Indian aviation in grip of crisis

NEW DELHI: India's airlines are caught in a "perfect storm" of big losses, high debt and falling demand, and need urgent help from the new government to make them high-flyers again, says an industry report.

The struggling sector was once a vibrant symbol of India's economic progress but it has seen its fortunes nosedive due to over-expansion, costly fuel and cut-throat competition.

"The industry now is at a very critical stage," said Kapil Kaul, India head of the Sydney-based Center for Asia Pacific Aviation, the consultancy which authored the report entitled Aviation Agenda for The Next Indian Government.

Sector losses for the fiscal year just ended in March 2009 are expected to nearly double from last year to 1.75 billion dollars, Kaul said.

That's a fifth of the losses of airlines globally of 8.5 billion dollars estimated by the International Air Transport Association.

"India’s contribution to this (loss) is significantly higher than the two percent of world air traffic for which it accounts," said the report.

The Indian industry's woes are highlighted by a slump in passengers. In April, the number of domestic passengers fell by 591,000 or 15.2 percent year-on-year, the fourth straight month of declines.

The figures are a far cry from earlier heady government forecasts that passenger growth would run at 25 percent annually until the end of the decade.

Passenger numbers were expanding by double digits when India's economy was booming. Cheap fares and increasing affluence among India's middle classes drove a migration from the country's antiquated train network to planes.

After the government opened India's skies to more competition in 2004, a clutch of new airlines took flight, revolutionising domestic travel in the country of 1.1 billion.

But then costlier oil pushed up air fares last year, sending many passengers back to trains.

Now the sector has also been hit by a slowing economy triggered by the global financial crisis, reducing business and leisure journeys.

"It needs to quickly restructure and the new government has to help them reduce high structural costs," Kaul told AFP, citing hefty jet fuel taxes.

There is also a need to allow more domestic airlines to fly internationally to boost revenues, Kaul said.

The Congress-led government should allow foreign airlines to take equity stakes in domestic airlines to give them access to fresh capital, he said, but to draw investment the carriers must clean up their balance sheets.

"Over-aggressive expansion" to grab market share is "partly responsible for the fiscal demise of the sector," the report said.

Flagship state airline Air India is hurting the most. It's estimated to have racked up 800 million dollars in losses for the past year and debt of four billion dollars, the report said.

Air India, which flies internationally, merged with government-run domestic carrier Indian last year to become more efficient but its planes are flying emptier and passenger revenues are still falling.

Despite this, it still plans to take delivery this year of 26 new aircraft -- "a significant augmentation in capacity when the opposite would be more appropriate," said the report.

And India's two major private airline groups, Jet Airways and Kingfisher Airlines, also have hefty debts and big losses. Jet reported its third-quarter net loss more than doubled to 44 million dollars.

Rationalisation "is inevitable and desirable for the health of the industry," said Kaul, who believes India can only support two full-service carriers. He declined to say which should survive.

But the no-frills airline model offered by carriers such as Indigo Airlines, which has bucked the falling passenger trend, could be the platform for future growth, he said.