Wednesday 8 August 2012

Why Gulf Airlineses won’t ever invest in Indian MRO or Airlines

India represents a major market for Gulf carriers, and with a developing middle class, a significant potential market for hundreds of millions of travellers by air. With India closing in on new regulations to permit foreign investment of up to 49 per cent in airlines in India, the market would seem ripe for Gulf carriers to quickly snatch up market share by investing in India’s domestic airlines and creating a market for feed traffic and connecting flights. While that is certainly the intent of India’s legislation, unfortunately, that scenario is quite unlikely.
Several factors that permeate the Indian airline industry will result in airlines from the Gulf concluding that the potential returns from investing in airlines in India will simply not materialise, and foreign direct investment makes no sense in this case.

Four factors will prevent such investment:

1. Government support of unsustainable pricing:

Foremost among them is the state support for Air India, which is annually bailed out from major losses by the Indian taxpayers. The primary reason they need this bailout is a pricing policy aimed at appeasing politicians that results in domestic fares being priced at levels less than the cost of delivering service. And because travellers in the Indian travel distribution networks typically book by price, an airline will need to match Air India or accept traffic only after the government carrier is sold out. Ask Kingfisher how easy it is to compete with someone pricing under actual costs.
The situation has worsened considerably in recent years. After a politically-engineered merger between Air India, which handled international routes and Indian Airlines, which handled domestic operations, losses increased markedly rather than decreased as expected, and labour unrest grew as inequalities in pay forced increases in salaries and benefits to unprofitable levels. A merger intended to bring synergies has resulted in even more massive losses. Yet cutting routes is difficult, as any time Air India suggests cutting routes or fare levels, a local politician objects, and the political difficulties continue. There is no end in sight.
With the growing market in India, several strong potential operators entered the market, including the flamboyant Vijay Mallya with Kingfisher Airlines. Offering new aircraft and excellent service, but being forced to match the below-cost fares offered by government subsidised Air India, Kingfisher incurred massive losses, is now essentially bankrupt and will soon cease operations. Other competitors, with a low-fare business model, have been able to survive, but are not financially thriving or meeting profit expectations for carriers of their size and scope.

2. High operating costs:

Operating costs in India are also particularly high, unusually so for a developing country with low costs for many commodities. State taxes imposed on aviation fuel by the individual states within India, in addition to federal taxes, make it difficult for airlines to compete with international carriers, who typically tanker fuel for regional flights to India to save money. High fuel costs, with no ability to recover those high costs in fares have hindered growth in Indian aviation.
This situation became so bad that several carriers petitioned the government to allow them to import their own fuel, rather than purchase it locally, to save on taxes and remain viable. But that proposal has gone nowhere.

3. Weak infrastructure:

Airport and Air Traffic Control congestion also hampers airline operations in India. Flights into New Delhi and Mumbai are typically delayed during peak hours, and the inefficiency of India’s antiquated air traffic control system typically results in aircraft operating in holding patterns for a couple of hours each day. These delays result in the equivalent of a lost flight each day per aircraft for domestic operators, as the majority of traffic flows to, from, or between the two major cities.
Combine that with airports that are antiquated, with development programmes that result in new terminals that are full by the time they are completed due to continued growth, and the conditions for domestic airlines are unattractive from a service level perspective. With delayed flights routine, and a lack of world class facilities, a quality operator from the Gulf would not likely choose to have their reputation sullied by association with a domestic carrier operating in an environment that needs dramatic improvement.
India has been talking about a new airport at Navi Mubai for several years, but where are the construction cranes and bulldozers? Stuck in the political mire in New Delhi.

4. Political corruption:

Unlike western countries, where political corruption has been institutionalised through lobbyists and campaign contributions, the path to success in India is much less straightforward and less certain. Political officials have been known to show favour to those who make “appropriate arrangements” — but that process introduces uncertainty — especially if appointments change, and India’s ministries seem to rotate leadership frequently.
The bottom line: The net result is that despite a growing market, the inability to charge a price that covers costs, higher than normal costs due to high fuel taxes, negative operational impacts from overcrowded airports and air traffic control congestion, and needing to play politics results in an exceptionally difficult environment for foreign investment in Indian airlines. The carrier in the Gulf, after reviewing these factors, are better off staying away from investing in India’s domestic carriers.

Capt Shekhar Gupta
Asiatic International Aviation Corp.
Mission To Canada
Madhya Pradesh, INDIA

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