RESPONSES TO SUFFERING AVIATION INDUSTRY OF INDIA: SOME REVISIONS

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1 CORPORATE LAW ALLIANCE (Advocates & Consultants) Corporate Office: 250, Hari Nagar, Narayan Nagar, Faizabad Road, Lucknow Website: ; CORPORATE EXAMINED (A Briefing Document) RESPONSES TO SUFFERING AVIATION INDUSTRY OF INDIA: SOME REVISIONS This document does not offer or tender or should be inferred to mean commercial advice, opinion or finding. This briefing document is for informational/ academic purposes only.

2 I. DECLINING STATURE OF AVIATION SECTOR Indian aviation sector has been witnessing distress, financial crisis and employment issues consistently over the last decade which has resulted into enhanced miscalculations about the sector. The aviation industry has seen deep situations of crisis and instances of bad financial health, periodical employment issues and mismanagement remain in the news reports quite regularly. Despite several measures and efforts being taken both at the corporate and government levels, the industry is getting it hard to overcome the challenges that have kept the sector bleeding since a long time. Time has witnessed entry and exit of many aviation companies, most of which were due to crisis. It is a contrast situation in India that aviation sector is coming across challenges gradually built-up by itself while aviation companies in the neighborhood nations are recording huge profits (for instance china). It is not always correct to pass the blame on market speculations, fuel prices or cut-throat competition if the companies see a downfall. A serious inquisitiveness should be reserved to locate the problems inside the industry itself. Taking a generalized view, almost all companies operating across different sectors witness similar challenges of price-rise of raw materials, market fluctuations, instability and stiff competition, but the experience with aviation sector has alarmed the sector considerably. During analysis at corporate law alliance, the firm outlined significant reasons for the purported reasons of sectoral crisis and arrived at conclusions which reflect that though the external factors do influence the stability, coherence and functioning of the companies, there are many internal factors which add proportions to the rising fire. A sectional study across take-over of Tata Airlines by Government of India, Entry & Exit of Kingfisher Airlines, Takeover of Air Deccan, Entry of Air Vistara, Entry of Air Asia, Crisis in Air India and Crisis in Spice-jet takes the study to reasons though largely unexplored but affecting the industry very significantly. Present report on responses to suffering Indian aviation industry attempts to forecast the reasons that have added to the uncontrolled movement of the companies operating in sector along-with those circumstantial facts which if would have been avoided would have helped the sector in revising its operations to land to an airport of success.

3 II. REASONS AS ARGUED Most of the aviation companies have similar reasons to cite behind any alleged mismanagement or crisis and they are highlighted herein below. Much has been done to overcome these reasons but the sector is still bleeding with wounds create from outside and nurtured from inside. Government Taxes: Aviation industry in India has to comply with a highly stringent and complex tax structure further complicated by both the Union as well as state governments. It is not just the taxes paid for services rendered to the high-end customers but also the taxes on maintenance, repair and overhaul facilities for which most of the aviation companies are forced to park their machines abroad. Taxes added to the base fare throw the services out of medium-income customers basket and make the sector a playground of the rich which significantly reduces number of customers in a developing economy like India. Less number of customers signifies less revenue as compared to the expenditure per flight. Fuel Charges: Aviation fuel in India is most costly as compared to most Asian nations. Air fuel in India accounts to nearly 50% of the expenses on a flight and the price have kept increasing significantly over a period of time. Aviation turbine fuel is one of the most important factors which widen the gap between revenue and expenditure and there is a race amongst the companies to grab the fuel at a lowest rate from the market. Depreciation value of rupee in international market makes the fuel costlier though there is no price-rise of fuel in international market. Competition: A controlled level of competition is presumed to be beneficial for most of the business operations but competition in the aviation sector has taken a different stand altogether. The biggest challenge among the players has been cited as fare-war. With the joining of Air Asia in 2014, the fare-war witnessed another stroke. Air Asia in its week-long sale program provided one-way air services at Rs. 699/- on all of its network routes inclusive of all taxes. Since entry barriers to the industry are low, there is abundance of operators irrespective of high operating costs. This provided opportunity to other operators to introduce a price hike.

4 III. REASONS AS INVESTIGATED 1. Lack of Proper Policy: In a thorough analysis, it was revealed by the facts that aviation industry in India is largely regulated as per policies which are not clear, precise and result-oriented. It appears that the government has taken such policy stands as and when it deemed fit. For instance, Foreign Investment in aviation sector was much required when the kingfisher airlines was in distress and urgently required foreign investment to keep the airliner surviving. The government was however unable to arrive at a clear conclusion and kingfisher was forced to ground its operations. Interestingly, soon after the collapse of kingfisher airlines (due to financial crunch), the government introduced foreign investment in aviation sector with the arrival of Air Asia and Air Vistara in Indian market. It is therefore important to note here that a right-policy at a right-time may help even those who are on the edge of extinction. 2. Over-expectations: Over-expectations of most of the aviation companies is apparent in their corporate strategies. It has been experienced with Kingfisher that what the company expected to flow profits in-fact exposed the dreamenterprise to greatest of the financial threats. Frequent discounts, subsidized travel-plans, attractive offers and service up-gradation at a time when the company needs to balance itself, further deepens the crisis. While the sector is able to extend its benefits to a selected class of community, over-expectations are pills of self-destruction which have wiped out presence of many operators. 3. Careless Mismanagement: Mismanagement is rampant in most of the airline operators in India. Some companies are witnessing mismanaged cash flow statements while others are fighting in-house issues with employees and other stake-holders. Expansion of business, acquisitions, dream-line services, cost reduction, discount offers, frequent flyers etc prove to inbound burden on the companies themselves which lead to costs in litigation, arbitration or consumer compensations. Airline industry is a sophisticated venture and therefore should pay legitimate concern to balancing its revenue and expenditures and should open up quality services when it may be accommodated by the balance sheet. A poorly managed company keeps surviving with backlog of problems.

5 IV. SPECULATIONS The Hindu (National Daily) categorizes the situation as under: So what's wrong with the airlines, or even the aviation industry in such a growth centre as India? Why is the sector booming in China but not here? The airlines, speaking in one voice at least on this, insist that it is the lack of a positive, coherent aviation policy since the opening up of the skies that has led to this crisis. Though traffic is growing, the cost of operations has risen sharply. Aviation fuel accounts for nearly 50 per cent of the costs, and its price increase over the past two years has been substantial, eating into already low margins. Air fares have not risen correspondingly because of competition and the need to raise the load factor. Airport charges, particularly after the advent of privately developed green-field airports, have also increased manifold. For Air India, the unwise and as yet incomplete merger of Indian Airlines and Air India has remained an albatross, while the now-on, now-off aircraft acquisition program has led to a huge debt and interest burden. The Centre's decision to allow airlines to directly import fuel has been a welcome measure. But it is too little too late. The Civil Aviation Ministry must discuss all the issues affecting the economics of the industry threadbare and come up with a positive aviation policy to revive the sector without giving anybody a bailout or compromising on safety. The airlines, too, must set their houses in order and take employees into confidence, without leaving them in the lurch. The above passage exactly enumerates what needs to be done for the aviation industry to revive from the financial and managerial diseases that have kept it bleeding. The striking feature is that this is not the only new report which identifies various jobs to be performed by the government in order to save the aviation business, there are many largely unnoticed by the commentators. The issue is not about the times that analysts have suggested for a comprehensive review on the policies and measures, the issue is that how the policies and measures are engineered to respond to challenges that the industry feels it would never be able to overcome.

6 All Rights Reserved CORPORATE LAW ALLIANCE (Advocates & Consultants) LUCKNOW Report Prepared at: Corporate Law Alliance Published on: 09 May, 2016 (Monday) CORPORATE LAW ALLIANCE (Advocates & Consultants) Corporate Office: 250, Hari Nagar, Narayan Nagar, Faizabad Road, Lucknow Website: ; corplawalliance@gmail.com