Why Airlines in India Struggle and What Could be Done

November 7, 2013 12:39 pm

indian airlinesBeing an aviation/aerospace enthusiast myself, I have been recently attracted to look into the reasons behind the continuing struggles of India’s airline businesses. This idea of airline operators in India, choking themselves for profit and scrambling their way through their operations, trying to stay afloat is something that is worth pondering about. After all, commercial aviation is an industry that is branded with huge investments and is visibly famous for being very lucrative for investors and an increasingly sought after travel service, world over.  The risks and troubles of this industry are often exposed by shut-downs and mergers among the airline operators.

I am, by means of this research attempting to bring out certain set of “obvious-yet-overlooked” facts that otherwise would lead to viable solutions for struggling airline businesses and the allied businesses that together make the commercial aviation industry in India. I am of the opinion that the Indian aviation industry has spent more than required time pondering over the problems without even acknowledging the underlying root-causes and attempting to create solutions. I am taking the privilege of suggesting the players of the commercial aviation industry in India, a few solutions that may help each member of the industry in preparing themselves for sustainable growth and development, possibly without having to beg or fight against regulatory bodies. The cure is there but it has ingredients and they need to come together and blend themselves. When they don’t, something has to be done to get them together. The rest of this post is going to deal with those certain set of causes, patterns and the corresponding ideas for a state of sustainable growth and development of the commercial aviation industry in India.

Introduction

It is a popular opinion among almost anyone even aware of the Indian aviation industry that the policies enforced by regulatory bodies are restricting airline operators from making profits. This opinion coexists with the counter argument that accuses the airline operators of pricing their tickets too low for the sake of market share.

The civil aviation regulations and taxation policies alone cannot be held responsible for the “Sick” nature of the airlines trade. There are other significantly influencing factors pertaining to airlines such as routine operational behaviour, management style, crisis-response, requirement-capability assessment and so on that tend to combine with the regulatory hassles to cause the trouble faced by airline operators.

The analysis of airlines’ performance with respect to their “Response-to-Market-Forces” and “Influence-on-Market” aspects would help us get a bird’s eye view of their interaction with the air travel market. This view is necessary to identify and assess the operational pattern that would describe the airlines’ response to and influence on the market.

Departures Made vs. Passengers Carried

If we are attempting to see what troubles a system, we need to know how the system has performed so far and gain a good understanding of the performance pattern. When it comes to commercial aviation, especially with passenger airlines, this idea narrows down to the concept of resource utilization in pursuit of meeting service demand.

As for the mathematical component of this analysis, I intended to do it in the comparative sense and therefore chose to compute the percentage difference on a month-to-month basis for both the “Departures Made” and “Passengers Carried.” This way, the comparison table can carry the comparison of the variation of the parameters under study.

Snapshot Overview

The table given below gives a big picture view of the comparative analysis. The highest values have been highlighted in yellow.

 

Comparative Snapshot: India's Airline Operations (2012)

Comparative Snapshot: India’s Airline Operations (2012)

Table given above can be used as a big picture capture of the Indian commercial aviation market with respect to the scheduled carrier domain. The highest values of each column had been highlighted in yellow for reference. The first distinct feature that captures the eye is the average monthly departures that give a clear first estimate view of the market share held by each of the airlines captured. In that regards, it has to be noted that excluding Air India and Indigo, the rest of the airlines put together would not match the departures of Jet Airways. A private airline has the largest market share beating the other private and government run airlines.

The second distinct feature that may be important for the discussion later on would be the monthly passengers carried by each airline, where Indigo, on average, has transported at least 25000 passengers higher than that of jet Airways, while still having done around 1600 departures lesser than jet Airways. This difference points at the capacities at which competing airlines had operated.

In terms of passengers per departure, Indigo’s international service holds the highest average of 150 which is just 1 greater than that of Jet Airways (International). But the distinction here is that Jet Airways (International) has maintained 149 with a monthly departure count of 3144, which is 2565 departures greater than that of Indigo’s international service.

Freight revenue is auxiliary yet important revenue for airlines. Cargo wise, Jet Airways seems to hold the majority of the market share by transporting over 12000 tons of cargo every month internationally and over 6000 tons every month domestically. However, excluding the international carriers, the domestic airlines have had a rather low cargo per departure value ranging between 0.03 to 0.77 tons.

It is also clear from Table.1 that the Indian airline industry has multiple players of varying sizes. Therefore the scale, scope and depth of operations vary to great extents from airline to airline. The variation range however gives us an idea of volatility in terms of revenue. The departures and passengers carried have varied significantly to all airlines which indicate that the revenue generated by the airlines would have had corresponding variations depending upon the pricing and operational strategies of the respective airlines.

 

Issues Faced by Airlines

The comparative analysis given above indicates that the airline operators have varied operational trends but face very similar market trends in terms of passenger traffic. They depend greatly on their operational strategies for revenues and have their pricing methods designed accordingly.

To get a close look at the issues, I spoke with a good friend of mine who happened to be an airline employee in the past, working in the technical services department of an airline that is not in visible operation any more. I thank him for his constructive contribution to this research. The issues based on the data collected from the interview and secondary research are as follows:

 

Loss of Market Share owing to High Pass-On Cost

The ATF prices and related sales taxes levied in India take up a major chunk of revenue generated by airlines in the form of fuel cost. The ATF price has a very volatile nature in the Indian market and the airlines have no other way but to bear the cost and pass it on to the passengers. This translates to increased ticket fares that in the long run forces passengers to switch airlines on the basis of ticket cost. The sales tax for ATF roughly varies between 25% and 30%, maintaining an average of 28%. Few states in India have 0% sales taxes on ATF but those are states that are least connected by airlines owing to very low passenger traffic to and from those regions.

The airport charges, as per the airline operators are very high, especially to those airlines that have a rather small scale of operation. The demand for take-off and landing slots in busy airports is high and therefore the cost of connecting busy airports becomes naturally higher for airlines. Again, the cost is passed on to passengers leading to an eventual loss in market share.

Owing to regulatory restrictions, airlines are forced to begin with a minimum number of aircrafts that is greater than one (depending on the category of aircraft). This forces the airline to lease more aircrafts and the cost of leasing, added to the related minimum equity requirements that have to be satisfied for operational eligibility poses a big entry barrier to those operators who wish to enter the airline industry with a low-cost or small scale business model. This increased initial cost motivates the operators to pick up revenue oriented pricing methodology that ends up resulting in loss of market share. As a result the airlines have to go through a longer gestation period before they realize a profit-earning operational trend.

Lack of Technology and Technical Expertise

As per the cancellation data of scheduled domestic airlines, released by DGCA, 47.9% of cancellations as of May, 2013, had been due to technical reasons. It has also been established that, excluding the large, established airline operators, those that have small-scale operations do not have enough technical expertise or infrastructure to meet the technical issues at all destinations connected by the airline. There are times when aircrafts face technical snags at destinations where the airline does not have technically qualified personnel or equipment ready to resolve such issues. The airline borrows the equipment from other equipped airline and sends its technical personnel from its home base. This forces a delay in operation as well as an increased cost of renting equipment along with transportation of personnel. Also, there is a popular opinion among aviation professionals that there is lack of technically skilled personnel to meet the technical requirements of newer aircrafts that are being introduced in the Indian aviation industry. This lack of technically skilled and certified personnel forces the airlines to have a weakly structured maintenance process that eventually fails to avoid technical snags that causes most of the operational delay.

Aircraft maintenance is an important aspect of the airline business and it needs careful assessment and suitable investment of resources. Maintenance works such as engine overhaul & repair tend to be an expensive affair for airlines and often times engine-related technical issues cause large financial losses to airlines. Lack of personnel and equipment only worsens this scenario.

The aircrafts used by airlines are for the most part, mid-sized to large jet aircrafts. Pilots capable and certified to fly these aircrafts are not easily available as all the training institutes that operate in India are not equipped to provide the necessary flight training with jet aircrafts. Select govt. aided training institutes have a few jet trainer aircrafts and only those pilots graduating from those specific institutes get ample opportunities. This in turn poses the restrictions on airlines from choosing the ideal aircraft for their business, forcing them to choose from select categories of aircrafts, based availability of certified pilots and related certified technical personnel.

Reduced Market Penetration due to Revenue-Based Pricing Strategy

As per the DGCA statistics, as of 2012, the total number of passengers transported by the Indian airline industry (including domestic and international) amounts to 7,00,49,250 which is roughly about 5.84% of the Indian population. With an increasing middle-class population with increasing spending power, the Indian airline Industry is yet to tap the entirety of the air transport market in India.

A large portion of travelers choose other means of transport owing to the fluctuating and high air ticket fares. Although airlines with small scale operations and a low-cost model attract passengers, they eventually fall back into the trend of revenue-based pricing strategy in order to cover their losses in the short run. This in turn restricts the airlines and the airline industry in general from further penetrating the air transport market.

 

What Can Be Done

Fuel costs, taxes, duties and regulatory restrictions are part of the market characteristics that all airlines have to endure irrespective of their scale and scope of operations. It is therefore required to create a solution mechanism or platform that can serve the airlines and other members of the aviation industry by means of collaborative ventures while not hampering the scenario of competitive coexistence. This mechanism shall not be based on the availability of regulatory exceptions but in fact be independent of the same.

This may be segregated into Synergies or Consortiums, where multiple players participate to help each other out. Each system may be established as separate collaborative entrepreneurial ventures. These systems would in no way enforce any type of mandatory participation from any member of the aviation industry. The willing participants will make appropriate contributions and share the benefit with the other members in a mutual manner.

Consortium I: Operator-Trainer Joint Venture

The first consortium of such kind would be that of the airline operators and technical training institutes that train personnel for the flying and maintenance streams of commercial aviation. Most flight schools and AME academies do not have access to jet aircrafts owing to high cost and therefore the personnel trained by them are dependent on the operators to hire them and train them further for appropriate certification before deploying them into their operations. This imposes a heavy recruitment and training cost on the airline operators. This situation is synonymous to both the flying and maintenance streams. The pilots who graduate out of most flight schools are trained on propeller driven aircrafts and therefore do not have any jet aircraft experience while they join any airline as a trainee pilot. Very few flight schools that are aided by govt. funding have jet aircrafts and only their pilots graduate with jet aircraft experience.

This consortium may be a multiparty joint venture business based on what may be a viable “Operator-Trainer Synergy” philosophy. In simple terms this would be a joint venture where the participating operators would collectively fund the establishment of a jet-aircraft related training infrastructure and the participating training institutes will fund the related civil/academic infrastructure. In exchange for the funding contributed by the operators, they will get custom-trained pilots and maintenance technicians trained by the participating training institutes and flight schools. The institutes will customize their regular course modules to suit the specific needs of the contributing operators. The jet aircraft and related maintenance training equipment shall be provided by the operators. The figure given below gives an overall schematic of this consortium:

 

Schematic of Proposed Operator-Trainer Consortium

Schematic of Proposed Operator-Trainer Consortium

Scale, Scope and Depth:

The initial scale of this consortium may be as minimal as possible, featuring just one jet-aircraft (trainer) and related equipment. The academic institutional infrastructure may be one institute built with a dedicated air strip. Leasing out an unused or abandoned airfield may be an option to begin with. Depending upon the operator requirements, operator specific training equipment shall be installed in the institute in a minimal scale but of complete and comprehensive nature. The scope of teaching may be subjective of the technical expertise requirements of the operators in the technical and flying streams respectively. These specialized courses may be regular coursework added with additional modules involving the concerned operator specific requirements. The students recruited shall be allotted specific operator upon admission based on the training and release commitments decided by the consortium. The recruitment of students may be subjected to both the operators’ and institutes’ collective supervision so as to enable transparency and avoid the corruptive institutionalization of the consortium by external parties.

The depth of this consortium may be restricted to the regional level to begin with and it may be gradually expanded to a national level, as per the growing demands and increased participation of operators and training institutes from other regions. The consortium may however have its management comprising of third party executives with the participating operators and institutes being represented by their own selected executives who may contribute but not control the executive management of the consortium. The training programs shall be designed such that they do not end up cannibalizing the stand-alone training programs of the participating institutes. This way, organizationally, the consortium may function as an independent entity to ensure an element of fairness in its operations. The detailed organizational design falls out of scope of this research and therefore not included.

Benefits:

The operators can design, alter or expand their operations without much hassle as they have an independent body working in sync with them to produce their required technically skilled workforce. Newer aircrafts may be chosen for operations depending upon the availability of its related training infrastructure available with the consortium. As the consortium will have an evolutionary design, it may be expected to grow over time. Its growth would directly reflect on the extent of diversification/expansion of operations by the respective airlines. Institutes may benefit by receiving suitable training fees from the consortium for training the personnel with custom-designed courses. This way the operators get their regular supply of skilled workforce and the training institutes get an opportunity to invest and generate steady revenue apart from their individual stand-alone training operations. The stand-alone training programs by the participating institutes would benefit by getting access to additional training modules and related infrastructure helping the institutes grow further.

 

Consortium II: Operator-Operator Joint Venture

The initial analysis of airline operations reveals that scheduled airlines, both domestic and international, depend on ticket revenue as well as freight revenue. Now air freight has its own restrictions on the means, modes and materials involved. A major disadvantage of transporting cargo via air is the fact that it is an airport-to-airport affair. The sender and receiver have to engage themselves to submit and retrieve the cargo from their respective airports on a timely basis. Although there may be independently operating businesses that handle gate-to-gate shipping, such services are often out of reach owing to cost and accessibility issues and the mere existence of such businesses do not hold any significance with respect to the freight revenue generated by airlines. Also shipping through airlines imposes a restriction of timely delivery at the destination airport and any delay in collecting the cargo may put the operator, customer and the airport resources in trouble.

This second consortium would be an integrated supply-chain mechanism with participating members being land-based logistics operators and airlines. The consortium would establish itself as an end-to-end shipping service provider connecting destinations that have an access to airports. The cargo may be picked up from the customer point, shipped via air through an available airline and delivered to the target destination. The service will provide an end-to-end shipping service to the customers. The figure given below provides a schematic of this supply-chain mechanism:

Schematic of Proposed Collaborative Supply-Chain Mechanism

Schematic of Proposed Collaborative Supply-Chain Mechanism

The infrastructure to be established would be the respective cold and dry warehouses suitable to hold different types of cargo. The trucks and trailer-tractors may be provided by the participating shipping service providers. The consortium may comprise mostly of service contribution from the airlines and logistics operators, other than the warehouses at each connecting destination.

Scale, Scope and Depth:

The scale of operation may be large enough to accommodate the participants and the operational constraints. The prime operational feature of this service may be the transfer of cargo from the airport to the warehouse/customer point as per the delivery requirements, thereby relieving the airlines of the burden of timely cargo clearance from airport premises. The scope of this consortium would be limited to those materials that qualify for air-transport. The depth of this consortium again shall remain regional to begin with and depending upon addition of participants, suitably expanded.

This consortium being a collaborative supply-chain mechanism, would require detailed design of each link of the supply chain, complimented with a robust scheduling methodology that enables all the airlines and logistics operators, a fairly-shared opportunity to carry cargo, while providing the customers of the service with a one-stop shipping solution at their doorstep.

This consortium, like the previous one, shall have an independent management with equal representation of the participating members.

Benefits:

The airlines will have an externally operating system (consortium) that may collect and provide sufficient amount of cargo on a regular basis such that the participating airlines always operate at their preferred load-factor range. The airlines will get an opportunity to compensate their sparely occupied aircraft with suitable amount of cargo and thereby can make up for the loss of ticket revenue by the freight revenue generated. On a flight-by-flight basis, this may not be very visibly profitable but in the long run, airlines would be able to reduce losses by the addition of this marginal revenue on a recurring basis. The initial investment in this case would also be minimal as the participating members may be higher in this case.

The logistics service providers who would contribute by providing their trucks and tractor-trailers would benefit by getting a source of continuous business, enabling them to have their vehicles profitable occupied. The trouble of price negotiation on a case-by-case basis is also significantly reduced, allowing the operators to effectively estimate their revenue and plan their operations accordingly.

The customers, mostly businesses, will have a new mode of shipping service that they can choose to ship cargo without having to coordinate with multiple operators. More businesses will come forward to ship through such services allowing the airlines and logistics operators to further penetrate the shipping market while still operating in their respective domains. The consortium being an independent body, would handle the burden of coordinating the elements of this collaborative supply-chain mechanism.

 

Pitfalls to be Aware of

Both the above mentioned consortium are nothing but an optimized version of otherwise existing business models around the world. The participating members, their relationships and their contributions however make these consortium unique. Such widespread entrepreneurial collaboration can bring together the otherwise segmented business world in India and can help the airlines in many different ways. The risk of such consortium is that, over time, they might evolve to establish an unfair monopoly that may contradict the laws that protect fair competition. It is therefore a necessity to ensure a systemic control over the mechanism of such consortium so as to ensure it does not enforce monopoly or harbour unfair oligopoly. The objective shall remain to be focused on the benefits of the participating members without destroying existing or growing opportunities that may benefit everyone. This is the prime reason, I propose to keep the managements of these consortium, an independently operating body, constrained by the binding agreement over performance levels and duly delivered benefits, financial and operational.

 

Simple Steps for a Safer Future

The airlines that have small-scale operations with a low-cost model need to assess their capabilities and constraints clearly and use the information obtained to design their operations. Following an already existing operational methodology with revenue oriented strategy will only force the airline to adopt the ticket pricing model quite similar to their competitors and other established airlines. This may eventually lead to an unintentional “Cartelization” of the ticket pricing, which may end up charging the passengers more to compensate for the empty seats that airlines operate with. This may in turn restrict many flyers from choosing other modes of transport, leaving the airlines to just meet the existing demand from those passengers who can afford to pay the high prices. This way market penetration remains a restricted strategic move for most of the airlines. The pricing methods must be developed based on the airline’s cost estimates calculated through real time analysis of operational data rather than following a randomly developed software system or following the competitors on a regular basis.

Establishing better aircraft maintenance programs with enough trained personnel, supported by suitable Annual Maintenance Contracts with MRO’s and manufacturers for expensive and sensitive aircraft components (such as engines). These maintenance contracts can help the airline weather any sudden technical snag that may otherwise cost more in the form of an incidental expense. Also the airlines need to make sure that they have sufficient manpower and equipment at all connecting airports, so that they can handle their technical issues management on their own instead of depending on other operators for equipment and other resources. These establishments should never be considered auxiliary as they are essential for the airline’s trouble-free operations.

It is a popular opinion among professionals in the commercial aviation industry that in any airline, the certified engineers get paid handsomely but the remainder of the technical and non-technical workforce handling the maintenance and ground operations are being paid very low salaries, because of which there is a high employee turnover. Continuous recruitment and training adds significant financial burden and to avoid that the airlines need to pay the workforce, suitable salaries. When the market is unstable and unreliable, there is no reason to follow market trends without a fact-based decision.

 

Conclusion

Having gone over the operations of airlines, we were able to identify and understand the operational volatility faced by the airlines and their corresponding issues that hurt the airlines financially. Although there are many regulation-based issues hurting the survival of India’s airlines, in my view, there are many issues that can be solved with changes to operational behaviour. The proposed consortium/joint-ventures may help the airlines and related businesses coexist in a collaborative yet fairly competitive environment in spite of the restrictive regulations, taxes and infrastructure deficiencies.

Having analysed India’s airline industry in my own little way, I feel that I have reached a point in my thought process where I am prompted to wish that if I had the money to get such big business models moving, someday, I will.

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  • MAHESWARI

    wait & see raj. your dream will come true. best wishes.

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