More than 2,000 years before Jet Airways (India) Ltd looked set to join the ash heap of airline history, Aristotle postulated horror vacui, the concept we understand as “nature abhors a vacuum". While Hindu philosophers as well as those like Epicurus and Lucretius subsequently debunked the thought, it is a convenient way of looking at where the Jet Airways crisis is headed.
While Naresh Goyal may well choose to believe (and declare), that après moi le déluge—reality may be a bit more banal—even if it hurts his delicate sensibilities. Markets, especially free ones, tend to handle the loss of a single competitor with far greater equanimity than what floundering protagonists themselves display when faced with their unfortunate demise.
Examples abound of industries where the loss of one or even more participants has been swiftly followed either by existing players stepping up to the plate or newcomers seizing the opportunity.
In the aviation industry, of course, we have the oft-chronicled instance of how when the first set of private airlines like Damania Airways, ModiLuft and East-West Airlines collapsed in the mid-1990s, they were replaced quickly by newer players like Jet Airways, Air Sahara, Air Deccan and of course, Kingfisher Airlines. In turn, even as the last three were disappearing from the map, their place in the sky was being taken up by IndiGo, SpiceJet and GoAir.
The airline business is at its core fairly straightforward, with the mobility of underlying assets a given. Planes, gates, pilots and other key resources can smoothly be transferred from one company to another. After all, in which other business can you slap a new name over an existing one overnight and operate as if nothing has changed?
But, even in a more complex sector like the telecom industry in India, the elimination of six of the nine companies that were present in the business even three years ago hasn’t led to a shrinking of the market or even a paucity of choice for the customer. Indeed, if anything, with the business reduced to just three major competitors, there has been a bonanza for customers in terms of lower prices and greater data offerings.
Far from leaving a hole that can’t be filled, the exit of a market leader often triggers a burst of fresh growth. That happens largely because incumbents, especially those who are leaders, tend to get caught napping just when the market is ready for take-off.
In 2007, Nokia had a 50% share of the smartphone market. Today, its share is down to barely 1%, but the market for smartphones has grown exponentially. Nokia didn’t read the tea leaves and paid the price for it.
Around the same time, an entirely new business was emerging around the social media space. At this time, Myspace was acquired by Rupert Murdoch for $580 million in 2005 in an effort to leverage its hugely popular online community for his news business. Just four years later, Murdoch sold Myspace at a massive 90% discount, effectively killing it as a competitor. But instead of signalling the end of social media as a business, it marked the rise and rise of Facebook.
Market leaders slip and fall due to complacency, mismanagement, circumstances beyond their control or simply because they have nothing new left to offer, and this cycle of boom and doom has become increasingly shorter.
Indeed, the consolidation that has taken place in both telecom and aviation in India is the new norm for businesses across the world.
In a recent piece in the Harvard Business Review titled The High Price Of Efficiency, author Roger L. Martin points out, “In more and more industries, profits are concentrated in a handful of companies. For instance, 75% of US industries have become more concentrated in the past 20 years. In 1978, the 100 most profitable firms earned 48% of the profits of all publicly traded companies combined, but by 2015 the figure was an incredible 84%."
So, let’s ignore all the hosannas for Jet Airways on social media. The truth is the airline has been underperforming for several years now. Its fate also reflects the repudiation of its business model. Simply put, the yield on a two- or three-hour flight—which forms the bulk of air services within India—can never justify the full-services model that Jet Airways adopted.
Only low-cost airlines, with their maniacal drive to constantly cut costs, grow revenues and maximize efficiencies, can survive in such markets. It is a trend that is being replicated in country after country, with even the long-distance flying market now being driven by low-cost carriers (LCCs).
According to the International Civil Aviation Organization, LCCs are consistently growing at a faster pace than the world average growth, and their market share is continuing to rise both in advanced and emerging economies. In 2018, these LCCs carried an estimated 1.3 billion passengers, accounting for approximately 31% of the world’s total passengers on scheduled flights.
The Jet Airways crisis is part of what Joseph Schumpeter called “the essential fact about capitalism", creative destruction, and will ensure that the cycle of business continues.
The next entrant to the market will do well to take lessons from Jet Airways’s fate to heart. Each quarter is important and profits are the only holy grail of every business.
Sundeep Khanna is executive editor at Mint and oversees the newsroom’s corporate coverage.