Indian aviation business cycle

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.