The structural issues plaguing the domestic airlines industry take the sheen off the FDI push and are likely to keep off prospective investors,says a report by India Ratings,the domestic arm of Fitch Rating.
Last week,after many months of dithering,the government allowed up to 49 per cent direct investment by foreign carriers into domestic airlines.
“Though the possible equity infusion may not only de-leverage the sector but also provide funds for long-term growth,the structural challenges may limit the attractiveness for such foreign investors at least in the medium-term,” the report said.
The report,however,added the move will improve the capital structure of those airlines which have viable business models.
According to the report,possible equity infusion,which will lead to stronger strategic and operational ties with foreign partners,may improve the credit profile of domestic airlines.
While the long-term growth potential of the domestic market may draw interest from international airlines,the continuing structural weakness may increase the perceived risk in such tie-ups,the report warned,adding other key consideration of prospective partners will be the lack of majority equity control in addition to specific board constitution.
The key structural weakness of the domestic airlines is the higher operating costs,driven primarily by higher tax on aviation fuel,compared to that of the other emerging markets while the cost of infrastructure development is also higher for the industry which usually translates into higher airport user charges.
“This is in addition to the present limited airport infrastructure which acts as a bottleneck to significantly improve scheduling efficiency,will act as a direct drag on operating cost,” says the report.
In FY12,Ebitda margins of three of the listed airlines ranged between 1 percent to negative 37 percent,as aviation fuel accounts for 40-50 percent of an airline’s operating cost here compared to around 30 percent globally,notes the report,and blamed this on higher taxes on ATF.
Together the domestic airlines lost over Rs 10,500 crore last fiscal with none of the six airlines making money as stiff competition forced them to keep ticket prices low.
According to industry data,the airlines were selling each ticket at an average of Rs 1,200 below cost.
Another key bottleneck is the airlines’ customer base which is dominated by corporate travel,which though is comparable to other emerging markets,the report said adding that household-level spending on flying is limited to no more than top 10 percent of households on low-cost airlines.
The high-cost structure of the domestic airline would always keep airfares high relative to the income of even this top 10 percentile households,it said and warned that high availability of lower cost substitutes like AC II& III tier trains tickets is limiting the growth of air travel.