India has had a fair share of failing airlines. From East West Airlines and Damania Airways in 90s to the recent cases of Kingfisher Airlines and Jet Airways, it’s a long list of several starts and many failures. As another one, Indigo, enters turbulent times, although for different reasons, Mint deconstructs brings to you the reasons behind the high fatality of domestic airline business.
Why is airline such a tough business to run?
Airlines, world over, are tough to run. Barring some airlines like Singapore Airlines and Lufthansa, most find it tough to charge a premium as customers, local or foreigner, are forever looking for the cheapest ticket. Glamorous from outside, it is a commoditised business for most players. For every empty seat in a plane, an airline takes a hit on its profitability or what is called the ‘yield’. There are very few companies making planes in the world and each plane costs millions of dollars. The government heavily regulates the sector and with it come the high cost of operations.
How is the airline business in India currently placed?
India’s air passenger traffic rose 18.6% on year in 2018 to 138.97 million. While more and more people take to flying, many airlines have been forced to shut shop. India’s second largest carrier, Jet Airways, is the latest to do so. That has led to ticket prices rising. Generally too, ticket prices are affordable only on a few routes like Delhi-Mumbai, Delhi-Bengaluru, Mumbai-Bengaluru, Delhi-Hyderabad. This is because of demand-supply mismatch as airlines are unable to have more flights on those routes as airports are unable to add capacity. This is because there’s no more land available or it belongs to the defence or regulatory clearances aren’t in place.
What has the government done to promote aviation amongst the masses?
The government’s UDAN scheme which stands for ‘Ude Desh Ka Aam Nagrik’ (the country’s common man flies) aims to make flying affordable for the masses. The scheme connects under-served and un-served airports in the country. The fares are capped with the government subsidizing the airlines to make it viable for them. Routes are awarded to airlines in this scheme through a competitive bidding.
How is the cost structure high for the airlines?
There are five private airports in the country - Delhi, Mumbai, Cochin, Bengaluru and Hyderabad. Most of the others are run by government-owned Airports Authority of India (AAI). Airlines pay a mindboggling number of charges to airport operators, both private and the AAI, to operate their flights. These include separate charges for landing, route navigation, terminal, parking, fuel and royalty. Bigger (more seats) and heavier the plane, higher are the charges. Airlines are forced to send their planes abroad due to lack of MRO (maintenance, repair and overhaul) facilities here and get no input credit for taxes paid abroad. They also pay 5% and 18% GST on aircraft spares.
How are the other regulations hurting the sector?
Till 2016, the government had a self-defeating rule of 5/20 which meant that airlines had to be operating in India for five years and had to have 20 planes if they wanted to fly overseas. This limited airlines’ ability to earn more revenues. Airlines now need to operate only 20 aircraft on local routes to start flying overseas. Government allows 100% foreign investment in airlines but has capped it at 49% if a foreign airline wants to invest in an Indian counterpart. Airline is a highly capital intensive business and restrictions on foreign investment prevent the sector to benefit from competition, new technology and modern practices prevalent elsewhere.