Sunday, September 26, 2021

Being profitable, a huge challenge for airlines in India

by Jitendra Bharghav
Why did India fail to take advantage of the foundation laid by JRD Tata? One primary reason was that the governments before the 1990s considered the aviation sector to be elitist and therefore did not accord the priority it deserved.

Indian civil aviation was fortunate to have been given a head start by JRD Tata when Tata Airlines began operations in 1932. Air India launched international flights under his stewardship in June 1948, when many global airlines, now dominating the skies, did not even exist. 

Why did India fail to take advantage of the foundation laid by JRD Tata? One primary reason was that the governments before the 1990s considered the aviation sector to be elitist and therefore did not accord the priority it deserved. Even the much needed national civil aviation policy was formulated only five years ago after being in the works for almost two decades, an irrefutable example to conclusively prove the lack of priority accorded to civil aviation.

After private airlines were allowed to operate in 1991, several airlines were established only to become extinct in a matter of months because many of the promoters neither had the experience nor the financial muscle required for the industry. This was ironically a repeat of what the country had witnessed before the nationalisation of airlines in 1953. JRD Tata had described the then scenario in his speech ‘End of an era’ delivered at the last Annual General Body Meeting of Air India on 22 June 1953 before it was nationalised. He said: “While the fundamental requirement was of a small number and efficient operators”, AbdurRabNishtar, the minister for communications, “encouraged a ruinous scramble for route licences by a large number of concerns created almost overnight.” 

Most airlines have continued to be financially weak. If Air India was the only economically profitable and robust airline in the pre-nationalisation era, it is only Indigo airlines that is profitable now with substantial cash reserves. 

Why are most Indian carriers perpetually in the red? A clue may be found in another statement made by JRD Tata in his above-referred speech. He had averred: “The main causes of the losses are to be found, not in high operating costs, but in the uneconomically low fares and mail rates and the crushing burden of fuel taxation imposed upon it.” Though the statement was made 68 years ago, it is entirely relevant in today’s context. 

Price sensitive market

India is a price-sensitive market, and airlines in their quest to bolster their respective market shares and stimulate growth, have often sacrificed profitability by offering lucrative fares, not because they are charitable towards the travelling public but because the ambitious airlines have placed large orders for new aircraft to expand the fleet. How will the new aircraft be filled if the growth is not sustained? The paradox is that even as operating costs are high in India – be it the cost of ATF, airport charges and taxes levied by the government, the fares, measured in terms of earning per passenger per kilometre flown on domestic sectors are low by global standards.

The situation is all the more acute for full-service carriers, which have to compete with the low-cost airlines to entice passengers. With a comparatively higher cost platform and inability to command fares that can adequately cover costs – full-service carriers to not lose out on price-sensitive passengers are compelled to either match or keep fares only modestly higher than those offered by low-cost airlines. 

How long can an airline sustaining losses year after year remain in business? The collapse of two full-service airlines: Kingfisher in 2012 and Jet Airways in 2019, provides ample proof of flights being operated without recovering the costs? Vistara, a joint venture airline promoted by Tata’s and Singapore Airlines, as a full-service carrier, hasn’t made a profit since its inception.

Within the low-cost segment, Indigo, with a domestic market share of almost 50% in the pre-Covid era and higher now, and multiple frequencies operated to most destinations, sets the benchmark fares, which are used by rival airlines to set their fares even if they are not adequate to cover the cost of flights. SpiceJet, Go Air, and Air Asia have stressed balance sheets, often leading to speculation on their future. The grounding of flights in March 2020 to prevent the spread of Coronavirus through the travelling public only increased the miseries. Resumption of flights in a calibrated manner effective 25 May 2020 did provide some relief, but the number of passengers patronising airlines plummeted again from April 2021 when the second wave saw a number of infected people spiralling beyond control.

Unpredictable future

To comprehend the criticality of our airlines’ finances, it is important to look at the situation since the advent of private airlines in the early 1990s. A not-so-impressive financial performance of the two government airlines, Air India and Indian Airlines, was attributed to poor productivity and inefficiency? Now, even the well-managed airlines – superior productivity and efficiency – struggle to make a profit because of the market realities – high operational costs and price sensitivity of passengers who opt for airlines offering the lowest fare. 

Covid and its disastrous effect on travel, whether business or leisure, has further impacted the airlines.

Financially weak airlines? 

Unlike other businesses where inventories of produced products can be stored for selling later, seats on a flight are a perishable commodity. Once a flight has taken off, empty seats have zilch value? Airlines are thus tempted to sell seats at unsustainable fares. Indian market is tough as Air Asia will vouch because even after being a successful airline in most Asian countries, it has failed to be profitable and grow in India.

Because most Indian carriers do not have healthy balance sheets, mergers thus far haven’t helped the acquiring airlines. Whether it was the acquisition of Air Sahara by Jet Airways or the merger of Air Deccan with Kingfisher, the reality is that the two acquiring airlines are also no longer in business. If the financially weak airlines with an uncertain future have to be acquired there, have to be financially strong airlines because the merger of two weak airlines will make little sense? India, unfortunately, has only one strong airline – Indigo, and it has it own long term plans to expand.

The future lies in promoters of all airlines taking a more pragmatic approach, ensuring that the business model pursued is economically viable. After all, they are expected to be in the business to make money, not lose money – whatever be the challenges and market dynamics.

About the author: Jitender Bhargava is a former executive director, Air India & author of The Descent of Air India.


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