30% fuel tax, leasing in dollars: Ex-Air Asia CFO on why airline cost structure is uncompetitive in India

Amid the IndiGo crisis, former Air Asia CFO Vijay Gopalan has explained why the airline business is tough in India. In recent history, he said, Jet Airways and Kingfisher have folded. Even SpiceJet was in deep trouble. "Structurally, there is something about Indian aviation which is not very profitable," Gopalan said in a video explainer. 

"50% of my cost is governed by air turbine fuel, which is the fuel cost. The taxes are not governed by GST. It is governed by the state government's taxes. And in some states, the taxes on the fuel are as high as 30%. It's not going to be structurally profitable. We need to rationalise the cost," the former CFO said.  

According to him, the dollar is another major problem. "About 75% of my costs are costs that I spend in US dollars. Meaning, my fuel cost is benchmarked to the Brent Index, which is a dollar-denominated one. My aircraft leases are paid for in dollars. My maintenance costs are paid for in dollars. So, when
you have all these things in dollars, foreign exchange should be maintained."

Gopalan suggested that the transaction in dollar denomination raises the cost when the rupee is losing value against it. "Today, we are speaking about rupee being at 90 to a dollar. So, if my payout is 100 dollars for aircraft lease rentals. Two years back, I ended up paying Rs 8,000. Today, I end up paying Rs 9,000 for the same aircraft. So, this is the second biggest issue. Because most of our costs are dollar-denominated." 

Then, of course, aircraft availability, Gopalan added. "It's not as if you can go and shop for an aircraft and come. Aircraft should be available. There is a lead time in placing the orders. And a lot of lessors believe that India is a risky market, given that a lot of airlines have folded. So, it makes the leasing cost inherently high. So, the cost structure is very, very uncompetitive in India," he added. 

Slot is another key issue. 

Explaining the slot issue, Gopalan, who served as Air Asia CFO from August 2013 to 2015, said: "We still haven't come to slots-related issues. In Chennai, the slots are full. And we may not even have slots to connect to major cities. There are a whole lot of these structural issues."

The former aviation executive also said that India needs to up its training facilities and infrastructure. "Our training facilities, for instance, need to be approved by DGCA. And the current approved list may not be sufficient to cater to the ramp-up in the pilot needs," Gopalan added.

"So, there are a lot of these structural things that we need to look at. And now is probably a great time to streamline and ensure that it is cost-competitive. And therefore, investors are not afraid to enter this industry. It's high time that we make structural changes and not make quick fixes.