By Aritra Banerjee
India is a country filled with burgeoning economic prospects. With a population of 1.3 billion, a favourable young demographic, and a swelling middle class, the nation stands tall as one of the fastest-growing markets for airlines. Yet, beneath this shimmering veneer, the aviation industry in India, there is the picture of a complex reality. The dubious moniker of “graveyard for airlines” sits heavy on the chest of the Indian aviation industry. Over the last two decades, as many as 13 carriers in the country have fallen into the depths of inoperation and bankruptcy. Prominent names like Kingfisher Airlines and Air Carnival are fresh in mind.
Go Airlines India Limited became the latest casualty in this relentless battle of the skies, marking India’s third significant airline collapse in the past 11 years. The airline, which once stood as the nation’s third-biggest carrier, has found itself seeking insolvency protection after a series of misfortunes.
Pratt & Whitney’s failure to supply essential parts and replacement engines for the Airbus A320neo jets forced Go to ground about half its planes. Coupled with its inability to grow at the pace of its rivals like IndiGo and Air India, along with the burden of heavy borrowing during the pandemic, the company now faces imminent creditor defaults, with liabilities amounting to a staggering 114.6 billion rupees ($1.4 billion).
Jet Airways and Go First are still trying to claw their way out of the insolvency pit, with limited success so far. The situation they face is emblematic of the larger industry’s predicament.
A Graveyard Of Airlines: The Closed Doors
So, what explains this contradiction? Why does a thriving market simultaneously represent a death trap for so many airlines? According to industry watchers, the key to deciphering this lies in a complex interplay of high operational costs, cut-throat competition, government interference, and the unique characteristics of India’s aviation landscape.
- Low Profitability: The Perennial Struggle
Celebrity investor Warren Buffett’s characterisation of airlines as a business proliferating and requiring significant capital but earning little rings especially true in the Indian context. High costs, intense competition, fickle customer preferences, capital intensity, and lack of profits create a vicious cycle of challenges.
Secondary airports, typically favoured by low-cost carriers to reduce costs, are limited. This forces airlines to operate from expensive main airports. Despite being a low-cost market, the operating costs are exorbitantly high. The Indian aviation market is characterised by cheap fares and intense competition. New entrants and razor-thin profit margins create a volatile environment.
The dominance of travel agents and Online Travel Agents (OTAs) in the booking scene eats into profit margins. Airlines here have consistently grappled with low profitability.
Even with high airfares, the industry is estimated to post a net loss of INR 110-130 billion in the April 2022-March 2023 period. The business of flying in India is truly brutal and unforgiving.
- Fuelling The Fire: The Hidden Costs Of ATF
Air Turbine Fuel (ATF) constitutes a major chunk of operating costs in aviation. It is heavily taxed in India, with value-added tax (VAT) reaching as high as 30%. Although Civil Aviation Minister Jyotiraditya Scindia’s appeal to reduce VAT found resonance in several states, and there have been calls to bring ATF under the Goods and Services Tax (GST) regime, the high taxation continues to cripple airlines. The exorbitant price of Aviation Turbine Fuel (ATF) and the government’s failure to integrate ATF under GST signal an insufficient response.
With a nearly 60-70% price surge in the past few years, fluctuating ATF costs mean perpetual instability. For some brands, fuel taxes alone can account for more than half of their expenses, significantly increasing operating costs.
When dues pile up, oil companies may impose a cash-and-carry basis, further aggravating the situation
- Government’s Role: Support Or Absence?
The highly regulated nature of aviation in India often increases operating costs. Government intervention, or the lack thereof, also plays a pivotal role. Private airlines have accused the government of protectionism, particularly when the state-owned carriers, Air India and Indian Airlines, were operating. Government fare caps, while fostering the rise of low-cost airlines, have also hindered profitability. This restriction on fare hikes and the intense competition has stifled growth.
Successive administrations have been hesitant to offer critical support to ailing airlines. Though the Narendra Modi government provided credit lines during the pandemic, it stopped short of full bailouts.
- Dollar Dominance: An Unpredictable Foe
For airlines, an appreciating dollar elevates costs across various operational aspects, including jet fuel, maintenance, and aircraft purchases. Fluctuating currency values, like the Indian rupee’s fall against the dollar since 2019, in other words- a depreciating rupee, squeezes profit margins, makes overseas tickets pricier, and can shrink demand.
Due to weak balance sheets, most airlines in India prefer leasing over purchasing. Currency fluctuations can escalate these costs, making outright purchases unattainable. The failures of giants like Kingfisher Airlines have further hit confidence levels, restricting access to funding. - Fluctuating Demand: The Elasticity Challenge
Demand elasticity is a universal challenge in aviation, with sensitivity to business cycles, global disruptions, pandemics, and conflicts. This issue is further exacerbated in India by high fixed costs for staff salaries and aircraft maintenance.
Hope & Resilience: A New Path Forward?
Despite the downfall of many, India’s aviation market continues to allure. The privatisation of Air India has opened doors for consolidation, and owning an airline remains a prestigious venture for rising Indian industrialists.
Some carriers like SpiceJet have managed to stay afloat, despite financial set-backs by renegotiating contracts and cutting loss-making routes. However, the critical question remains: Does India need to structure an ecosystem that ensures survival?
