The Tide is Turning

After two years of gloom, the tide seems to be turning not only for the private carriers but hopefully for Air India as well

The mood in the airline industry in India appears to be generally upbeat these days. Since the last quarter of 2009, the volume of traffic has maintained an increasing trend propelled by rising demand for business travel. The impetus for growth in air travel has been provided by revival not only in the Indian economy, but in the global economy as well. Despite rising fares, both full service carriers (FSC) and low-cost carriers (LCC) are reporting decent load factors. During the recessionary phase, private airlines went through a number of corrective steps including the painful exercise of trimming excess capacity returning leased aircraft, leasing out their own and rescheduling delivery of new orders. The yields are now reported to be stable and encouraging. Some of the leading private carriers such as Jet Airways, IndiGo and SpiceJet have posted profits in the last quarter and Kingfisher is likely to do so in the near future. As per assessment by the Centre for Asia Pacific Aviation (CAPA), profits of the private airlines in India collectively could reach $300 million (Rs. 1,400 crore) in the current financial year. There is definitely a good reason for the private airlines to cheer as they seem to be emerging intact from their two-year long struggle for survival.

But CAPA is less optimistic about the performance of Air India estimating that its loss for the current financial year is about $700 million (Rs. 3,200 crore). Air India’s woes can be attributed to a number of flawed decisions and mismanagement especially during the last two decades. Running an airline is a challenging exercise fraught with risks. It is a capital intensive business, sensitive to a host of factors such as competition, changes in government policy/regulatory provisions, volatility in the price of fuel, epidemic, war and the economic upheavals. During the recent global economic meltdown, over 30 airlines in the US had to shut down owing to unsustainable business models.

In the nearly five decades of its existence, both Air India and Indian were able to withstand buffeting by many of these adverse factors with the government paying a heavy price for their sustenance. Profitability was really never an issue as these two airlines were the nation’s flag bearers. These were not run as business enterprises with financially viable business models, but as departments of the Central Government with characteristic inefficiency and associated ills. The emergence of the private carrier consequent to the liberalisation of the civil aviation sector in the 1990s changed everything for government-owned airlines—Indian and Air India. They lost monopolistic status and in the face of stiff competition, their market share shrunk rapidly. The success of the low-cost model aggravated matters further and on account of the rising financial burden on the government, it became clear that Indian and Air India had either to perform or perish. Two major decisions, one involving major fleet rejuvenation that entailed procurement of a large number of aircraft and the merger of Indian and Air India in August 2007 to form the National Aviation Company of India Limited, have generated controversy both within and outside the airlines. Since the merger, the combined entity has been operating as Air India and losses have continued to mount.