PremiumIn the US, a Mark Zuckerberg or Jeff Bezos no longer view an airline as the next big thing. In South Asia, it still seems to catch the fancy of even seasoned businessmen, as is evidenced by Tata’s reported interest in buying Jet Airways
Between an asphyxiating state behemoth and a set of private companies with increasingly stressed finances, India’s airline sector is once again looking down the barrel of a gun. Liquidity issues at SpiceJet Ltd have just led Crisil Ltd to downgrade the budget carrier’s long-term and short-term rating, while ICRA has downgraded Jet Airways (India) Ltd’s long-term borrowing programme from BB to B, which signifies a high risk of default on servicing financial obligations.
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That’s not all. In the first quarter of this year, InterGlobe Aviation Ltd, the operator of IndiGo, India’s largest airline with a market share of 42%, posted its biggest-ever drop in profit. Indications are that its numbers for the July to September quarter will also be subdued.
The causes of this decline are well known—rising fuel prices and a weakening rupee being the main culprits.
Nowhere though is demand growth ever mentioned as a stress point. The numbers, in fact, tell a tale of a sector that should be soaring.
India’s aviation market is expanding at the fastest pace in the world, with the government planning to double the number of airports in the country from around 100 now to nearly 200 by 2035.
The number of passengers, domestic and international, grew 17% in 2017, according to the ministry of civil aviation. More significantly, the large domestic segment, which accounts for 80% of the traffic, has been growing every month since 2014.
Yet, we are back to a scenario where all domestic airlines are facing severe headwinds. This is just four years after the last major air pocket in the industry, which saw IndiGo’s pre-tax profit fall 52% year-on-year, while Jet Airways and Spicejet posted consolidated pre-tax losses of ₹ 3,411 crore and ₹ 1,003 crore, respectively.
A strange and vicious cycle of bloom and doom lies at the heart of airline unprofitability across the world. The more an airline struggles to make money, the more it resorts to cut-throat pricing to fill its seats, with the result that even the stronger competitors are forced to follow suit, which in turn drags their profitability down as well. In any case, the high cost structure of the business and its fragility, make viability tenuous even at the best of times.
Despite these odds, tycoons, sheikhs, playboys and entrepreneurs have rushed to set up airlines or look to buy and turn around ailing ones.
Just a few months back, even as aviation fuel prices climbed, in Vietnam, 43-year old property tycoon Trinh Van Quyet was preparing to launch a new airline, Bamboo Airways. A growing middle class, which is flying in ever-growing numbers, is his professed ally as they were for India’s homegrown airlines Damania and Modiluft in the 1990s, and Kingfisher Airlines and Jet in the following decade.
According to Switzerland-based airline intelligence provider ch-aviation, in 2017 alone, over 80 new airlines were started across the world. Equally though, 25 airlines shut down that year.
So what is the allure of this business?
Maybe it is the chance to soar into the skies, defying gravity itself.
Or maybe it is the irresistible toy that many a young man just want to possess. Richard Branson started Virgin Atlantic because his flight from Puerto Rico to the British Virgin Islands was cancelled. As he explains: “I had a beautiful lady waiting for me in BVI and I hired a plane and borrowed a blackboard and as a joke, I wrote Virgin Airlines on the top of the blackboard, $39 one way to BVI. I went out round all the passengers who had been bumped and I filled up my first plane." (read more here)
Warren Buffet famously said that if a capitalist had been present at Kitty Hawk, he would have shot down the Wright brothers, saving investors of airline stock millions.
Which is probably why in the US, entrepreneurs such as Mark Zuckerberg and Jeff Bezos no longer view an airline as the next big thing. In South Asia, though, it still seems to catch the fancy of tycoons and even seasoned business groups, as is evidenced by the venerable Tata Group’s reported interest in buying the beleaguered Jet Airways.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider looks at current issues and trends in the corporate sector every week.
