More airlines for Indian skies: What's holding them back?

India has capacity for 5 big airlines, aviation minister highlighted in Parliament.

As more and more Indians make flying their preferred mode of transport, why is it that new players are not taking to the skies despite a burgeoning market. A plethora of challenges ranging from high taxes on aviation fuel to airport charges have served as a graveyard for many airlines.  A low-cost model, coupled with higher operating costs, makes the airline business a tough nut to crack with flyers usually opting for lowest fares on a short-haul domestic route.

Civil aviation minister Ram Mohan Naidu, while speaking on the IndiGo fiasco in Parliament, clearly laid out what's ailing India's civil aviation industry and the challenges before it. This includes entry of new players, more competition and eliminating the possibility of a duopoly controlling connectivity and pricing in the industry.

India currently has two big airlines -- IndiGo and Air India. Both these airlines dominate the skies and control more than 90% of the overall market. Part of the problem is the fact that this duopoly controls the skies in a way that if something goes wrong, it triggers a cascading impact throwing operations out of gear.

So why is running an airline such a tough business in India. Here's a quick look:

Jet Fuel Taxes

Jet fuel or what is called aviation turbine fuel (ATF) prices comprise 45% of the airfare with states levying VAT at different rates. This makes running an airline in India vastly more turbulent as crude oil volatility can throw the finances of airlines out of gear.

The Centre had asked states to bring VAT down to lower airfares in the country.

ATF taxation is a complex maze ranging from customs to excise and state VAT. ATF doesn't come under the GST ambit.

Maintenance costs

A major chunk of an airline's expenditure is in dollars making rupee vulnerability a worry for the carriers. Macro environment plays a huge role in the profitability of airlines.

Most of the maintenance and repair costs are dollar-denominated making weakening rupee a major challenge for airlines. While airlines earn in rupees, their expenses are in dollars making the current environment tough as rupee slides to historic lows.

India's domestic MRO operations are picking up pace with the market projected at $4 billion by 2031.

Most of the MRO activities happen in hubs like Singapore and Dubai making these non-fuel expenditure cost-guzzling for airlines and adding up to the challenges of staying profitable.

Profitability puzzle

IndiGo is the only airline that's enjoying profitability despite increasing traffic and surging airfares post pandemic. Scale helps IndiGo to optimize its operations and efficiently run airlines.

Along with a low-cost model, the challenges become more pronounced in an environment when crude oil prices are rising. Cost of aviation turbine fuel is a major barrier not just for new players but poses a challenge for the existing player.

Airlines are faced with low single-digit yield growth which gets worse when ATF prices are rising and rupee is depreciating. These two factors chip away at the earnings of carriers making profitability difficult.

A JP Morgan analysis shows that higher fuel cost and rupee depreciation are major headwinds for airlines. Low single digit yield growth may not be enough to cover rising fuel and currency-related expenses.

The report warns that cost inflation and currency challenges pose near-term hurdles in a stabilizing demand environment.

Other charges

Other costs add up to spoil the math for the airline business. Airport charges, leasing costs, crew salaries, high training cost for pilots make owning and operating an airline a nightmare for many.

IndiGo's troubles have kick started the debate to further open up the sector to more players and make it easier for them to operate.