Questions have been raised over the future of the Indian aviation industry. Some of those questions have been prompted by prospects of a big churn aimed at survival of airlines. It may be too early to foresee a consolidation in the industry with airlines registering a dip in profitability owing to a combination of factors. Some ominous signals are available as airlines have begun to grapple with the rise in operating costs resulting from a spurt in fuel bill, depreciation in rupee against the dollar and lower per seat revenue realisation due to cut-throat competition.
Over-leveraging of companies’ balance sheets, escalation in aircraft lease rentals and burgeoning interest liabilities seem to have played out. But, low cost airlines appear to be better placed compared to full service counterparts whose overheads have virtually done them in. For instance, Jet Airways owned by Naresh Goyal showed losses of Rs 1,040 crore in the fourth quarter of last fiscal, i.e. January-March, 2018, providing enough fodder to hint at possibly India’s oldest private airline going into the red. The airline said it was confident of riding through the rough patch but reports of promoters seeking to offload some of their stake to mobilise liquid funds have set tongues wagging.
Meanwhile, the move to slash the company’s Rs 3,000 crore annual wage bill by about 25 per cent to cut costs may not go well with staff. Unless the company saves about Rs 750 crore to Rs 900 crore in wages for the next three years, sustainability and flying back into profitability will be uncertain. Pink slips may also have to be issued to cut flab. Jet Airways is not alone in hitting this air pocket with losses staring them in the face.
The massive dive in IndiGo’s profitability by 97 per cent in the April-June 2018 quarter pointed to serious stress in the industry. Indigo’s profits trimmed to a very modest Rs 27.79 crore as against Rs 811.94 crore reported for the same quarter a year ago. Increase in fuel costs by over 54 per cent and rupee depreciation seem to have contributed to Indigo’s woes. Interestingly enough, the 20 per cent growth posted in passenger intake and 89 per cent passenger load factor does not seem to have helped the airline. Unless the airline takes some corrective measures, prospects of the company slipping into losses are real.
Several other low cost carriers seem to be holding on for now even though their bottom-lines appear to have taken a hit. Tariffs taking a plunge and cartels not being very effective in manipulating the prices unlike earlier, airlines seem to have come under severe pressure to perform and stay afloat. The airline industry needs to reinvent and innovate to make the business work given the big untapped potential for air travel in India. One way could be to try cross subsidisation model, between air cargo, passenger services and other related businesses.
Limiting full services offering may be one option before older players like Jet Airways. In fact, it should look at SpiceJet idea to provide long haul international services on low cost model. Thirdly, diversification into related hospitality could help value accretion. Airlines can even consider cross-selling their services and products, cut marketing and promotion costs as also attempt generating new revenue streams.
From the policy perspective, there’s very little that government can do, as subsidising air travel may not be an option. In the melee, consumers may face the brunt as airlines cut corners. For airlines, getting the right model to sustain is the challenge.