Airline firms can soar if government loosens its grip

Pulp fiction writer James Hadley Chase named one of his books “Just a Matter of Time” which became quite popular in the seventies. It might just be a matter of time before the Indian airline industry begins to flounder.

India has become a graveyard for domestic airlines. At least three big and six to seven smaller airlines have closed down in just over a decade. Many believe that if airlines in the West can turn around, so too can airlines in India. Unfortunately, such turnarounds are unlikely in India.

The Indian government and politicians have always viewed flying as a luxury and hence reforms in the sector are on the slow track. This, perhaps, is the reason for the airline sector to post continued losses. Jet is a prime example of an entity which in spite of being a legacy carrier, ran out of money and had to temporarily shut down operations.

Preferred choice

There is no denying the fact that in spite of heavy taxes, air travel is now the preferred choice of an increasing number of Indians. According to the regulator, Director General of Civil Aviation (DGCA), there has been a 19% increase in the number of domestic passengers travelling by air to 13.9 crore in 2018. This percentage is at least three times higher than the global average of 6.5% for the same period. Even at a lower base, the airline sector in India is growing at a faster clip than the average global industry growth.

The paradox is that the airline sector in India is perhaps one of the most heavily taxed industries in the country. According to the airline trade body, IATA (International Air Transport Association), fuel accounts for 24.2% of the total cost structure globally. In India, it is about 34%. Between January and March this year, fuel prices have grown 9% adding to the misery of the domestic airlines.

According to industry analysis, if the crude price is $60, even a 5% drop in yields (average fare per passenger per mile) can result in a profit of ₹611 crore for an airline like IndiGo. If the crude price were to increase to $70, then the yield will have to increase 5% to get profits. As of now, the Brent crude price (Brent is a trading classification for sweet light crude oil especially used for jet fuel) is trading at $69-$70 per barrel.

On its part, the government has been introducing policies to benefit the airline industry like the UDAAN scheme (regional connectivity scheme) to increase connectivity between the hinterland and the main cities of the country. It has resulted in an increase in flight movements between a tier 3 city and a metro but as the founder of Air Deccan, Capt G R Gopinath pointed out in an interview, policies like UDAAN are good on paper. An airline flying under the UDAAN scheme should be allowed other incentives as well. It should be allocated at least 25% of the total flights in metro cities to regional airlines. Hence, the UDAAN scheme has not found enough traction among the airlines. Nor has any new regional airline been launched in the recent past though there have been few which have closed down.

What US experience has shown

Compare this with the airline sector in the US. A decade after the 9/11 tragedy, the airline industry lost about $55 billion and 1.6 lakh jobs. Considering the magnitude of the tragedy, it should have completely crippled the industry but airlines managed to recover and some of the larger ones have posted healthy profits. One of the reasons for this to happen could be because there is very less intervention from the government but it has pitched in whenever needed. Soon after the 9/11 episode, the US Government launched an air transport stabilisation fund worth about $10 billion. The fund was allocated to the airlines depending on their respective shares. It did not initially help much but US Airways came out of the bankruptcy protection because of the fund.

The airline industry is getting buried under mounting debt and losses and if it has to come out of such a mess, the government should keep its hand off the sector just as it did with the IT sector and allow market dynamics to take over. Only then the airlines will be able to grow.