Flying in the face of profitability3 min read . Updated: 01 Dec 2011, 10:17 PM IST
Flying in the face of profitability
Flying in the face of profitability
The current drama in the Indian aviation sector is not about Vijay Mallya selling his luxurious yacht to pay Kingfisher Airlines’ wage bill; it’s not about selling a piece of real estate to pay for its fuel bill; it’s not a debate whether the government should bail out Kingfisher Airlines or not. In fact, it’s not about Kingfisher at all. The state of Kingfisher Airlines reflects the state of Indian aviation—where annual losses running into billions of rupees are now “normal". Even if Prime Minister Manmohan Singh hands out a token bailout to the industry after the airline chiefs met him to discuss their woes, the industry is far from seeing the light at the end of the clouds.
This makes the situation in Indian aviation even more farcical—airlines are defying all known anti-competitive laws and set whatever fares they want. Yet they end up reporting losses of crores of rupees every year. At the moment, airfares are not regulated. Airlines can virtually sell at the prices of their choice and fly into profitability. So why don’t they?
The first part of the problem is the Indian carriers themselves— shooting themselves in the tyres with an unholy obsession with market share and seat factors. Airlines simply buy passengers to achieve this, at the expense of profitability.
Imagine you’re an airline executive and your manager walks in from a beer party on an F1 circuit and says: “You have 200 seats on Bombay-Delhi tomorrow. Fill it up like a pitcher of beer." Your solution? Sell as cheap as possible. This is the first unholy obsession in the industry. Call it the seat factor.
The manager, very happy with a full flight and a healthy market share—something the press latches on to—swaggers in from an air show in Paris and says, “I’ve ordered a couple of aircraft for you to fill up, since you’ve done a good job filling the first one." The second unholy obsession—increase the number of seats you have to offer to increase your market share.
Is greed another problem here? This cannot be denied. The reason for this is simple: most air travel in India today is essential, which means the passenger will pay for the travel. This is irrespective of the cost and the taxes levied. The government, the airlines and airports, all stand to gain and earn quick money. The temptation is too strong and the systemic issues—overcapacity, delays and the quality of service—don’t figure in this equation.
All this proves that airlines’ peeved, schoolboy-like attack on the government and demands for lowering sales tax on aviation fuel are quite unjustified. Even if the government removes this tax, that is not going to dramatically turn the fortunes of the industry. This tax constitutes just 8% of airlines’ cost. There are enough other ways to reduce that.
What the sector needs today is not a “bailout", but a rationalization of taxes from the government. The government and the airport operators should stop viewing the industry as a quick money spinner, and view it as a long-term enabler of the economy instead. If the primary tenant of these airports—the airlines—dies, then the airports will automatically perish.
Where does this leave Indian aviation? It is quite likely that the government will offer some kind of stimulus for the sector. Allowing foreign direct investment in domestic airlines will only excite an overly optimistic foreign airline that has a lot of money in its cargo hold. This will give a short-term capital injection to Indian carriers, but six months down the road, they will run out of money because of the chronic illness of the industry.
The solution is obvious: Indian carriers need to stop chasing market share and seat factors. The industry has to shrink. Their growth doesn’t mean growth at the expense of profitability.
Shrinking in the airline industry is not a bad idea, as it only means that you are stabilizing and pushing up fares to a profitable level instead of running on a treadmill of newer aircraft coming in and dropping fares. Airlines should either lease or ground their aircraft and defer new deliveries till the industry stabilizes.
Simply put, the airlines should drink a little less of champagne when ordering aircraft.
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Bharath Mahadevan is a former airline executive. He is currently working on a book on India’s aviation industry.