MONEY OR MARKET?

Manan Thakkar

Why are the Indian Airlines failing to make money?

Every time I am on a flight, glancing past the big vehicles, I wonder, so many passengers, such a huge staff, crowded airports, how much would the airline be earning?

To join the dots to this confusion, I browsed the internet and encountered a whole another dimension to the aviation industry.

According to Civil Aviation reports, Indian Airline passenger traffic has grown by at least 16% annually over the past decade. In 2001, it stood at 14 million passengers, while it easily crossed the 150 million passengers mid-2016. Despite a continued and exponential growth in the air passenger traffic, the airlines are failing to make profits. 55+ Indian Airlines have become defunct till date, while some are dying a slow death, while a few airlines like Air India are burning the tax payer’s money to stay in the air.

Aviation Industry, being one of the major industries in India, faces the unavoidable problem of high capex and hair-thin margins. Let’s have a look at a few major problems, which the airlines have to deal with.

Market-Money Dilemma:

The airlines are in a state of an absolute conundrum. One of the major problems that all airlines, collectively are facing today, is the dual goal of increasing the passengers and profits.

With exponentially increasing passenger traffic, every airline is trying to capture a slice to increase the size of its pie. In this market capturing war, there is a series of price reduction, leading to a price war between the airlines. According to DGCA (Directorate General of Civil Aviation), some of the airlines are even running at or below the breakeven point.

The Dilemma the airlines face here is, should they choose passenger or profits?

-If they choose quantity(passengers) they have to lower the price, hence the barely make any profits, as a result hindering the future plans.

-If they choose quality(profits), they are left behind with no share in the new customers, while also losing out the existing customers to other airlines.

Quantity over quality is what the Indian Airlines are currently following. The consequences of this are grave as it limits the airline’s ability to increase the price in future. This is because there is a huge possibility that the customers acquired today, are because of the lower prices (lower and middle class), will move away from airlines, due to increase in its prices. This leads to a no-profit today-no customer tomorrow situation.

Soaring Fuel Price and Falling Rupee:

The increase in ATF (Aviation Turbine Fuel) price and the depreciation of the Rupee has added to the airline costs, thus making profit margin even thinner. During the last 12 months, crude oil prices have risen by 36%, while Rupee has fallen by 8%. About 50% of the airline costs-majorly fuel (30%), airplane lease, maintenance, parking charges, are dollar-denominated. The dollar reached a high of rupees 70, on August 14. 

One of the major reasons, the airline industry has been affected is the lack of hedging of USD and fuel prices. Unlike other industries, the airlines failed to realize the need for hedging at the right time. Though, some airlines have started the practice to insure their costs, thus saving them from future cost turmoil.

With costs and price running in the opposite direction, the near future of the aviation industry seems uncertain.

Debt Trap and Falling Future Plans:

With falling profit margins due to unfavourable cost conditions, several airlines are having to postpone their expansion plans to a later date. Ajay Singh, the chairman of Spicejet, announced that they would “put the long-haul flight plan on hold, till the ATF(Aviation Turbine Fuel) and taxation conditions improve.” This decision has been followed by several major airlines.

Falling margins are not only postponing future plans, but also cancelling it all together in some cases. Airline Industry is largely financed by debt. With low margins, most of the money is being used up in paying interest costs. In some cases, like Kingfisher, airlines have to take new debts to repay the old ones. Thus, they get into a debt trap, that usually ends in it becoming defunct.

With many other problems like unfavourable government policies, huge tax expenditures, cut-throat competition, entry of new carriers seems almost impossible while the existing ones have to struggle to survive. With growing passenger traffic, I believe, the right business model and proper coordination between rivals, the airlines can move towards mutual growth.

Fun Fact:

About one-third of your taste buds become defunct when at a high altitude. Thus, next time you feel that a 250 bucks worth sandwich is only okay in taste, it's not only the airline chef but also your taste buds.