August 8, 2022

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Despite High Demand Growth, Airlines Struggle and Tend to Go Bankrupt. Why?


Indian economy manages to grow swiftly, but a look at the state of India’s airlines reveals precisely the opposite. Over the past five years or so, passenger growth in India has been phenomenal, the number of departures has increased almost 15 – 20% a year. An airport like Patna sees 44 full flights a day today. Seven months ago there used to be just 12 flights a day!

High Demand Growth
An IndiGo plane at Patna

Demand for more air tickets this year is likely to be the highest in the world. Yet the Indian Aviation Sector itself hasn’t been able to get any visible benefits. Almost every Indian airline is showing losses, every airline is struggling.

The story of Jet Airways Ltd., the oldest private airline in India, is most disheartening. It suffered losses for three consecutive quarters now; its cumulative current liabilities have climbed to $2.2 billion. The DGCA had to intervene for auditing to check whether the safety is being compromised. The airline is struggling to pay its employees on time and has reportedly defaulted on lease rentals payments. It’s even been difficult for it to pay for the fuel or its airport fees. It even asked a credit line from the government.

High Demand Growth
Spicejet’s airplane lands at Pakyong airport

SpiceJet Ltd., has been in the red for two quarters and is also not able to pay to the Airports Authority of India. And even the market leader, the much admired IndiGo, declared a quarterly loss recently for the first time since going public in 2015.

As usual, they blame the fragility of this sector on variables beyond their control, which to a large extent is not true. The volatility in fuel prices, the depreciation of the rupee are well known risk factors in the business of aviation. Of course, aviation worldwide is famously crisis-prone. That’s why every prudent aviation entity keeps itself prepared very well for any eventuality. This is what management vision is all about, the lack of which is the reason behind the crisis in today’s Indian aviation, which seems to be in a nosedive even as demand is growing faster than anywhere else.

ALSO READ: Jet Airways Collapse


Government intervention is also stifling the future of India’s civil aviation sector. It never cared to reduce the excise on ATF depite numerous presentations. Had the government not increased the excise in 2016, more than half of the problems the sector is facing would have disappeared. Connecting smaller Indian towns and making short-haul flights profitable is central to Indian aviation’s hopes for the future. Yet Prime Minister Narendra Modi has insisted on a populist and nonviable Rs 2500 price cap for such flights. Few airlines have been interested — and those that were discovered that metropolitan airports would prefer to give their scarce landing slots to bigger and more remunerative jets.High Demand Growth

Unsurprisingly, the new UDAN scheme to connect smaller cities appears to have flopped before it could start, with airline licenses being cancelled one after another.

The state-owned Air India moves along merrily. Diminishing its losses is nowhere in sight. Every second, Air India puts taxpayers deeper in debt. Its influence on the sector as a whole is even worse. After all, it’s tough for any private airline to operate in the absence of any level playing field.

ALSO READ: Airline industry in Deep Red

Jet is looking for investors now. Etihad — which is bleeding cash itself — might have to step up. The Tata Group seemed to be keen earlier, but became reluctant after seeing its debt and liabilities. Nobody else looks really interested in Jet, and certainly not without a controlling say in management. Air India, too, drew a blank when the government put it up for sale earlier this year.

The Tatas run one airline — Vistara — has reportedly been interested in both, but they soon realised that Steel is a much better bet than Aluminum!

Tatas have made money out of steel. This money gives Tatas the strength to deal with Jet and Air India who have only lost billions in air.  After all, obsession alone can not run an airline in India.

Ques: Why, then, Jet Airways and others are running in losses?

Ans: Because they didn’t make full use of available resources. They wasted opportunities, lacked vision. Their business model remained flawed.

Ques: The ATF prices. The weak rupee. Did they not ruin the airlines?

Ans: These are just lame excuses. The Companies should have remained prepared for these well known risk factors. They should have observed austerity much earlier.

Ques: What is the way forward then?

Ans: Observe certain principles. Don’t go for a machine which runs on carbon emitting fuel. Go for an aircraft which does not require any fuel for propulsion. Spare a thought for the environment. 

There is, as a matter of fact, nothing organic in aviation business that can sustain it given the way it is presently being run. From the outside, though, it seems that everything is favorable — strong demand, smart companies, sound fundamentals, but a combination of private sector mismanagement and the strange ways of the government make it virtually impossible to make sustained profits here.

Brighter side of the story. Despite numerous loss stories for the airlines, only one airline seem to be sailing smoothly. Read More Here. It posted profit of over $1 bn in nine months!

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