In Greek mythology, Cassandra, the daughter of Priam, the king of Troy, had the gift of prophecy, which had turned into a curse. She warns against accepting the gift of the Trojan horse, in which the Greeks were hiding, but the King chooses not to believe her. As the myth goes, this leads to the downfall of Troy. India’s airline industry finds itself in a similar position today.
With aviation turbine fuel (ATF) prices soaring to new highs, the domestic airlines find themselves in a desperate situation including contemplating a collective strike in the last week to 10 days, sources confide with Fortune India. What if all the domestic airlines were to go on a collective strike and issue a newspaper advertisement saying they have saved so many crore rupees by not flying the country anywhere that day? What if many of the players pulled back on flights on offer and let fares soar? What if some of the smaller players downed shutters?
All these and other desperate measures were being considered by the domestic carriers battered by one crisis after the other since March 2020. On June 21st, Tuesday, aviation minister Jyotiraditya Scindia is holding a meeting with the CEOs of all the carriers where representatives of the finance and petroleum ministry will also be present to look into the immediate demands of the industry.
Airlines have raised fares and hope to cover around 60-70% of the hit they are taking on ATF but they are not passing on the entire burden. In the last many weeks, fares have been inching up but loads have so far remained robust. But, airline chiefs remain conscious that at some point, the loads will begin to fall and demand could taper off in India’s highly price-sensitive market.
For a long time and well before the Ukraine war wreaked havoc on oil prices, the industry has been asking that the government bring ATF under GST (goods and services tax). While the government listens to its list of demands, it has either not yet been able to do it or not bought into it.
The sector, for now, wants parity with petrol and diesel such that the tax rate on ATF is fixed and not ad valorem as at present. “Currently, the tax on ATF is ad valorem and has a cascading effect,” argues one of the CEOs of the airlines. Airlines cannot claim VAT input tax credit on fuel. So at ₹50,000/KL, the tax outgo on account of excise and VAT would be around ₹19,000/KL whereas at ₹100,000/KL, the tax outgo goes up to ₹38,000/KL. “Even though international flights are exempt from excise and VAT, this makes us uncompetitive vis-a-vis the global carriers as we make losses at home. This pulls us down and acts as a drag overall,” says an industry source. The industry has been pushing for GST status for ATF, and this demand has been reiterated time and again ever since the pandemic battered the airlines.
Trust Deficit
Industry insiders and chiefs are unable to comprehend why their pleas to various government authorities have fallen on deaf ears. The sector has always assumed that the primary reason is that the government does not want to appear to be siding with an industry that is perceived to be a luxury, which is a fallacy, to begin with, since almost 150 million passengers flew in 2019 domestically.
But former and present government and the ministry of civil aviation sources say this is only a partial truth. One of the reasons why the government remains quite unmoved by the pleas of the sector is that they are not convinced that the industry is as “loss-making or beleaguered” as it claims. This lot argues that most of the airlines that have gone bust in the past in their view are more a case of mismanagement by the founders/promoters/management, mal-intent or even a faulty model, rather than a hostile operating environment overall. They point to IndiGo’s success to buttress their point. “Jet operated in virtually a no competition era so taking its example might not be ideal but IndiGo has amply demonstrated how one can make money and build a strong business even when there are reasonably strong competitors,” says one official.
A senior ministry official points to three or four facts observed by them over the years. He argues that in good times, airlines can and do make good money, and in a debt-free and easy manner. For one, through sales and leaseback, airlines that go in for large aircraft orders straight away book a large profit as there is almost a discrepancy of $5-8 million per aircraft between the price at which the airline buys the plane from the manufacturer and at which it sells and leases back the asset from the leasing company. If the airline chooses to bring that money back into the company’s books, it has a good buffer, as IndiGo had done with its very first 100 aircraft order at the time of launch. This is what many argue gave the airline a headstart over others.
Another reason why government sources say they are not convinced about the sorry plight of airlines is unlike most other businesses, airlines do not need working capital loans as they open flights, and fares are collected in advance. “The moment a sector or flight is opened, fares begin to accumulate and they provide working capital for the airline,” explains an airline CFO who has been with three of the Indian carriers. This is a big advantage, he argues, which only a few other sectors have. Overall, debt is usually not a concern for most airlines as aircraft financing is also well-established and does not reflect on their liabilities as such. Unlike debt of say infrastructure companies and other similar businesses, there is no real gestation period for the asset (the aircraft) to begin to offer returns.
Three, most airlines - both in India and globally - earn revenues through ancillary businesses and this can be a significant portion of their total revenues. “In other words, as has been demonstrated by airlines like IndiGo in the past, the business can be profitable and quite remunerative even when the macro environment is not wholly favourable,” says this official. He argues that even if the airline loses some money through its core operation of flying, it can be more than made up through other avenues. “If this was not the case, why would many of the players continue in this business. Nobody is here to consistently make losses,” says he, pointing out that most in the sector are “pretty shrewd businessmen”. Moreover, why would new entrants like an Akasa come in, they ask.
An aviation industry veteran called it a “trust deficit” between the airlines and the government and said authorities were of the view that the industry - like many others - cries wolf at the drop of a hat. Be that as it may, there’s no denying the last three years have been a test of the sector’s nerves in more ways than one. Whether the airlines will prove to be Cassandra, the government, like the king of Troy, refuses to believe them, and will this lead to the downfall of one or more players, can only be known in due course. Readers should watch this space.
