India’s domestic air passenger traffic reached a record high in 2023, with approximately 450,000 people flying domestically on April 30, 2023. The aviation ministry stated that this marked a full recovery from the impact of Covid-19, surpassing pre-pandemic peaks.
Data compiled by aviation analytics firm Network Thoughts estimated the domestic air traffic in 2023 to be at an all-time high of 15.2 crore passengers, surpassing the previous record of 14.4 crore passengers in 2019.
India is currently positioned to become the region’s fastest-growing aviation market over a period of 20 years. However, some Indian airlines are grappling with challenges. In May of the previous year, Go First, formerly known as Go Air, filed for bankruptcy. Surprisingly, just a year earlier, Go First was expanding its operations, acquiring new aircraft, and preparing for its IPO. Despite maintaining low operating and maintenance costs and having a 10% market share, Go First found itself joining the list of now-defunct carriers, including Air Deccan, Air Sahara, Kingfisher Airlines, Air Pegasus, and Jet Airways .
Go First’s Failure:
According to the company’s official statement, the suspensions occurred due to engine failures. However, was engine failure the sole reason for the company’s demise?
Understanding the airline's operations reveals that Go First, owned by the Wadia Family since 2005, leased aircraft from Airbus and sourced engines from Pratt and Whitney. The problems escalated when Pratt and Whitney’s engines started failing. By 2021, they had grounded around 30% of their aircraft, and by 2023, the number rose to 50%. In contrast, its rival, IndiGo, faced a similar issue but promptly changed its engine supplier to CFM International and sought compensation from Pratt and Whitney.
Go First also grappled with management issues. In 2021, its head, Jai Wadia, resigned from the role of MD, and in 2022, the company lost its CFO, airport services, and several senior executives, leading to a decline in customer service quality and subsequent financial losses. Go First incurred a loss of 1800 crores in 2022.
In General, Why Do Airlines Fail?
One of the most notable examples is Kingfisher Airlines, founded by Vijay Mallya in 2005. This airline saw a boom in a very short time and created a reputation for being a WORLD CLASS AIRLINE. It became popular among business-class travelers. By 2008 it also launched its international operations. Along with 250 daily flights, it had a 26% domestic market share. The strong start led to an impressive Skytrax rating of five stars when it came to customer service.
Despite rapid growth and a reputation for being a world-class airline, it faced accumulated losses of over $880 million within seven years. The primary reasons included poor governance, a flawed strategy of starting as a premium business-class airline, and the impact of the 2008 global recession, leading to increased fuel prices.
Let's look at some of the major reasons-
Governance and Strategic Decisions:
Kingfisher Airlines faced challenges due to inadequate governance and an unsustainable strategy. Initially launched as a premium, business-class airline, the company's balance sheet didn't align with its strong reputation. To address this, a merger with Air Deccan took place, segregating operations between the mainline and Kingfisher Red (formerly Air Deccan), focusing on low-cost services. The fleet included 24 A320s, eight A321s, and 27 ATR 72 regional units, aiming to capture middle-class travelers.
The onset of the global recession in 2008 intensified the airline's problems as fuel prices surged. In September 2011, Kingfisher disclosed substantial losses and eroded net worth to the Bombay Stock Exchange (BSE).
To offset losses, they raised prices for their budget airline, Kingfisher Red. However, a year later, operations of Kingfisher Red were halted. The leadership turmoil worsened as ex-CEO Alex Wilcox served for only two months, leaving the airline without a CEO for five years. Operated according to Vijay Mallya’s wishes, the airline faced accusations, and in February 2012, received a notice from the Airports Authority of India for dues of $32 million. On October 20th, the Directorate General of Civil Aviation (DGCA) suspended Kingfisher's license until a concrete revival plan ensuring safe, reliable, efficient, and sustainable scheduled air transport services was submitted.
Air India encountered a similar governance problem, making poor decisions like ordering 111 Boeings instead of the planned 10 Airbuses. This decision was influenced by negotiations with the USA on a nuclear deal, further straining the airline's finances. The substantial aircraft order exacerbated the financial challenges, reflecting a governance structure that failed to make sound strategic decisions.
India's Unique Aviation Market:
Governance is not only the reason behind airline failures, another reason is India’s Unique Aviation Market. The low-cost airline Air Deccan was sold to Kingfisher Group despite them having a market share of 22%. Its operational cost increased, which couldn't be compensated by the consumers because their prices were low along with the increasing competition.
The success of low-cost airlines in India is primarily attributed to their ability to offer affordable fares. Indian consumers exhibit high price sensitivity, preventing companies from adjusting prices in line with operational costs. This scenario creates a complex environment for airlines, where maintaining profitability requires a delicate balance between cost management and meeting consumer expectations. In 2022, Indigo experienced the impact of this market dynamic, incurring a substantial loss of Rs. 1,681.8 crores.
High Operational Costs - ATF Challenges:
A critical challenge faced by airlines is the consumer's demand for cheaper tickets, while the airline's costs are influenced by several factors, one of the most significant being oil. Specifically, for Indian domestic airlines, aviation turbine fuel (ATF) stands out as the world's most expensive. However, the complexity of ATF taxation exacerbates the situation, as it operates outside the GST network, leading to non-uniform state taxes.
Currently, ATF is subject to an excise duty of around 11% imposed by the central government, along with varying state-level value-added taxes. This discrepancy is evident even within states, exemplified by Maharashtra, where the VAT on ATF is 25% in Mumbai and Pune, but only 5% at other airports. This variation from airport to airport contributes to the changing costs for airlines.
According to Niti Aayog, the cost of aviation fuel in India could be up to 60% higher compared to prices in ASEAN and Middle East countries, primarily due to high central and state taxes. Globally, ATF constitutes 30% of an airline's operational cost, whereas in India, this figure rises to 45%. Given these complications and recognizing potential benefits, many airlines are urging the government to include ATF under the GST system.
Indian Rupee Exchange Rate:
One of the other major issues is the Indian Rupee Exchange Rate. Many airlines rent from foreign manufacturers and these rental agreements are in dollars. So if the valuation of the rupee is decreasing, an airline keeps getting money in rupees but the Airbus and Boeing have to be paid in dollars.
Lack of Government Bailouts:
Unlike many other countries where governments have provided financial assistance to airlines post-pandemic, the Indian government has not pursued such bailouts due to trust issues with the airlines.
External Factors:
Geopolitical issues, such as fluctuations in crude oil prices due to tensions between countries, impact the operational costs of airlines.
Conclusions
Apart from all these issues India’s aviation market is booming. India is currently the third-largest domestic aviation market and contributes around 5% to the GDP. As people’s income increases, so will the demand for aviation. Apart from the increasing middle class, the Indian government is also promoting the aviation sector. In 2016, the government announced the National Aviation Policy. Apart from this the Indian government also announced a new policy called Udan that subsidizes some routes to improve connectivity to smaller cities.
While the Indian aviation sector faces challenges, addressing issues such as high operational costs, governance structures, and strategic decisions can contribute to the sustainability of airlines. The government's role in implementing reforms, including GST on ATF, can further support the industry's growth. The aviation sector's importance to overall development calls for a balanced approach, combining industry initiatives and government support.