Boeing believes India will be among the fastest growing aviation markets over the next 20 years. Alongside new airports opening up, an increasing number of people moving into the middle and upper middle classes, and ageing railway infrastructure, one would expect Indian airlines to have healthy finances, pay employees well and dish out bonuses and dividends.
The reality, however, is quite the opposite. Thirteen airlines have shut down in India over the last two decades. They include large ones such as Jet Airways and Kingfisher Airlines, and smaller ones such as Air Carnival and Air Pegasus. The count is higher if cargo airlines are included in the list.
While everyone survived during the peak of the pandemic, TruJet’s repeated announcements about restarting have remained in thin air; Go FIRST’s IPO has disappeared from the horizon; and SpiceJet’s turbulence has increased with every passing quarter.
With the projections and reality being so far from each other, why exactly is India a graveyard for airlines?
Low-cost market, high-cost operations
The split between low-cost carriers (LCC) and full-service carriers (FSC) in India has been 80:20 lately. Globally, LCCs make money by flying to secondary airports at lower costs, avoiding selling inventory on Global Distribution Systems (GDS) or via Travel agents focusing purely on direct selling via their website. But a look at the aviation landscape in India shows how different the market conditions here are. No city in the country has a second airport, leave aside assigning primary or secondary status. This means that the costs for all airlines are the same.
India is still driven by bookings through travel agents and OTAs (Online Travel Agents), with airlines struggling to move passengers to direct booking channels such as airline websites and mobile apps. Every booking done via a secondary channel translates to a commission being paid out. This eats into the already-thin profit margins airlines have. In the absence of the ability to be truly low cost, all airlines have focused on seeing how they can have the lowest unit cost for operations, which gives them a glimmer of hope for profitability.
Yields are low
Flights between Ahmedabad and Mumbai are selling at just over Rs 1,000, just a day before departure. Remove the charges that go to the government and airport operators and airlines will get just Rs 600 to 700. The story is the same in many other sectors, especially those that have seen new entrants and an increase in capacity by many players.
On the other hand, monopoly routes are seeing a rapid rise in fares, so much so, that this could motivate passengers to look at other modes of transport. A balance, clearly, is missing.
Leasing costs and a sliding rupee
In the absence of rock-solid balance sheets, most airlines in India have opted to lease assets rather than make outright purchases. Both options have their benefits. Jet Airways, for example, owned aircraft, which it monetised by leasing to sustain itself for a while.
When IndiGo started operations in 2006, it cost Rs 45.6 to buy a dollar; 16 years later it costs Rs 79.84. While fares should have gone up, the reality is that they have remained muted for much of the last decade.
Access to funding
After the experience with Kingfisher Airlines and Jet Airways, access to funding has been a challenge for airlines. The business is seen as one that is rapidly growing from the passenger numbers point of view but not as much from the profitability perspective.
While globally, the airline business is cyclical in nature, the Indian experience has been that airlines make tons of losses in bad times and just about float in good times. This prevents any recovery that may have otherwise taken place.
Establishment of Flight Training Organisations, encouraging a leasing setup at GIFT city, expanding airports, and subsidising airlines for RCS-UDAN routes are some of the encouraging decisions taken in the last decade.
However, Aviation Turbine Fuel (ATF), which accounts for anywhere between 35 percent and 40 percent of costs for an airline, is still exorbitantly priced in India. Demands to get ATF under the GST regime have not fructified. While taxes have been lowered in the recent past, it may have been a case of too little, too late.So, where does the solution lie? Is it in airfares that match costs and help airlines break even? That would mean limited market stimulation, single-digit growth and a modest uptick in passenger numbers. All of it will be far from the dream of India becoming a large market. But is it worth losing airlines to make that ambitious dream a reality, or does India instead need a structure to ensure the ecosystem survives?