How Indian airlines are caught in a vicious circle of profitless growth
Both events will help the sector breathe a collective sigh of relief. At no time since the pandemic have things reached such a high for the industry. By June, things had gotten so bleak that airlines were considering a one-day collective strike. Almost all airlines fly well below their approved scheduled flights to save money. In July and most of August, Air India performed 65-68% of its approved schedule, while AirAsia India, Go First and
stole 40-55%. Only Vistara operates approximately 80% of its approved summer schedule.
Where logic takes flight
So why are Indian airlines still on the brink of collapse? Every few years, why do we have a new set of carriers dominating the sky? Over time, India has found itself in a situation where airlines are caught in a vicious cycle of profitless growth. Most make little or no money from their core business of passenger transport. Airlines fly various routes, total losses from core operations, then order more planes to fund the losses through the sale and leaseback of planes. Along the way, they occasionally earn income through non-aeronautical pursuits. Even those who run their business fairly well rarely make a profit. IndiGo last reported a substantial full-year profit in 2017-18.
The pandemic and the war in Ukraine have caused oil prices to plummet globally. Carriers in India have paid the price, with air turbine fuel (ATF) prices rising nearly 542% since May 2020. But what is less known is that while traffic has rebounded , it is still nearly 75% lower on a daily basis than in February. 2020, a lean month on its own. Airlines actually sell most seats below cost. This is precisely why out of every ₹100 of revenue, ₹75-80 goes to the oil companies, the biggest cost head.
This and other factors have led to a situation where the airlines totaled combined losses of ₹16,777 crore in FY2021, ₹20,000 crore in FY2022 and will exceed this number in FY2021. of the 2023 financial year.
A preposterous anomaly has made the airline economy unsustainable, unique to India. Indian airlines pay more for fuel than their foreign counterparts to refuel in India, as the former are charged at import parity price. In addition, fuel taxes for the sector remain quite high. An 11% excise duty is levied by the Indian government, which is aggravated by the state Value Added Tax (VAT) on top. It ranges between 3% and 25% which averages out to around 20% since the rates are 20-25% in high levy states like Delhi, Maharashtra, Tamil Nadu and West Bengal.
Calls to subject the ATF to the GST fell on deaf ears. In most other countries with developed aviation sectors, if and when a similar tax is applicable, airlines can earn an input credit on the tax paid. India remains an anomaly in this respect.
To fund the losses they regularly incur through their operations, Indian airlines place orders for planes to earn money through the sale and leaseback of planes. This leads to more and more capacity being added to the market, further reducing fares, making the economy even more unsustainable and resulting in more aircraft orders. It is the vicious circle of growth without profit.
On each plane ordered, the difference is about 5 to 9 million dollars. This helps some airlines fund their flight losses. It’s never been clear how many airlines bring that revenue onto the company’s books. The result of this has been that airline promoters often get rich even when the airline goes bankrupt. When companies fail, the losers are usually the lenders, vendors and employees, not the promoters or founders.
This also partly explains why businessmen continue to run or create airlines. Most new founders or promoters believe they can do it better than their rivals. The precedents showed them that they had nothing to lose personally. As such, the business is relatively debt free, without even the need for working capital loans, as rates are collected up front.
Government officials routinely dismiss airline woes as exaggerated and argue that companies are often mismanaged, blaming either the model or the management. But there is no denying that Indian airlines need to make money from their core operations, not by buying more planes. This is a structural problem that the industry faces and that only constructive dialogue and follow-up action between government and industry can resolve.