acquisition purposes. The government’s continued financial support and bailout packages to the loss-making national carrier has only added to the industry’s woes. Airlines are taking a number of steps including route rationalization, cost reduction measures, exploring various avenues of ancillary revenues as also exploiting the shortage in capacity to increase fares etc. As indicated in the illustration, with fiscal prudence and a supportive regulatory environment, an operating margin of more than 10 percent can be achieved by companies in this sector. However, it must be noted that the industry is sensitive to changes in certain key drivers of revenues and operating costs. For example, an increase of 30 percent in global ATF prices leads to an increase of 40 percent in India, thus leading to an incremental increase of 33.33 percent. Similarly, load factor is a key revenue driver. With a high proportion of fixed costs, a slowdown in the volume of passengers flown translates into significantly lower operating margins.
Operating environment The Indian aviation sector has been struggling for decades due to a lack of a coherent and comprehensive civil aviation policy. “India is one market that is missing out on aviation’s potential as a result of a policy framework that does not support aviation’s competitiveness”, said Tony Tyler, Director General and CEO, International Air Transport Association (IATA) in his address to the Singapore Airshow Aviation Leadership Summit. It is evident that the civil aviation policy in India requires significant changes vis-à-vis escalating ATF prices, high taxes and rising infrastructure costs such as passenger service fee and user development fee, collected on behalf of the Airports Authority of India (AAI). There have been increased demands for the aviation industry to be declared as ‘Core Infrastructure’ and related benefits to be made available. We believe that the government, with its taxation policies, has caused a slowdown in the industry and is
IllustratIve Income statement 100%
7%
1%
2%
90%
EBITDA: Taking all the cost items into account, residual positive EBITDA margin is possible. However, an increase in ATF or a decrease in load factor could lead to a fall in EBITDA margin. S&M/ PArkIng/ LoungE/ BuILDIng rEnT: Ancillary cost items tend to accumulate to 10% and management focus is required to bring it down to help increase profitability.
80% 70%
AIrCrAFT InSurAnCE: ranges between 1%-2% of costs of aircraft. AIrPorT FEES: Fixed by AAI. range between 6%-8% of sales.
60% 50%
AIrCrAFT rEnT: rentals have ranged between $200,000 to upwards of $300,000 per month for new and used narrow bodied aircraft. Careful negotiations and getting into long term contracts might help stabilise the outflows to 10%-14% of revenues.
40% 30%
MAInTEnAnCE: Maintenance costs vary significantly across carriers and in the higher end can range between $1,000 - 1,500 per hour. Contracts can be such that the P&L impact is limited to 8%-10%.
20% 10%
SALArIES: Salaries currently have fallen on the back of increase in supply because of kingfisher Airlines grounding its flights. However, labour cost is expected to be in the range of 10% in the long run.
0% Base Case
Increase in ATF by 10%
Decrease in Load Factor by 5%
FuEL: Fuel costs for LCCs move between 40% and 55%. Effective management of routes and fuel costs can curtail such expenditure to 40%.
effectively killing a golden goose. The industry is a key infrastructure for a geographically large country like India and the recent slowdown in passenger traffic is of concern and would have an impact on our GDP growth. Based on envelope computation, we have estimated that the airline industry earned gross revenues of `1,28,000 crore or $26 billion in the past three years. Taking into account taxes on tickets and fuel, we have crudely estimated that the industry contributed about $10.6 billion or `54,900 crore to the state and central governments and had a loss of `28,000 crore or almost double the amount of taxes paid. As we argue later, it is necessary for the government to take a comprehensive view of the industry and how it is taxed and it is our belief that reliefs in tax rates will increase the revenues of the industry, reduce airline losses, make it more affordable to the passengers and importantly, will not result in revenue loss to the government as we have seen when rates of income tax were reduced. ATF, which comprises 40-55 percent of total operating costs for airlines here, is subjected to a multitude of cascading taxes by different central and state government entities. Currently, ATF costs more in some Indian cities than others, prompting airlines to refuel aircraft in cities where ATF costs less. For example,
ATF being more expensive in Chennai, if an aircraft is scheduled to cover the Delhi-Chennai-Madurai route, the aircraft carries enough fuel to fly all the way to Madurai, instead of refueling in Chennai. If ATF is categorized as ‘declared goods’, it would ensure a uniform rate across states and lower tariffs for passengers. The tax rate currently varies between 12-30 percent in different states and giving ATF a ‘declared goods’ status would result in a uniform tax rate of four percent across all states. However, in the current situation, airlines can avoid some of these taxes through direct import of ATF, and though permission has been granted to private companies to use oil PSU-owned facilities such as refueling terminals and storage at the Kolkata and Chennai airports, airlines are yet to make full use of these facilities. Also, only those carriers who have completed five years of operations in Indian skies and have a minimum fleet of 20 aircraft are allowed to fly overseas. This also acts as a barrier to expansion plans and efficient operations. The government should look at relaxing this limitation to ensure a level playing field between the incumbent and new players.
Investment activity Massive investments are being made to upgrade and modernize airport facilities, and India now boasts of world-class airports in certain cities. Development
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