India’s airlines need help offsetting operating costs, amid expectations for low fares

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An Indian-operated SpiceJet Boeing 737-800 aircraft (foreground) takes off.

Indranil Mukherjee | AFP | Getty Images

NEW DELHI — India needs to fix structural issues in its aviation market that keep operating costs high for domestic airlines, a top industry leader told CNBC.

Aviation has a bright future in the country but carriers are struggling to square the differences between high operating costs and the low, competitive fares they have to offer, according to Ajay Singh, chairman and managing director of SpiceJet.

SpiceJet is a low-cost airline in India and has one of the largest market shares in the country for the number of domestic passengers carried.

“Demand outlook remains strong. People are shifting and moving from trains into planes, and more and more people are flying as the economy grows, as disposable incomes increase,” Singh told CNBC at the India Economic Summit. He added that airlines are operating “in an environment where our costs are among the highest and our fares are amongst the lowest.”

India is considered to be one of the fastest-growing aviation markets in the world, but not every airline has been able to weather the challenging operating environment.

Jet Airways, which was once India’s biggest private carrier, stopped flying in April after the company ran out of cash. In June, it filed for bankruptcy after its lenders failed to agree on a revival plan. On the other hand, the Indian government is still struggling to sell debt-laden national carrier Air India, and Reuters reported last month that New Delhi could be open to selling a partial stake in the airline to a foreign competitor.

Singh pointed out airlines are struggling because India has high taxes on aviation turbine fuel; carriers also pay high airport charges as well as duties on aircraft parts that are re-imported after repair.

“I think it’s time we made the structural changes that are required in aviation and made Indian aviation competitive with our peers around the world,” he said. That includes ensuring India’s aviation fuel costs, import duties and airport charges are on par with other countries in the region. If that happens, aviation can give a boost to tourism and the economy, Singh added.

Air India in process of being privatized

India’s minister of civil aviation, Hardeep Singh Puri, told CNBC’s Tanvir Gill that the country’s national carrier is in the process of being privatized.

“We have initiated the process – what is called an alternate mechanism or a group of ministers has been established,” Puri said. “That mechanism had its first meeting and we are determined to proceed with the privatization of Air India, which has been the flagship carrier of India, within a defined framework of time.”

When asked to specify a time period, Puri said it is “a short period of time,” and that the privatization is intended to happen before the current fiscal year ends in March 2020. Still, the government has not yet reached a stage where it can invite prospective bidders to the table. But, Puri added that the government intends to sell the business in whole and not in parts.

For his part, Singh said SpiceJet is “too small an airline” to bid for a large carrier like Air India.

The International Air Transport Association said in a July report domestic passenger volume in India recorded an annual growth rate of 8.9%, up from 8.2% in June. Still, the market has yet to return to the double-digit growth rates that was the norm in the past five years, the global trade group for airlines said, adding the market “seems to be adjusting well to the disruption caused by the demise of Jet Airways.” The long-term outlook for India remains “very positive.”

In July, India announced that it will enter the aircraft financing and leasing business for self-reliance and to create jobs.

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