India's airline industry is on the verge of crisis. After a decade that saw all leading carriers expand their operations, most industry analysts predict that 2012 will be the year when an Indian airline will go bankrupt.
Extortionate taxes, high fuel prices and a bruising price war set in motion by state-run Air India are the main challenges India's private airlines face.
More News From Financial Times
Air India agrees debt-restructuring plan Overview: Eastern dawn lightens the gloom Transport: budget boom Indian airlines lifted by foreign investment hope Kingfisher Airlines' quarterly loss doubles Jet Airways, SpiceJet and Kingfisher, India's three listed airlines, all lost more than 60% of their market value in 2011.
Meanwhile, Air India is still flying thanks to a series of government bail-outs that have kept the national carrier airborne. However, analysts say state aid has seriously distorted the market and contributed to the sector's financial troubles.
Indigo, a private sector carrier that is not listed on the stock exchange, is the only profitable airline in the country. But nobody really knows its secret.
The sector's ailing conditions seem inexplicable given that India's passenger numbers soared nearly 20% in 2011 to nearly 60m fliers compared with the previous year, and capacity is expected to be outstripped by a surge in demand.
Yet the airlines are still bleeding red ink and are heavily dependent on bank loans to stay in business.
The carrier in by far the most critical condition is Kingfisher, controlled by Vijay Mallya, the flamboyant billionaire and liquor tycoon.
"It is very likely that one airline will go bust this year and the most likely candidate is Kingfisher," says Jasdeep Walia, an aviation analyst at Kotak Mahindra, a Mumbai-based bank. "They are running out of time to find a solution to their problems."
With net debt of about USD 1.25bn, Kingfisher is beleaguered by a series of problems, including loan payment defaults and penalties linked to unpaid taxes and salary dues.
The tycoon's airline has interest expense to net sales ratio of 21%, against 6.8% for its main Indian competitor, Jet Airways.
In September Kingfisher decided to shut down its low-cost operations to cut costs and focus more on its premium and higher yielding business. However, this was not enough to rein in the group's mounting debts.
In November it slashed 50 out of 340 of its premium flights and this month the country's aviation regulator warned that its financial troubles could affect passenger safety. Kingfisher said it was operating all its flights with "utmost safety".
All this is having an impact on the airline's market share. Passengers, who once took pride in travelling with Kingfisher as it was rated as one of India's best airlines, have started to desert the carrier.
Since its financial problems emerged late last year, Kingfisher has fallen from India's second-largest domestic airline - carrying just under a fifth of domestic passengers - to fifth place, transporting 14% of the 55m people flying in India.
Most airline experts and the government's aviation minister think that foreign investment could provide some respite to the ailing industry.
A government-backed panel recommended a radical reform early this year that would allow foreign carriers such as British Airways, Lufthansa and Singapore Airlines to invest up to 49% in domestic operators.
The entry of foreign airlines, which are not allowed to make any investments in India, could provide a vital lifeline to the country's cash-strapped carriers, analysts say.
"This is good news [for Indian airlines] as they desperately need the cash," says Sharan Lillaney, an aviation analyst at Mumbai-based Angel Broking. "It would be an absolute game changer for Indian carriers as they would join a bigger network of airlines and it would improve the quality of their services."
British Airways, Singapore Airlines and Lufthansa are among a number of airlines that have often been rumoured as potentially interested in entering India's fast growing market.
However, some analysts fear that the government's move to open the industry might have come a little too late to save it, and in particular Kingfisher.
Mahantesh Sabarad, an aviation analyst at Fortune Equity, a Mumbai-based brokerage, says foreign airlines would be deterred by India's tough operating environment and the poor state of domestic airlines' finances.
"I doubt we would see foreign airlines rushing into the Indian market given [its] current condition," says Mr Sabarad. "They [Indian airlines] need to fix their problems before they can become attractive to foreign buyers."
Analysts say there is little airlines can do to address their problems, as most of the challenges they face are out of their control.
Mr Walia at Kotak says slashing airport and fuel taxes, as well as stopping the bail-out of the national carrier, would help private airlines to push up their ticket prices and boost margins.
But that is very unlikely, say industry experts. Moreover, it all might be too little, too late to prevent one of the main airlines going bankrupt.
