India's aviation sector hits turbulence

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India's beleaguered aviation sector is experiencing severe turbulence as high jet fuel costs, fierce competition and losses threaten carriers' survival, analysts said.

The crisis engulfing Kingfisher Airlines, owned by billionaire liquor baron Vijay Mallya, has already sounded alarm bells, as it scraps scores of flights in a bid to stay financially viable.

Mallya's airline, which has slipped from second to third place by market share, has reported a doubling of its quarterly losses and its future now is in doubt.

All of India's six main airlines -- barring budget carrier IndiGo -- announced steep losses in the quarter to September, due to falling passenger yields and high fuel costs.

The Centre for Asia Pacific Aviation (CAPA) forecasts a $2.5-$3 billion loss for Indian airlines for the year ending March 2012.

"The bloodbath has already started," Vijay Nara, aviation analyst at Mumbai's Fortune Equity Brokers, told AFP, referring to the sector's bad earnings.

"Airlines are incurring cash losses and not even able to recover variable costs, which is a concern," he said.

For an Indian airline, jet fuel is a huge variable cost -- up 41 per cent from a year earlier -- and constituting nearly half of operating costs. Fixed costs such as fuel taxes can be over five times the international average.

Also, India's rupee -- Asia's worst performing currency -- continues to depreciate against the dollar. Almost 70 per cent of an airline's costs such as maintenance, jet fuel, and spares, are dollar-denominated.

On the surface, demographics make India, a country of 1.2 billion, an attractive story. India's passenger aviation sector is estimated to be growing at between 15 to 20 per cent each year, one of the world's fastest rates.

Air penetration in India is very low even as more Indians are flying than ever before. India has only three aircraft for every one million people compared to one aircraft per 50,000 people in the United States.

But India's aviation sector, once the symbol of economic growth, grew too fast, experts say, adding expensive planes to their fleets too quickly.

Dhiraj Mathur, aerospace executive director at PricewaterhouseCoopers India, said the industry will face problems until 'systemic and structural problems' such as poor infrastructure and high airport charges are dealt with.

Sharan Lillaney of Angel Broking agreed, adding that fares need to rise to clean up airlines' balance sheets. But most Indian airlines are unable to raise ticket prices due to intense competition.

Only no-frills IndiGo, which analysts say has managed its costs nimbly, has been able to navigate the storm.

Indigo, backed by former US Airways chief executive Rakesh Gangwal, placed one of the largest single orders of the Paris Air Show this year as it aims to boost its fleet size six-fold to 275 by 2025, from 46 currently.

Consolidation of the overcrowded sector may also be in store, say analysts, similar to buyouts in the past decade when Jet bought low-cost Sahara and Kingfisher purchased no-frills Air Deccan.

Kingfisher recently axed Air Deccan, saying there was more money in premium passengers.

India's six major airlines are Air India, which is state-owned, Jet Airlines and Kingfisher, plus budget carriers Indigo, Go and Spice Jet. Air India and Jet Airlines also have no-frills units.

Help for India's beleaguered airlines could also come if the government goes ahead with proposals to open up the aviation sector to foreign investors by allowing 26 per cent foreign direct investment, analysts say.

This could bring much-needed capital for cash-strapped Kingfisher and other airlines.