All eyes are logically on the new government. A host of challenges awaits it. Slippage in the economy, nagging twin balance sheet problems of banks and corporate sector, farmer woes, unemployment, stalled infrastructure and real estate projects — the list is endless. But the most important will be to bail out the sagging aviation sector and provide stability using all its might.
When airlines across the globe, even in small countries, are running well, though some stress in the sector is visible in some parts, it is in deep trouble in India with no sign of respite on the horizon. The stakeholders, some of them having steered the boards of the airlines, are staring helplessly.
It is not that fixing the problem is impossible but a granular look at what brings such apathy is urgently needed. Banks that have extended loans to the aviation sector are perturbed with the bulging bad loans with no respite or collaterals to fall back on. The haircut when a resolution takes place is beyond the imagination of lenders.
State of Airlines
East West Airlines, ModiLuft, NEPC, Sahara, Damania and Archana Airways are some of the airlines that shut down between 1996 and 2000 where banks have funded close to Rs 30,000 crore with no recoveries made so far. Later, Air Deccan merged with Kingfisher Airlines, which ultimately closed in October 2012.
Another iconic 25-year-old well-established Jet Airways is on the brink of closure with its last flight grounded on April 19 this year. Air India is groaning with the pain of accumulated losses with frequent delays in making payment to its staff. It is practically running with increasing government stake and frequent intervention of banks in government guarantees.
Fortunately, the National Company Law Appellant Tribunal (NCLAT) declined bankruptcy proceedings moved by one of the vendors against SpiceJet. It may be frivolous but a sure sign worth taking cognisance to contain further damage at an early stage.
The brewing discontent between key stakeholders of IndiGo Airlines is another adversity leading to a 9% loss of its share prices on May 16, 2019. It is the biggest single day fall impacting its market sheen. Moreover, it reported a 75% fall in net profit during the December 2018 quarter at Rs 190.9 crore, attributing the decline to high fuel prices and currency depreciation.
The rest of the airlines in India are somehow struggling to stay afloat. The ongoing struggle after the grounding of Jet Airways is increasing the cost of flying much to the detriment of growth. Aviation experts remain silent about the reasons for non-viability of these once-reputed airlines that are crumbling one after the other.
Exposure of Banks
Huge exposure of banks to the aviation sector is set to increase their non-performing assets (NPAs) with Jet Airways joining the league of defaulters. The exposure is Rs 9,000 crore to Kingfisher Airlines and Rs 11,000 crore to Jet Airways. The funding to Air India works out close to Rs 54,000 crore, of which Rs 29,000 crore has been converted into a soft loan. Air India exposure is a standard asset for banks due to government backing. But eventually, banks will have to take deep haircuts during the resolution process.
Banks provided loans against increasing NPAs to the sector during FY19 adding to the stress on profitability. According to the Center for Asia Pacific Aviation, the aviation sector in India made a loss of Rs 1,190 crore during FY18 and grounding of Jet Airways will skyrocket the losses in the current fiscal.
Ensuring Operational Viability
Every listed entity has to implement corporate governance standards prescribed by market regulator Sebi to enhance stakeholders’ value. Business Responsibility Report also forms part of annual disclosures of listed entities in addition to compliance with regulation 49 of the listing agreement. In the whole process, the need is to ensure viability and sustainability of commercial operations. Researchers and experts have to identify the reasons for the successive failure of airlines in India. The inhibiting factors for the sustainability of operations are to be clearly spelt out to improve the position.
Systemic controls and board oversight must be able to ensure that the business model remains profitable. The audit committee of the board should be able to exert its control on financials. If it is done, it is very difficult for airlines to fail. The basic tenets of costing must be followed and operations in unviable sectors, if any, should be cross-subsidised with revenue flows from profitable routes.
No business can be continued with recurring losses. The key ratios such as debt to equity and debt service coverage ratio must be maintained at sustainable levels. Aviation authorities should go into the precise reasons for failure and ensure that such circumstances do not recur. The board must ensure business continuity by aligning internal controls. Any sign of stress must be addressed in time.
Prospects of Civil Aviation
Employing a million people, the aviation sector recorded a double-digit growth during the last three years due to increasing middle-class, rise in per capita income, lifestyle changes, growth in cross-border trade, capacity expansion of low-cost carriers, increase in the number of airports, etc.
The investment in the sector is also increasing through enhanced foreign direct investments, external commercial borrowings and private equity. The sector has thus played a vital role in facilitating the growth of business and economy. There is still significant scope for improvement and penetration.
India has become the fastest growing domestic aviation market and is expected to overtake the UK to become the third largest air passenger market by 2024. With such immense potential in the sector, allowing its premier airlines to fail will be a retrograde step. Serious policy initiatives and corrective steps will be necessary for enforcing corporate governance to rescue the sagging civil aviation industry.
(The author is Director, Institute of Banking Studies and Corporate Management, Noida)