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.
For every empty seat in a plane, an airline takes a hit on its profitability or what is called the ‘yield’. (Photo: livemint).
1) Why is it tough to run an airline business?
Airlines, the world over, are tough to run. Barring some such as Singapore Airlines and Lufthansa, most find it difficult to charge a premium, as customers, both locals and foreigners, search for the cheapest airfares. Glamorous from the outside, it is a commoditized business for most players. For every empty seat on 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 aircraft costs millions of dollars. The government heavily regulates the sector and with this comes the high cost of operations.
2) How are airlines in India faring?
Domestic passenger traffic rose by 18.6% year-on-year to 138.97 million in the January-December 2018 period. More people are flying than ever before, but at the same time, many airlines have also shut shop. India’s second-largest carrier, Jet Airways, is the most recent casualty. This has led to a rise in ticket prices. Airfares, typically, are affordable only on a few routes: Delhi-Mumbai, Delhi-Bengaluru, Mumbai-Bengaluru and Delhi-Hyderabad. This is because of the demand-supply mismatch, with airlines not being able to offer more flights on these routes as airports have not been able to add capacity.
Some of the carriers that have closed down in India. (Photo: livemint).
3) What is the Centre doing to promote aviation?
The Centre’s UDAN scheme aims to make flying affordable. The scheme connects underserved and un-served airports in India. The fares are capped, with the Centre subsidizing airlines.
4) Why is the cost structure high?
Except the five private airports— Delhi, Mumbai, Kochi, Bengaluru, Hyderabad—most of the others are run by the government-owned Airports Authority of India (AAI). Airlines pay several charges to airport operators, both private and AAI, besides separate charges for landing, route navigation, parking, terminal, fuel and royalty. Larger and heavier a plane, higher are the charges. Airlines have to send their planes abroad due to lack of maintenance, repair and overhaul facilities in India, but get no input credit for taxes paid abroad.
5) How are some norms hurting the sector?
Till 2016, the government had a self-defeating rule of 5/20, which meant an airline had to operate for five years in India and have 20 aircraft to be able to fly overseas. This limited its ability to earn more revenues. Airlines now need to operate only 20 aircraft on local routes to start flying abroad. The Centre allows 100% FDI in airlines, but has capped it at 49% if a foreign carrier wants to invest in an Indian firm. Aviation is a highly capital-intensive business and FDI curbs prevent it from acquiring new technology and best practices.
Dhirendra Tripathi – livemint
