Richard Branson once joked that the best way to become a millionaire is to start with a billion and then invest in an airline. The mounting losses in the Indian aviation industry show that there is perhaps more to Branson’s remark than a flash of wicked humour.
The plain fact is that there has been irrational exuberance in the skies. There are several good reasons why booming India has been one of the world’s fastest growing aviation markets. But frenetic price-cutting has pushed the demand for plane tickets way beyond what can be justified by economics. It’s no wonder that most airline companies have reported smart increases in revenues but worrisome increases in losses—a sure sign that tickets are being sold below cost. One result of this is that India’s airlines are dependent on frequent infusions of equity to keep going.
Meanwhile, there have been newspaper reports suggesting that some airlines may desist from buying more planes, a clear symptom of oversupply. Between March 2003 and February 2007, India’s fleet size more than doubled, from 133 to 290 aircraft. In fact, so many more planes have been ordered by Indian airlines that many experts are wondering where all these planes would be parked. In the meantime, the glut of Indian orders has changed the fortunes of Brazil’s Embraer and Europe’s ATR, both of whom now count India’s Paramount Airways and Air Deccan, respectively, as among their largest global customers.
The recent consolidation in the aviation industry is thus not surprising. Jet Airways has bought Sahara. Kingfisher Airlines has taken a stake in Air Deccan. And the government has finally pushed through the long-pending merger of Air India and Indian. These three combines now account for most of the aviation market. The question is: will these mergers help India’s airlines fly out of trouble?
There are already some signs that the worst price-cutting is over, which should technically boost airline revenues. What is not clear is what will happen to demand. The stream of new travellers who started flying as a result of low prices shows that demand for air travel is still price-sensitive. A sharp rise in airfares could send them back to buses and trains, unless their exposure to the benefits of air travel have made them long-term converts to life in the skies. That’ll be an issue worth watching.
There are also reasons to be sceptical about the much-touted synergies in the recent airline mergers. Synergies are easy to talk about in theory but tough to realize in practice. Unfortunately, except for the merger of Indian with Air India, where there is clear potential for cost savings between the two full-service carriers that also have overlapping routes, the other alliances between full-service and budget airlines are unlikely to offer any great hope of cost savings. Pilots and in-flight crew have statutory limits on maximum hours of flight time possible to be undertaken.
Similarly, Kingfisher and Air Deccan are currently outsourcing ground handling, maintenance, repair and overhaul activities to others. The sales and distribution channels for an airline aimed at business travellers are different from one aimed at passengers upgrading from air-conditioned trains.
For example, a business alliance between Paramount Airways and GoAir aimed at realizing cost savings, too, may not help stem losses at this combo either. The opportunities for cross-sell, too, are limited.
Synergies can be realized in basic support functions like human resources and finance, but the question is whether such small savings are enough to cope with the huge losses facing the aviation industry in the immediate future. India’s airlines have long pretended that the only thing they can control is costs.
It’s high time they learn how to manage revenues, too.
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