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Go First has blamed its troubles on American company Pratt & Whitney’s “faulty engines” which caused grounding of half of its fleet. However, Pratt & Whitney has said that Go First had a long history of non-payment of dues. Go First’s engine woes are also due to its financial constraints due to which it deferred maintenance work during COVID, an ET report has pointed out, citing industry sources.
“Unpaid dues piled up and the airline didn’t pay it. Now demand has picked up leading to shortage in maintenance capability and of course the engine makers are giving first preference to the airlines which paid on time,” an executive with an engine manufacturer told ET.
Go First is not the first private airline to hit a dead end in India. The Indian aviation sector has seen so many airlines either go out of business or get bought after incurring heavy losses that it can be called the graveyard of airlines. From EastWest and Damania in the 1990’s to MDLR, Paramount, Kingfisher, Air Costa and Jet in the previous decade, the list of failed Indian airlines is long.
Airlines in India have had to face several challenges, besides general mismanagement, which impact profitability. Below are a few of them.
Fuel
A major chunk of operating cost in aviation is air turbine fuel (ATF). It usually comprises half the cost but can go steeply up depending on several factors. There has been a phenomenal rise in ATF price, nearly 60% to 70% in the past few years. International oil prices are sensitive to a host of global factors and can often play spoilsport for an airline which is otherwise doing well. Fluctuating ATF means a perennial instability built into the business. Wild swings in ATF prices can wreck an airline business. When dues mount, oil companies put airlines on a cash-and-carry basis which worsens the situation.
In India, ATF is heavily taxed. States impose a value-added tax (VAT) on ATF which could be as high as 30%. Aviation Minister Jyotiraditya Scindia last year wrote personally to 22 chief ministers to bring down VAT, arguing that a lower rate favours states as well since it means greater number of flights coming into the states and higher amount of refuelling. A large number of states have reduced VAT. There are also calls to bring ATF under the GST so that there is uniformity and more stability in price.
Since India is nearly 85% dependent on imports to meet its oil needs, the only way to cut ATF prices and bring stability to airline business is to reduce taxes.
Dollar
An appreciating dollar also raises the costs for an airline. Jet fuel, lease payments, maintenance and overhaul costs, along with aircraft purchases, are typically priced in dollars. When rupee depreciates against dollar, it increases day-to-day cost of operations, squeezing profit and cash balance. It makes overseas tickets more expensive, and can dent demand and shrink margins.
Fluctuating demand
Demand elasticity is a major challenge in the aviation business all over the world. Demand for air travel is highly sensitive to business cycles. It is one of the first sectors to feel the impact of a downturn because a low in business activity means immediate reduction in air travel. Air travel demand is also sensitive to global disruptions such as pandemics and conflicts. Fluctuating demand plays havoc with airline business since every seat going vacant translates into loss.
High fixed costs also become major concerns due to demand elasticity. When demand is low, airlines have to still pay salaries to all the staff. Airline staff, especially pilots, are highly paid. Most of the airline staff can’t be hired and fired at will because many, like pilots, are technical staff which is not easily available when needed. Airlines staff is also often highly unionised which means a company can’t lay off or cut salaries at will.
Planes make for a high fixed cost. They must be ordered years in advance since it takes a lot of time to build them. While placing orders for planes an airline must have a good idea of future demand. When the planes are delivered years later, the airline must pay up even if there is low demand and it won’t be able to use all its planes. Planes, even when grounded, cost a lot since they require regular maintenance and often they are sent abroad for it. If an airline does not have enough planes when the demand goes up, it has to lease them at a high cost. Airport costs too are high, especially for low-cost airlines, since India does not have too many separate cheaper airports for domestic airlines. Often, domestic and international flights operate from the same airport.
The government factor
Aviation is a sector highly regulated by the government and adhering to regulation means an addition to already high operating costs. Since the government itself used to operate an international as well as a domestic carrier, Air India and Indian Airlines, its policies were often seen as more favourable for its own airlines, making it difficult for private airlines to compete. The government has often been accused of protectionism by private players. The pampered and profligate government airlines, which had no pressure to adhere to market forces, had skewed the whole aviation business for private airlines.
In India, the government has regulated air fares, often capping them at a fixed price. Fare caps render a good chunk of operations unprofitable. It was the government airfare cap that had led to the rise of low-cost airlines in India, but intense competition means airlines can’t hike fares as much as they want.
Low profitability
Airlines is not an easily profitable business. As per credit rating agency ICRA, despite the high airfares, the airline industry is estimated to post a net loss of Rs 110-130 billion in the April 2022-March 2023 period.
Aviation may look glamorous but the aviation business is hard and rough. Cost can often mount to unmanageable levels; intense competition keeps fares in check; customers always seek low fares; raising fares can bring down sales; and it’s not easy to persuade customers to pay extra for better services and amenities. Aviation being a capital-intensive sector, it requires deep pockets and lots of patience for the business to do well. Success is based on building huge scale which requires loads of capital. Celebrity investor Warren had once said of the airline industry in one of his letters to shareholders: “The worst sort of business is one that grows rapidly, requires significant capital to engender growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers.”
While all these factors are present in the aviation sector of every country, Indian companies are more vulnerable to these because the aviation sector hasn’t grown much in India yet and per capita flying in India is still very low. Most private airlines in India have closed within five years of operation.
Over time, India has landed itself into a situation where airlines are caught in a vicious cycle of profitless growth, an ET columnist had argued last year. Most do not make much or almost no money from their core business of flying passengers. Airlines fly on various routes, tot up losses from core operations, and then order more aircraft to fund the losses through sale and leaseback of planes. Along the way, they occasionally earn some revenue through non-aeronautical activities. Even those who run their businesses quite well rarely turn in a profit.
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