Airports For Bharat): This scheme was launched in 2018 to increase the number of Airports and their capacity to handle traffic in India. It aims to expand airport capacity more than five times to handle a billion trips a year through investments to be made in airport upgrades by both the private sector and the state-owned Airports Authority of India (AAI).