Isn’t it hard to believe that ‘air travel’- a service that has become such an integral part of our daily lives today was once considered to be a ‘luxury’ that only the rich and affluent could get a taste of? With rising incomes as well as the introduction of low-cost carrier models and heavy discounts offered by the airlines, the aviation industry is currently witnessing an air travel boom in terms of the traffic they cater to. For all the obvious reasons, you might consider this to be a ‘gold mine’ for airlines, however, let us halt you for a second there- for, there are much more depth and mystery to this story than you can fathom.
A glance at the global aviation industry reveals three major trends that only substantiate how the current scenario is keeping afloat itself today, as follows down below:
- Aggressive pursuit of efficiency: Each of us is very familiar with the cost-cutting efficiencies that every airline has made over the years, be it the case of the food, luggage load allowed or the seat size, every service provided has gone completely downhill from a sustainable level to terrible ones now. Unable to create new value while at the same time battling high fixed costs, airlines only focus on margins today by slashing their bottom-line costs.
- Internationalization: An age-old misconception of the hoi polloi still stands to be that airlines, with their prices much higher than any other system of transportation, would be generating huge profit margins always. However, what people forego considering are simple things like how even an empty seat comes at a full cost for any airline. Owing to such a bloated fixed cost structure, and tackle the problem of vacant seats, airlines in the United States have enrolled in Global Airline Alliances (GALs) such as Oneworld, Star Alliance, and so on to at least make the carrier portion of the revenue for that passenger and monetize that seat. These enrolled airlines transport more than two-thirds of the world’s international traffic.
- Mergers & Acquisitions: Yet another adage followed by the aviation industry is that ‘when you can’t move upmarket to boost your growth through direct competition, the answer is simple: buyout the growth’.
For example, the acquisition of AirTran by Southwest Airlines; that of Virgin airlines by Alaska Air Group are all testimonies to this contemporary trend.
There is no denying that the aviation industry is home to either airline who are only breaking even or those who are running deep in losses. There is an old joke in the US markets- ‘The best time to sell airline stocks is anytime the market is open’. Bearing the tag of ‘historical laggard’, the commercial aviation industry has always known to be a highly fragile and crisis-prone one. When the fuel prices shoot up, airlines nosedive; when the rupee depreciates, airlines nosedive. The stocks of all listed airlines are a spectacular testament of how the industry, although a win-win for the passengers, is only a lose-lose for the shareholders. With a high vulnerability towards exogenous events like political instabilities, natural calamities, etc. a very high fixed cost structure, functioning of even unprofitable airlines and a reputation for degrading service, the industry is not one with a very healthy outlook.
This analysis of the global aviation industry brings us back to the intricacies of our home country. Topping the charts with the highest demand growth in the world, India has successfully recorded a double-digit passenger growth straight for over one year now. As the government relentlessly carries forward its plans of rapid airport construction and development, this number is expected to just grow by leaps and bounds. Over the next 10-15 years, the country expects to spend about USD 60 billion in developing airports alone. Today, despite having the world’s fastest demand growth, there is something specific to the Indian airline industry that makes it struggle even more. With the demise of Jet Airways, the mounting losses of Spice Jet and Indigo, the sector has weakened to levels we could not have imagined. A deeper look into the sector reveals the following reasons that have plunged India’s aviation industry it’s most precarious phase over the last 5-6 years:
- High Costs, Low Yields: Jet fuel prices comprise about 40% of costs for Indian carriers and are taxed higher in the country than anywhere else in the world. This combined with the typical low-ticket pricing in India’s price-sensitive markets is one of the biggest reasons that hamper airline margins. As the oil prices rise, the yield must increase by such a margin that garners profitability for the airline, however, the present situation involves an uptrend only in the former part and no such movements in the latter.
- Government Apathy: The government with its archaic rules like the route dispersal guidelines (RDG) has made it mandatory for airlines to fly a certain percentage of their flights in smaller, unprofitable routes. This has only resulted in overcapacity, introduced inefficiencies and added more to the already bloated cost structure of the airlines. In addition to this, government interventions like the recently introduced USD 35 price cap on tickets for certain specified routes and licensing regulations make it even more difficult for the industry to aim at achieving profits.
- Unprofitable Airlines Continue To Fly: In an unprofitable industry that has been plagued either by loss-making companies or ones just breaking even, one would expect the market participants to go for consolidation and rationalization to find better ways to do business, however, when talking of the commercial aviation industry, don’t let this thought come to your mind. In this industry, despite years of substantial losses and skyrocketing debts, many unprofitable airlines continue to function. The primary reason behind this is that the stakeholders cannot afford to shut them on top of the millions of job losses, inconvenience to thousands of passengers, millions in losses for the airline’s creditors and the inevitable hurt to the nation’s pride if the carrier is a national one.
- Pilot Shortage: Forming the second largest chunk of the cost structure after fuel, wage bills are expected to rise even further in the future as the projected growth capacity, which is expected to lead to a 14% shortfall in commander pilots, would require the expensive expatriates to come to rescue, as reported by The Economic Times. In February, Indigo announced a cut of 30 daily flights due to a shortage of crew members and the recruitment of 100 expatriate commanders for the remaining ones. This gap is expected to only widen further as expansion plans materialize over the coming years.
- Stiff Competition Due to The LLC Model: Low-Cost Carrier Models took a toll on the traditional full-service carriers in the country. At present, the domestic aviation market mainly comprises of leisure travelers who are price sensitive. Intense competition with prices as low as they could get, it seems like a far-fetched dream to be able to garner profits in a country like India while targeting this aspect of the picture.
There is no doubt when it comes to the vitality of the services that airlines provide, however, the aforementioned factors, as well as the industry’s high vulnerability to exogenous phenomena, present a big impediment in the way of profitability. Indian carriers, plagued by these challenges and problems, currently are looking at a large abyss of losses. With the demise of one airline, obstacles in the development of others and a huge expense revenue gap which is expected to only expand further in the future, the times are indeed very difficult for the Indian airlines. Unless the government eases the taxes on ATF, brings down the heavy landing charges as well as the costs of maintenance and repairs in India, among other measures, the situation would continue to remain tough for the commercial aviation industry to survive in.
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A highly driven and motivated individual, Aradhana is currently a B.Com undergrad at SRCC. Always on the lookout for being a better version of herself than yesyerday, Aradhana has always found her muse in pen & paper. We leave the rest for her articles to communicate to you about what buzzes around this budding writer’s head!