Saving the Indian Aviation Industry from the Hazy Weather

By K. Siddhartha (Corporate Advisor and Aviation Buff) and Naleen Chandra (Aviation Expert and founder of NC Airways)

Jet Airways has more than 640 flights a day covering 45 domestic and 20 international destinations. With its fleet of 112 aircraft, more than 29 million passengers take Jet Airways flights in a year, and the airline generated more than INR 2, 395, 83 million revenue in FY ended 31st March 2018. Moreover, Jet Airways is going to add 225 B737 MAX fuel-efficient aircraft in its fleet over the next decade, and of which 11 are slated to join within this financial year. Despite such a rosy scenario, Jet reported a loss of nearly INR 7,676 million in the last fiscal year. In view of the losses, Jet Airways did not recommend any dividend on the Equity Shares for the FY ended 31st March 2018.

One day, Jet Airways told its employees that its finances are in bad shape, it can’t operate for more than 60 days without cutting expenses, including salaries. As a result, Jet Airways shares plunged as much as 7.8% in a day, the most in nearly 20 days. Analysts believe that high debt, surging fuel prices, a weaker rupee and slower growth have crippled Jet Airways. But, it is not something particular with Jet Airways; the entire aviation industry is struggling with such challenges. All Indian carriers are bleeding while trying to out-perform each other. Jet’s competitor and current market leader, IndiGo, is also a victim of this, reporting a 97% dip in profits for the first quarter of this fiscal. Indigo’s revenues have fallen after listing.

Surging fuel prices and a weaker rupee are indeed hurting all Indian airlines. Apart from the various macroeconomic factors which are responsible for the setback in the aviation sector, the situation becomes worse when easy loans from public sector banks have also dried up post-PNB episode. This is bad news for India’s aviation sector at a time when many have speculations of INR 10,000 million worth of investment in India’s aviation sector. But such issues are beyond any control. Every business, in general, and airline, in particular, has to be run in a professional manner. Otherwise, it gets eliminated by competition. It is the survival of the fittest.

Obstacles which are making Indian Aviation flight difficult

In addition to the factors responsible for the slowdown in the aviation sector, there are two biggest obstacles which are making the scenario chaotic rather than conducive. 

1. Government Policies

Why does the government tax ATF at such high levels? Still, there is no initiative from the government to reduce taxes. If the trend continues, one airline after another will quit the market. The taxation pressure is going beyond the threshold point; many players are on the verge of closure and the remaining are vulnerable to heavy losses.

2. Operational Risks

 There are two prominent events in the aviation sector which significantly wipe out gains made earlier. And the irony is –the gains remain nominal but loses are so severe that it takes just one stroke of it to wipe out millions of hard-earned money.

Remedies and Corrective Actions

Although the rule of thumb for success in the aviation industry is following a practical roadmap to create a growth-oriented sustainable future with enhanced guest experience, there are many strategic way outs to relieve the airlines with looming losses.

1. Cost Optimization

Many airlines are now trying several measures to cut costs incurred upon operational and non-operational activities. These include sales and distribution, payroll, and maintenance costs. Jet has already started layoff across departments like cabin crew, engineering, and ground handling. Salaries comprise almost 18% of Jet’s expenses. It is a very prudent method by Jet. It is unlike Kingfisher which continued to work in losses, took more and more loans from banks and then declared itself bankrupt in the last.

2. Fuel Optimization

Go for such airplanes that do not require any fuel for propulsion. Continue buying fuel-efficient aircraft and selling them at a premium.

3. Improvised Business Model

Airlines must start embracing LCC concepts, giving due respect to the urban middle class, and giving due attention to real-estate assets and other ancillary services.

4. Focused Sales & Marketing

Airlines must ensure that it seats should not go vacant at any cost. It must try to sell all seats till the last minute even if the fare becomes less than that of the LCC.

5. Acquiring Working Capital from Alternate Sources

Despite drawbacks, aviation business is one which is inherently blessed with certain unique features such as no transaction of any physical commodity, and above all, ability to secure money in advance. And, instead of approaching a bank for working capital, airlines should go to its valued patrons, for instance, they must introduce membership schemes, privileged schemes, etc., to raise funds.

Conclusion
Organically, the aviation industry can not generate enough revenue through operations to justify its investment. It can sail smoothly only when fuel price stays within limits and when the seats are 85% full. The moment any of these prerequisites are not met, the Airline starts staring at negatives. It is not possible for any Indian airline to raise fares whenever fuel price increases. Airlines afraid that there will be no buyers since most of them belong to the urban middle class, the segment which is very price sensitive and powerful enough to bring sudden disruptions. That is why airlines like Jet and IndiGo resort to sale and purchase of aircraft rather than increasing the airfare.