Why Airline Companies fail in India?

It's Important to understand that there are several factors other than that of Company that may lead to collapse of an airline.

Image Credits: - SkyRefund

It's been almost a year when the oldest Indian Airline: Jet Airways had ceased operations. But, it wasn't the first airline to have ceased its operations. there were around 13 airlines that have ceased their operations till date. Understand, when an airline ceases its operations, its not only fault of the Companies alone, there are several factors behind it, including that of government.

In this article, the whole fault can be divided into three major categories: Company, Government, Other Factors.

Lets start: -

Image Credits: - Hindustan Times

Company Factors

1. Business Model: - Business Model defines whether the company will take the maximum share of market in the long run or whether it will miss out. Consider an example of Indigo: Its business model is low cost airline without any premium services. While the Vistara Business model is about charging a somewhat higher prices than that of Indigo but provide additional services to its customers. Its important for the companies to understand the needs of the customers, while Indigo understood it clearly that majority of Indians are price sensitive and don't really need and add on services, that's the reason the company is doing good it terms of growth. If we take into account what Jet airways was doing, Jet followed a model for Premium Pricing, i.e., it was charging somewhat higher prices than that of its competitors.That pricing only appealed to higher income individuals who were willing to pay extra for services.

2. Capacity Planning: - The demand is forever changing, there are seasonal factors involved, normally the airlines run in full capacity during festivals and Summer and Winter Holidays, rest of the time there is about 90 percent of Capacity Utilization. Now, as airlines fares are economical to customers, more and more people want to travel with airplanes. The result is higher demand and the companies need to make sure that they supply the customers with adequate seats. Since the companies have realised that in the coming years the demand is going to be more, they have placed an order for more aircrafts ( Like Indigo did in 2019 with 300+ orders ). Its good to have planned for future but its also unlikely that the demand will keep on increasing every year( especially after COVID-19) there are chances as described by some Analysts that the demand of seats will go down by at least 2 years. So, by the time aircrafts gets delivered to the companies, it will create a huge problem with unbalanced capacity.

3. Failed Mergers/ Acquisitions: - When an airline is struggling with its cash flows and is on the brink of collapse, the airline can still stay afloat by adopting some business strategies and measures, one of them being Merger. And that's what happened to Air Deccan and Kingfisher, Air Deccan had a huge debt pile so it got merged with Kingfisher( considered as one of the best airline during that time). Due to the merger, the debt was to be cleared off in a slow manner by the merged entity. Now, consider some of the expenses that are unavoidable that ultimately becomes debt if not paid on time they are:- Airport Charges, money paid for acquiring new aircraft, Lease money for aircraft etc. All of these charges amount to crores of rupees to be paid every year. Since, Kingfisher was not earning the margins from the tickets, its debt pile started increasing and one fine day the entire entity got collapsed. But, there is yet another reason for the companies to fail, if the merged entities have 2 different Business model wiz. Low Cost and Premium. The entities have to separate their Strategies and decisions from one another and, that what went wrong with the Jet Airways and Air Sahara Merger, Jet didn't separate the decision making part and operated as one entity which ultimately led to its collapse.

Image Credits: - Wix.com

Governmental Factors

1. Infrastructure: - The demand of the travel industry will rise again (after coronavirus). But its predicted that the demand will not be the same as it was in 2019, as more people continue to afford travelling in airplanes the demand will continue to soar in year on year basis. With the demand rising there will be a huge pressure on the governments of Tier 1 cities to continue upgrade the infrastructure facilities and build up more space in the airports so that there isn't any congestion in the airports. Considering an example of Mumbai Airport which can only operate one runway at a time( as its around the city). But, the problem is that unless the proposed new airport comes up Panvel, the congestion in the airport will remain due to which the airline may not get the slots to land there. Also if there is any delay from the airlines part, the companies need to pay fine for the time delayed in making the aircraft airborne. And, these fines also comes costly.

2. Huge Costs : - The government Entity which regulates and controls the airports across India AAI ( Airports Authority of India). is one of the costliest regulators across the World( India ranks in the Top 20 countries where airport charges are way higher as compared to other countries). As the result the airlines have to pay a higher price when their aircrafts land in airports across the country. Its estimated that the airport charges are actually 7-8 percent of total cost for the airlines( depending on the city, the above figure is for Delhi Airport). The are also the taxes related aspect which make the costs even more higher.

3. GST in Turbine Fuel: - From the past many year many of the companies were asking the government to move ATF into GST structure, since the various indirect taxes were more. The government did, but the thing is that it has made two tax slabs for different class of passengers wiz, for Economy class there is 5% gst, whereas for the Business class there is 12%. This changes the cost structure completely. The ATF is the one of the most expensive in the entire cost structure according to one of the reports, the Jet fuel costs around 35- 40%. This is one of the reasons why the Jet Airways collapsed as they were unable to bear to expenses of high ATF according to the different variants of the aircraft.

Image Credits: - Medium.com

Other Factors

1. Price War among the companies: - India is a price sensitive market, a premium Business model may not prove to be that successful here in this market. Consumers prefer to spend less on the ticket charges and also on the add ons provided by the companies. So, in order to get more customers what companies do is to keep the price of the ticket as low as they can, this ensures that the airplane is filled to its full capacity even during the non-peak season. Now imagine that you are in Top management of one of the premium companies i.e., Jet Airways, what you see is the price war going in your competitors .So, you come up with a strategy to reduce the prices of the tickets but keep it well above what the cheapest airline is offering( for premium charges). You see that you are attracting customers at a slower rate than that of your competitors. The result is that your airplanes get half booked and that leads to a loss in a trip.Its not the fault of the company but in this cutthroat market this is exactly what happens.

2. Unexpected Events: - The World never stays same every year, there are many things happening around the countries, nobody can predict anything about the future. As of 2020, this year is going to be remembered throughout many years to come, particularly for the airline industry in India. Since, the lockdown which lasted for 2 months, it has resulted in burning of huge amounts of cash from the companies. Now, there are many fixed charges that cannot be avoided like that of parking, airport, taxes etc. If an airline isn't operational for a single day, it still has to pay these expenses from its cash flows(which is huge, depending on the number of aircrafts). So, if the company hasn't operated for 2 months straight, it's clear that by this time, the company would have almost burned up its reserves.

These were some of the major factors, however there are some more minor factors which may lead to the collapse of an airline. Altogether it's important to understand that the companies must be very cautious while taking any major step and has to specially check the Economic and Political Environment in a much deeper way.