Most of the airline passengers in India cribbed about the
extremely high airfares that Indian airliners charged. We also witnessed one of
our aviation minister in a press conference in 2008 urging the airlines to
decrease the fares in order to accommodate the Indian common man. But, it is
obvious that the audience sitting in a theater would never know what kind of
effort goes in making the play. In Indian skies airlines tried hard to put up a
grand show even as they were struggling back stage.
Indian aviation market has seen over two decades of
uncertainty in business and managed to survive only through merger and
acquisition. India’s pride, the national carrier has been bleeding ever since the
merger of Air India and domestic carrier Indian Airlines took place in 2007.
Although partly because of government use, the carrier has accumulated losses
of 1.1Bn USD. With government pouring in funds, it may still survive. But
private carriers are not so lucky.
From 1991, there are several airlines that had become
bankrupt and were either acquired or merged with some other airlines. Air
Sahara and Air Deccan both started off with different business model but ended
up with huge debt and were finally acquired. Similar situation aroused again
when country’s two biggest airliners by market share Jet airways and Kingfisher
Airlines accumulated huge losses. Kingfisher airlines had to stop its flight
while Jet airways is still in recovery mode.
It can be seen that there seems to be pattern in both of
these happenings. Jet airways with a robust model was actually doing well till
2007. Even Kingfisher Airlines which never turned profitable was able to
survive till 2009. But when the crises of 2008-09 hit, aviation was the worst
sector affected. No doubt we agree on business cycle which occurs seasonally.
We have few years of growth and few years of consolidation.
But, for aviation these cycles are so impactful that some
Airlines fail to survive the crush. At the peak of its growth Jet airways had
logged a staggering Rs. 1222 Cr profit. After the crises in 2008-09 the total
accumulated loss for the airline was close to Rs. 14000 Cr. With such extremes
the industry seems to be very volatile. This can be attributed to the fuel cost
which adds up to 50% of the operating cost for the airline.
When the price for ATF
(jet engine fuel) plunged with the international fuel cost (coming down from
$120 per barrel to $50 per barrel), most of the airlines slowly and steadily
moved into black. It is imperative that the airline recover all the losses
accumulated over the years before the cycle changes again.
It is also important to touch upon the cost structure and
government policy in aviation. Most of the services provided by ground support
costs higher than that of the same services in any other country in the world.
Government policy which are based on older laws require airlines to cover
routes which are not profitable along with the regular routes. Also, the famous
and most debated 5/20 rule require airline to have 20 aircraft in its fleet and
5 years of experience before going international. It is also obvious that with
present cost structure it is profitable for airlines to fly international than
domestic. For proof we can always compare Air India and Indian Airways
performance (before merger in 2007) and also GoAir who had no international
flight permission.
In such an atmosphere, the eagle of Indian skies Indigo
Airline with its excellent business model also faced problems. The balance
sheet turned red when the crises was at the peak. But, it was able to lean out
all the losses with it’s out of the box ideas.
Indigo Airline bought in the concept of buy, sell and lease
back of aircrafts. When they buy from Airbus in bulk they get it at lower
price. It takes a year for Boeing/Airbus to deliver a plane. The aircraft is then
sold to Banks at higher rate and leased back for operation. The aircraft is
leased only for 4-5 years after which it is given back to the banks. This helps
in maintaining a low average age of the fleet which in turn reduces cost of
repairs. Also, the major checks on the aircraft (level C and level D) are due
only after 4 years. Hence, Indigo avoids any major maintenance. Indigo also
keeps control on the cost by cutting salaries of the employees specially the
technicians who handle the maintenance of aircraft under the Aircraft
Maintenance Engineer. Quick turnaround
time, hub and spoke model for operation and self-owned ground equipment has
given the airline cost advantage.
Many of the people believe that Indian airliners can never
provide services like Emirates. It is obvious that an airline cannot provide
excellent service without charging higher. There are some who would pay more,
but majority are not willing to pay more for ‘travelling’. With high cost
structure and very few people paying for high class service it is impossible
for an airliner in India to survive with a full service model. Hence, the way
forward for Indian traveller is Airline that provides on time service with
minimum cost. Indigo is clear example of such a pure cost for service provider
airline.
