Airlines - A BOOM That Never Was

Analysing a subject In hindsight from an economist’s perch is a privilege few enjoy. Imagine the sheer gratification of telling everybody how fundamentally inaccurate they were, how not following the basics actually resulted in disastrous outcomes; if only you had asked yours truly for guidance! The present downturn in the aviation industry, with all its associated convulsions, throws up just such an opportunity. To project an insider’s view on the subject was too much to resist. Moreover, in the interest of the aviation fraternity, it was imperative that certain issues be put in perspective.

Aviation in India was revered as a holy cow for over five decades, a party to which attendance was by invitation only. The protagonists were expected to have either family or political connections. Indian Airlines, Air India and Vayudoot, followed by its new avatar, Alliance, were the only players. Entry into the charmed circles was well denied to the commoners, with the exception of a few. Expansion was limited or even unheard of. Recruitment rare. Inroads were made by a few outsiders like Jet, Sahara, EastWest, NEPC, Damania, Modiluft and Jagsons, but most could not stay the course and wound up, some of them unceremoniously. These fringe players, nevertheless, did manage to shake things up a bit. They did add to the capacity.

Several pilots, who were languishing without jobs for over a decade, suddenly found themselves in demand. This was also a period where the public sector giants were shaken out of their cosy, comfort zones. There was, of course, little to benefit the common man. A tacit understanding between all players, public and private, seemed to exist. Ticket prices were more or less uniform; the only difference being in the service. Those were still the days when exorbitant airfares made flying prohibitive and the term Revenue Model was unheard of. Owning an airline happened to be a fad. To put things in perspective, at least a few of the players were one aircraft wonders. One particular airline continued to be so for quite a few years.

Anyway, bad maintenance, insufficient finances, poor regulation, lack of vision and inefficient management hastened the demise of most while a couple of resilient ones held on. In their wake, the defunct airlines left behind mountainous debts, shattered reputations, unemployed pilots and smirking public sector players. Few such as Jet Airways and Air Sahara continued to limp along. The industry then faltered to deceive. The Indian elite class, who were just getting used to some efficiency and comfort, were rudely thrown back into the arms of the dreaded public sector behemoths. For the record, this rise and fall of the aviation industry coincided with the commencement of liberalisation and the subsequent hiccups in the Indian economy.

Credit for the current boom in civil aviation is generally attributed to Captain G.R. Gopinath who entered the sector with his baby, the Air Deccan. No debate on that certainly. Pilots, cabin crew and ground personnel even went vocal with their gratitude for the break provided by Air Deccan. While Gopinath pioneered the concept of low-cost airlines in India, his own model ultimately failed and he was compelled to sell out.

Soon after Gopinath’s pioneering step, there was a scurry; anybody who was somebody wanted to start an airline. Fabulous pictures were painted of a prosperous Indian middle class eager to embrace air travel; impatience to splurge was created where none existed. Hundreds of aircraft were ordered, press releases made fantastic claims, new airlines were launched, traffic created, pilots poached—and revenue models conveniently ignored. The big names to join the party were Kingfisher, Paramount, SpiceJet, GoAir and Indigo. The celebrations continued.

The so-called boom that began in the fourth quarter of 2004 was characterised by extremely low priced tickets—something as ridiculous as a rupee. There was a mad rush by school children to discontinue higher studies and head abroad to obtain Commercial Pilot Licence (CPL). Flying and ground training establishments and air-hostess training academies mushroomed across the cities and towns of India. Unrealistic pay scales induced even well-placed professionals from other fields to throw up their careers and fly off to destinations far and wide for a CPL.

Skills, passion or dreams, leave alone competence or safety, had little to do with this new-found passion. The party continued, the charade painfully maintained. A game of passing–the-parcel began. The first to realise that we were staring at a mirage was Air Sahara’s Subroto Roy, who said as much. Well, he got away rather handsomely and Naresh Goel was left straddling the baby, Jet Lite. This also in a way signaled the beginning of the end. Not long afterwards, it was Captain Gopinath’s turn to get lucky. It is not certain whether the Captain was smart, lucky or just chanced upon Dr Vijay Mallya on one of the latter’s ego trips. The rest of course is history.

What Exactly Went Wrong & Where

Historically, airlines, with the odd exception, were not established to make a profit. The purpose of establishing an airline generally has been to show the flag, serve a social purpose, build a brand or add glamour to an otherwise drab business house. Also, once in a while, they pay their bills on time. Anyone who feels otherwise should not only be not running an airline but also needs to seriously consider getting out of the business of making money. When queried on a popular business channel, an analyst confessed that given a choice, he would any day prefer to fly in an airline rather than buy into its stock.

Only a few airlines have actually made a profit in the last 50 years; due largely to accounting gymnastics and insurance write offs. The business of running an airline is no different from any other trade. One has a vision, a revenue model, invests capital, hires capable people, develops a product, sells it with a margin and makes profit. In the interim, debt obligations are fulfilled, even as Risk versus Returns and Cashburn remain predominant and are never lost sight of. The aim of business should be to make money. Anything else is foolishness bordering on betrayal of the shareholders’ trust. The foundation of the Indian aviation industry was laid without any attention to these fundamentals. The governing factors were glamour, publicity, projection of image/brand, one-upmanship and in extreme cases, political currency. Thankfully, most displayed their intentions unabashedly. Where then was any chance of the industry taking off ? Bloodbath was a foregone conclusion. However, to be fair to industry captains, the script is the same all over with only a few exceptions.

High glamour quotient and projection of an image of prosperity bordering on the opulence have allowed airlines as an industry to have a misleading effect on shareholders, creditors and the public at large. Pomp and show displayed at various nation and international air shows of giants placing aircraft orders of astronomical proportions conveyed distorted images. Normally, prudent analysts have invested precious shareholder wealth at fabulous premiums, only to lose huge fortunes. At last count, there were at least 30,000 students who had left Indian shores to chase the coveted CPL in the US, the Philippines, Canada and Australia. Many had sold their properties, borrowed huge sums, relinquished well paid jobs, emptied parents’ savings and had given up their education only to face a bleak future.