Of the 638 aircraft in indian skies, all the 18 Boeing 737 Max's are grounded. Even if this crisis isn't grave enough and may blow over in a few months, India's aviation sector still has too many air pockets ahead to revive any time soon. High aviation fuel prices, rupee depreciation, excessive parking and landing charges, loads of debt and fare wars, even some inefficient operations, have been the millstones around the airline industry. Just last quarter there were indications that the industry was on the verge of mild recovery, even though the distress in the industry is far from over. Airlines such as Jet Airways, IndiGo, SpiceJet, GoAir and Air India continue to struggle when it comes to financial and operational performances.
Take the case of Jet Airways. The Mumbai-based full-service carrier has been battling its biggest financial crisis in history. Recently, the Naresh Goyal-controlled carrier has defaulted to its foreign loan repayment due to liquidity crunch, and is staring at a fault of$109 million which it has to pay by March 28 to the HSBC Bank Middle East. Its lenders have prepared a resolution plan which includes Goyal's shareholding coming down to about 20 per cent from 51 per cent now. Under the plan, the banks will take control of the airline and appoint a new board. The plan is still stuck in the approval stage.
The problems with IndiGo are not as complex as Jet. Besides facing the pilot crunch, the airline has been struggling with rising costs, particularly aircraft rentals, fuel and finance costs. The marginal improvement in the fares have moved up the yields in the last quarter but they are still lower than 2014/15 levels. In the quarter ended December 2018, IndiGo, which has 42.5 per cent market share, registered a 75 per cent drop in net profits.
Its rival carrier SpiceJet, which has been affected by the recent groundings of Boeing 737 MAX 8, reported 77 per cent drop in net profits to Rs 55.1 crore for the same quarter. SpiceJet, which was flying 13 737 MAX 8 till recently, is likely to face issues with capacity additions. It has placed an order of 205 such planes order, including 50 aircraft that the airline has the option to convert into a firm order later.
"Jet's operating fleet have nearly halved; Air India's fleet is down by almost 20 per cent, and the 737 MAX grounding is the most unfortunate thing to have happened to the aviation sector. Six airlines that had bid under UDAN (Ude Desh Ka Aam Naargik) scheme have shut down operations. With all these developments, the passengers will be affected because of lesser number of flights and higher fares. Ticket prices are already costing an arm and a leg on some sectors," says Mark Martin, founder of Martin Consulting.
Experts believe that external factors - fuel prices and rupee-dollar exchange rates -- are difficult to control, and the current situation can be salvaged by the government by lowering import duties. "The government can lower the excise duty on jet fuel further (from 11 per cent now) to bring down the operational costs of the airlines. With the grounding of aircraft, the DGCA could make the wet leasing process easier which is not the case right now," says an aviation consultant.
While some parameters have improved, but the outlook for the domestic sector still looks weak. Australian aviation consultancy CAPA (Center for Asia Pacific Aviation) forecasts that Indian carriers will lose a collective$550 million to$700 million in the financial year 2020 as compared to an estimated$1.7 billion loss for the 2019 year ending in March. In a January note, ratings agency ICRA too had predicted a bad year for the aviation sector.
"The profitability of all airlines in 2018/19 is expected to be weaker than in 2017/18. Some of the airlines have large capacity expansion plans, which may be either owned (through debt funding) or on operating lease. Thus, the aggregate industry debt level is expected to increase to about Rs 61,000 crore by March 2019. Many of the industry players have weak balance sheet structure; and with rising losses in the near term, the industry would need about Rs 35,000 crore equity infusion over the next 3-4 years," the report said.
Globally, the profitability of the aviation industry is likely to face some issues. International Air Transport Association (IATA) forecasts the global airline industry net profit to be $35.5 billion in 2019 as against$32.3 billion expected net profit in 2018. However, the industry association remains cautiously optimistic, and believes that there are downside risks as the economic and political environments remain volatile.
Boeing to suffer up to $2.5 billion loss every month
Boeing 737 Max accounted for 90 pc of all 737 series orders for the aircraft maker. It was to make over 900 of these this year alone. With nearly all users grounding the aircraft, Boeing will suffer up to $2.5 billion every month it isn't able to produce and deliver new aircraft. The global ban on the controversial Boeing 737 MAX 8 has rattled the airline operators. The FAA (Federal Aviation Administration), the US nodal agency for aviation, says that the worldwide fleet of 737 MAX 8 and MAX 9 is 387 planes which are operated by 59 operators. When compared with the size of the active global commercial fleet (about 26,307), the 737 MAX 8 and MAX 9 fleet constitute just 1.47 per cent.
The scenario changes completely if the pending aircraft orders are taken into consideration. For instance, 737 MAX series accounts for over 35 per cent (4,636 aircraft) of the total pending aircraft orders with Boeing and Airbus (13,216). In India, the situation is no different. SpiceJet and Jet Airways had 18 of them, and out which five were already grounded by Jet due to its financial troubles. For domestic commercial aircraft fleet of 638, the current groundings might not have a significant impact. But the pending orders of 430 737 MAXs - out of the total 1,008 orders for the entire sector - could affect the growth projections for airlines like SpiceJet and Jet. For Boeing, this is the biggest setback for the US-based aircraft manufacturer in its entire history. The overwhelming dependence on this single-aisle aircraft - 4,636 737 MAX out of the total backlog of 5,826 aircraft - can seriously jeopardise its financials, and the company is under immense pressure to fix the problems.
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