Keeping Airlines Afloat

Over the last decade, the Indian aviation industry’s two airlines – Kingfisher and Jet Airways – crumbled from the second-highest position in the market to bankruptcy in a matter of months. These cases are symbolic of a larger industry trend that is highly turbulent and uncertain, with the combined profits of all scheduled Indian carriers turning red in 2018-19 for the first time since 2015-16. The poor industry performance seems surprising, given the fact that the demand for domestic air travel is witnessing healthy growth in India. The domestic passenger air traffic grew by 18.8 and 13.8 per cent during 2016-17 and 2017-18, respectively. Therefore, the demand for air travel is not the problem plaguing the industry in the country, unlike the global aviation market, which is experiencing issues of slowing demand.

There are a couple of reasons that are often cited for the peculiar performance of the aviation industry in India. The first is the volatility in aviation fuel prices, which accounts for a third of the overall costs of airline operations. The volatility of global crude oil prices results in the unpredictability of operational costs. And the uncertainty coupled with a weak rupee puts a significant dent in the profitability of the airlines. The second common reason put forward to explain the performance of the Indian aviation industry is that airlines across the world are loss-making, and India is no exception.

These arguments explaining the fragility of the sector ignore the strategic issues which arise due to government intervention and poor strategic choices by the private players. First, while the fuel prices are uncertain, they are also heavily taxed as compared to the rest of the world, with a margin of 35 to 40 per cent. A reduction in taxes could improve the firms’ revenues by lowering fuel prices.

Another problem with government action has been the arbitrary nature of its decision-making process. For instance, Jet Airways, partially owned by Abu Dhabi-based Etihad, benefited immensely from the government’s controversial decision to increase the number of seats permitted between airports in India and passenger-heavy Gulf hubs of Abu Dhabi and Dubai. On the other hand, Kingfisher was denied permission to halt and re-fuel its aircraft in the Gulf, which would have helped in reducing its fuel costs. The regulatory unpredictability has been problematic for the sector.

Further, an issue that emanates from within the private sector is the pricing strategy. A significant tool to stimulate demand in the Indian aviation industry is through competitive air ticket pricing. But airlines make significant monetary losses as they end up selling a majority of the seats at the price points, which are not only lower than the average fare on that route but also lower than the cost. Such a pricing strategy narrows the revenue margins of airlines.

Thus, the Indian airline industry has multiple problems that span from private players to the government. The former needs to be more strategic in its operations and draw lessons from airlines around the world that have managed to remain profitable. Southwest, for instance, has used its short-haul and point-to-point strategy to lower its operating cost within its domestic market. And, the government needs to play its part through easing up on its taxes and bringing more certainty in its regulatory practices. The industry holds a lot of promise, given favourable conditions for growth. But just like the rest of the country, poor strategic decisions by the private sector and government are proving fatal for its survival.