The collapse of India’s largest and most successful private airline Jet Airways brings into focus the centre’s policies where full service carriers are left at the mercy of LCCs which dictate fares to price-sensitive passengers
By Jitender Bhargava
“Affordable” fares are the bane of the aviation industry.
“The main causes of the losses are to be found, not in high operating costs, but in the uneconomically low fares and mail rates and the crushing burden of fuel taxation imposed upon it.”
Any guess about when this statement reflecting the state of the Indian aviation industry was made? Many would say recently considering that many airlines have collapsed during the past two decades, some losing heavily and struggling to survive and others just managing to make modest profits.
It may come as a surprise to many that this statement was made on June 22, 1953 by none other than the legendary JRD Tata, the father of Indian civil aviation, while delivering a speech titled “End of an era” after the government decided to nationalise the air transport industry.
The relevance of this statement 66 years later speaks volumes of how this sector has been managed by successive governments. JRD Tata made another pertinent point which is just as relevant today and needs to be heeded to ensure that airlines are economically viable and do not collapse due to losses. Tata said: “While the fundamental requirement was of a small number and efficient operators”, Abdur Rab Nishtar, the minister for communications (there was no separate civil aviation ministry then), “encouraged a ruinous scramble for route licences by a large number of concerns created almost overnight.”
Even though Tata gave India a head start in aviation, one feels sorry that the country neither built the industry on the foundation he had laid nor deemed his words of wisdom worthy while taking decisions regarding the sector. Alas, if his sane suggestions had been heeded, Indian aviation today would have dominated the global scene because of the sheer size of the burgeoning market instead of seeing foreign airlines monopolising India-originating international air traffic.
FOR THE ELITE?
One of the tragedies of Indian aviation has been that till a couple of decades ago, it was seen as an industry for the elite. The government did not feel the need to invest in airport infrastructure or airlines. Even self-sufficient Air India, which in the early days did not rely on government funding for survival as it does today, was discouraged from expanding its fleet and network.
When wisdom finally dawned in the early 1990s that air connectivity, which acts as a catalyst for economic growth, needs to be encouraged, the steps taken were inadequate and haphazard. This reflected lack of expertise and vision. Quite like the pre-nationalisation days, anyone interested in setting up an airline, some literally overnight, were given licences. As a consequence, almost a dozen airlines—East West, ModiLuft, Damania, NEPC, to name a few, vanished from the scene within months and years of being set up.
One of the reasons why many entrepreneurs flocked to start an airline when the skies opened up to the private sector was because it has a high glamour quotient attached to it.
As India did not have a national civil aviation policy till 2015—it was in the works for three decades—it facilitated framing of policies keeping in view the interests of airline promoters. This severely affected the performance and growth of many airlines.
Naresh Goyal, the promoter of Jet Airways, the only one to have survived from among the airlines that were established in the early 1990s, will be remembered not just for giving India a world standard airline, but also for his manipulations to benefit his airline. Even though he entered the business when his competitor was only the government-owned Indian Airlines (IA), which wasn’t known for quality services, he ensured he did not have to face competition in the formative years. He did so by not only forcing IA to withdraw from profitable routes and substituting them with Jet flights, but putting road blocks for new entrants in the airline business by influencing policy decisions.
One of the first victims was the Tata group, which in partnership with Singapore Airlines, was intending to start an airline. Through political brinkmanship, Goyal derailed the plans through the introduction of a policy that barred foreign airlines’ participation in domestic airlines.
When he came out with an IPO at a huge premium, he ensured that the government’s nod for international operation preceded the launch date. Likewise, before he launched international operations, he ensured the introduction of an unprecedented policy – only those with five years of domestic flying experience and a minimum fleet size of 20 aircraft could qualify. This was a devious design to ensure that no other airline operated on international routes and he had only Air India to contend with.
In 2011, Kingfisher and Jet, both private full service carriers, were in deep financial distress even though banks, oil companies and airports were extending a helping hand to keep them operational. Banks had even gone to the ludicrous extent of accepting tag lines such as King of Good Times as collaterals from Mallya. But when the banks were not in a position to lend any more, the government decided to allow FDI from foreign airlines up to 49 percent. This could have been a breather for the struggling Kingfisher, but it is alleged that Goyal, who was then against the policy, got its introduction delayed till Kingfisher collapsed. He subsequently became a supporter of the policy and used it to sell 24 percent equity stake to Abu Dhabi-based Etihad at a huge premium. Value addition was again facilitated through government largesse – grant of a record 50,000 seats per week on the eve of signing the deal.
Even as Etihad deputed officials to manage Jet Airways, which Goyal had to accept due to a dire need for funds, he began shunting them out when financials improved in 2015. He did not emerge as a trustworthy partner. He knew only one way to survive – oblige and win over. Children and relatives of many DGCA officials were employed by Jet Airways; two former civil aviation secretaries with whom he had closely interacted with for getting approvals were appointed on the board of Jet.
When Jet Airways faced an existential crisis in 2018, he began scouting for funding. However, his reputation preceded him. Whether it was the Tatas, Etihad or lenders, all wanted him out of Jet Airways before infusing money. His past karma had caught up with him. Even though lenders managed to make a reluctant Goyal step down from the board before initiating the bank-led resolution plan in March-end, he seems to have successfully transferred the headache of the airline’s revival on to the lenders. This was so much so that the employees of Jet Airways aren’t blaming him for the airline’s downfall, but the lenders. Goyal certainly knew how to play his cards well.
UNSUSTAINABLE OPERATIONS
Indian aviation, like the rest of the world, has two kinds of airlines. FSCs that offer amenities like food, better seats, entertainment system, frequent flyer mileage points, etc, and low cost carriers (LCCs) which provide only basic transportation with no frills. The concept of LCCs in India was introduced by Capt GR Gopinath when he launched Air Deccan in 2003. It was later acquired and merged with Kingfisher Airlines. After Indigo, SpiceJet and Go Air entered the market, it became increasingly evident that Indian passengers were hugely price sensitive and had a distinct preference for LCCs as they offered value for money.
As both models co-exist with different business models but chase the same customer, FSCs have to compulsorily pitch their fares close to that of LCCs, which have conventionally benchmarked their fares only marginally above the costs. FSCs, therefore, are unable to recover the cost of producing a seat. And therein lies the unsustainability of FSCs.
When airlines record losses for prolonged periods, they are bound to starve for resources at some stage. While banks liberally bankrolled these loss-making operations, largely under political pressure and without proper due diligence, the promoters paid scant regard to the economics of managing a full service airline. Kingfisher collapsed in 2012 after never making a profit. Mallya forgot that unlike his liquor business which has profit margins of over 100 percent, airline business, even if efficiently run, doesn’t generate more than 2-3 percent surplus. The demise of Kingfisher was attributed more to his flamboyance and extravagance than to the perils of market dynamics. An overwhelming majority of Indian passengers are unwilling to pay more even for a high quality travel experience.
Other FSCs failed to read the message that the collapse of Kingfisher sent. Air India and Jet Airways, the other two FSCs, continued to report losses in their quest to retain/garner market share at the expense of profitability. Air India failed to make profit even once in the past decade and Jet Airways has been able to do so only occasionally, notwithstanding the sustained market growth and high load factors.
When Indigo and SpiceJet, the two listed LCCs, reported losses in the quarter ending September 2018 due to the combined impact of rising fuel prices and depreciation of the rupee against the dollar, Rahul Bhatia and Ajay Singh, the promoters of these respective airlines, publicly acknowledged that existing fares were unsustainable and needed to be increased. With both the carriers accounting for almost 60 percent of the domestic market share, the initiative had to come from them, but they did not act on their own words. Fares in Indian domestic market are amongst the lowest in the world even though cost parameters aren’t very different.
LOW FARES
Low fares are being retained by LCCs to provide an artificial stimulus to ensure double digits growth. The gradual reduction in capacity of Jet Airways due to grounding of aircraft for non-payment of plane lease rents and the resultant rise in air fares, up to 30-40 percent in some sectors, have more than reinforced this fact. Indian air traffic growth was reduced to a mere 0.14 percent in March 2019.
There are almost 900 aircraft on order by Indian carriers, out of which over 600 are by the three LCCs—Indigo, SpiceJet and Go Air. These airlines, naturally, have an interest in stimulating growth to ensure that future aircraft are gainfully deployed. While low fares help LCCs recover their costs, FSCs lose out big time and profits are a bygone word. With under 30 percent domestic market share, FSCs are in no position to either dictate fares or change the psyche of price-sensitive passengers. FSCs are truly at the mercy of LCCs. Hence, their only salvation lies in periodic funding.
The collapse of Jet Airways thus needs to be attributed to Goyal’s failure to read the writing on the wall and not tweaking the business model to conform to market realities. Air India, as a government-owned airline and assured of funding, continues to operate unmindful of the losses being incurred year after year.
Is there then a need for the government to regulate fares and capacity induction to ensure that overcapacity does not lead to uneconomical fares? A call will have to be taken on this, sooner or later. Protagonists of free market can vehemently argue that in a deregulated industry, market forces should be allowed to determine the fate of airlines. However, those concerned about banks risking their funds in airlines, employees about losing jobs and soaring fares advocate sustainability for the airlines through government intervention.
In the aftermath of the Jet Airways collapse, there has been a clamour for the government to rescue the airline through funding, largely dictated by the need to save the jobs of 22,000 employees. If governmental intervention is indeed expected by employees, why shouldn’t a semblance of intervention in regulation of the industry be considered too? It is high time this was debated as we can’t have a scenario of an airline being grounded every few years.
Let us pay heed to what JRD Tata said: we need a small number of airlines which are efficient and uneconomical fares need to be looked at too so that losses suffered by airlines do not lead to elimination of some and monopoly by others. The government should realise its folly of seeking affordable fares so that the common man can fly while taxing the industry heavily, bringing into question the very survival of airlines.
—The writer is former Executive Director, Air India and author of “The Descent of Air India”.