Indian aviation sector hit by financial trouble; domestic traffic at five-year low

October 18, 2008

The Indian aviation sector looks set to shrink amid financial turmoil, with the nation's air carriers in schemes to try and ride out the problems and domestic air traffic at a five year low.

Air traffic has fallen by 19% in September, the fourth month in a row of negative growth. The news comes as a joint result of the current financial crisis and high jet fuel prices, with Indian airlines in debt to the tune of Rs1,800 crore after surpassing their credit limits with oil companies, who are themselves making losses due to government controls on the price of jet fuel.

Kingfisher Red - originally known as Air Deccan, India's first budget carrier, until Kingfisher Airlines bought the company out - suffered the biggest drop in passenger numbers at 20% of their load factor. Flag carrier Air India is running at 53% of capacity after a 10% fall, and the average for airlines is now 55% as opposed to 65% this time last year.

Kingfisher Airlines has decided to enter an alliance with Jet Airlines that will see them collectively control half the Indian aviation market. Both airlines are in debt over fuel payments with Jet owing Rs850 crore while Kingfisher refused to disclose the amount they needed to pay. The money is owed mainly to the Indian Oil Corporation, with the rest owed to the Hindustan Petroleum Corporation and the Bharat Petroleum Corporation. 45% of costs for Indian carriers is fuel, which is 70% more expensive than abroad due to multiple taxes.

Air India's head Raghu Menon expressed concern about what the Kingfisher-Jet alliance meant for his own airline. "We were competing with both these airlines separately. Now we'll be competing with them perhaps as one entity. It'll be a challenge," he said.

Kingfisher have cancelled an order for three A340 aircraft from European airframer Airbus. Airbus executive John Leahy said that Airbus had discussed the issue with Kingfisher before the choice was made and that this was the only cancellation from India. He also maintains that India will be an important area for Airbus, with the firm predicting Indian aviation growth will be at 9.7% compared to a global rate of 5.4%. Airbus predict that 1,000 new aircraft will increase the Indian fleet fivefold by 2026. Airbus have also welcomed the partnership between Jet and Kingfisher, saying it will help consolidate the carriers.

Airlines are cutting capacity to reduce costs, with around 20% gone already. Average flight movements are down to 8,000 a week compared to 10,500 in the period from April to June. The aviation industry in India is expected to post a collective loss of US$2 billion.

One executive at Boeing, Dinesh Keskar, predicted the downfall to be brief. “The current downturn in the sector is temporary and may not prolong for more than 6 to 9 months,” he said. Airlines, however, feel that the risk is very much immediate; Jet and Kingfisher are requesting a government bailout package worth Rs 40.7 billion. They are currently losing a combined US$1.3 billion.