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India’s Telecom And Aviation Have Something In Common: Debt And Losses

Telecom and aviation are considered as benchmarks of development for a country. Both sectors have witnessed massive technological advancement in the last few decades and have become the backbone of a booming economy. Every industry today depends on them, and for a developing market like India, the contribution of these sectors is even more crucial. Several areas of the country still remain untapped and need better air and telecom connectivity to realise their growth potential.’

After liberalisation, the two sectors have grown massively and thanks to fierce competition, every player has been forced to maintain a competitive edge. Anil Ambani’s RCom revolutionised the mobile telecom industry with CDMA-based phones. Similarly, Jet Airways started 26 years ago and brought some much-needed competition to the domestic aviation industry, which was till then dominated by national career Air India with its massive fleet and codeshare agreements. However, today, both the companies have ended up in NCLT with ballooning debt.

The second wave of growth spurred after 2004 with the entry of many new players. Telecom entrants like Tata Docomo, Uninor, Videocon and Idea were all set to bid for 2G and later 3G spectrum while Kingfisher, IndiGo, Spicejet and GoAir were slowly picking pace with new aircraft deliveries and increasing demand.

By 2008, the telecom industry hit a speed bump owing to alleged 2G scam and exceedingly high spectrum rates. Crude oil was at an all-time high and airlines were forced to operate in loss because filling up seats was becoming a priority. This is where the downward spiral started, and within a few years, older players went kaput thanks to increasing loan repayments and insufficient market demand because of the global slowdown.

Both the industries require massive capital at start and need to scale up operations exponentially. A telecom operator needs spectrum, towers and equipment, as well as marketing to attract users. Average revenue per user (ARPU) is a standard metric to judge the operational efficiency of a telco. It has always been disappointing and every time the industry bounces back, a new challenge derails stability. With 4G, Jio wreaked havoc with its predatory pricing and only two companies have been able to survive the turmoil.

According to Department of Telecommunication, the ARPU of Indian telcos was at Rs 114 in 2014, this slowly increased to Rs 127 in 2016, but went into free fall and corrected at Rs 71 by 2018. All this while, companies were adding millions of new subscribers and expanding reach.

For airlines, whenever crude oil went down, young players with a strong balance sheet like IndiGo ensured the competition doesn’t mint enough profits by undercutting fares. Jet Airways and Kingfisher made some infamous management disasters like merging and this further added stress to their ability to hit back.

The now-defunct Jet Airways made Rs 4.28 in revenue for every available seat kilometre (RASK) it flew, but ended up spending Rs 4.33 CASK (cost for every available seat), according to Q3 FY18 results of the company. Similarly, low-cost carriers IndiGo and Spicejet reported 75 percent and 77 percent drop in profits, respectively.  Coincidentally, even Airtel’s profit slumped 72 percent in the same quarter.

India is a very price sensitive market and the only way companies can differentiate themselves is with pricing. Any attempt by a company to lower prices is followed by everyone else. The issue is, you start off with massive investments, but to maintain that investment as an asset, you have to continue pouring in much-needed capital. There comes a point where nobody wants to invest any more money, and the borrowings are immediately turned into non-performing assets, thereby making the company’s assets into liability.

Once well invested, the companies have only two options: either to close down or get bought out. Every telecom company was bought out by others directly or indirectly. Jet Airways and Kingfisher too dissolved and players like Air Sahara and Air Deccan got bought out. There have been no mutually profitable exits for either.

Statistics will tell you India is leading the next telecom revolution and adding millions of users each week, but they don’t show how much of this is profitable. The country is also the world’s fastest growing aviation market, but more than 12 airlines have closed shop in the last two decades. What’s the use of scaling and adding more subscribers/passengers when your average revenue per user continues to dip?

Airtel has a net consolidated debt of Rs 1.15 lakh crore,  RCom owes creditors Rs 46,000 crore, and Vodafone-Idea owe more than Rs 1.13 lakh crore . On the other hand, Jet Airways owes more than Rs 15,000 crore, Kingfisher owes banks more than Rs 9,000 crore, and Spicejet had almost shutdown in 2015.

Today, Jio and IndiGo are comparable thanks to strong cash flow and promising business models. They have managed to find a sweet spot and have enough firepower to bring down anyone else challenging their dominance, though every company was in a similar position a few years back and nobody could’ve predicted they’ll actually run out of business.

BSNL and Air India go hand in hand, they have a debt of Rs 90,000 crore and Rs 58,000 crore, respectively. The government is keen on divestment, but there have been no takers so far. If it really wants to get rid of them, a huge haircut is going to be necessary.

RCom and Docomo shutdown is equivalent to Kingfisher and Jet Airways. Investors were tired of pumping money and ended up being sold off one asset at a time or went to the bankruptcy court. Airtel and Vodafone-Idea are stuck like GoAir and SpiceJet. They are going with the flow but lack market control.

The primary reason why the two sectors are always unstable is the absence of a long-term government policy. There have been multiple instances of regulations changing to favour a particular company. Jio getting a free hand at launch and opening up FDI for Jet-Etihad deal are just a few examples. Also, the government treats the two like its cash cow. Spectrum sale of 2016 brought in more than Rs 65,000 crore as revenue and aviation turbine fuel is highly taxed and the most expensive in Asia.

Thanks to strict regulations, the companies also have to deal with never-ending bureaucracy. For telecom, technology adoption needs to be faster than ever, but India picked up pace only after 2014. We still depend on two-decade-old laws to govern the internet and its secondary mediums. DGCA has been a sleeping watchdog with selective instincts and failure of UDAAN proves how short-sighted the planning has been.

Today, Indian markets call for top-notch efficiency and customer-centric approach of companies that will make India ready to face the global competition and in one way, create a niche for itself. We take pride in having both, cost-effective telecom connections and various airlines that now connect you to the world thereby making this world a smaller place indeed, but the real story of this success is only a warning, which both the companies and the government are now forced to read out loud and cannot turn a blind eye to, anymore.―CNBC TV18

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