The short answer to this question is – Most companies in this industry never make any money ! Sure they make money once a while, but over a period of time most airlines loose money. As a whole the industry has lost money for its investors over a period of time.
If you don’t believe me, following is the list of airlines since early 90s, which closed down or got bought out by other airlines.
Air Deccan , Air Sahara , Archana Airways , Crescent Air, Damania Airways , East West Airlines , Himalayan Aviation, Indian , Indus Air , Kalinga Airlines , MDLR Airlines , ModiLuft, Paramount Airways , Skyline NEPC , Tata Airlines , Vayudoot.
Do you think the airlines which have survived such as jet airways or kingfisher are making money ? Kingfisher’s troubles are in the news and jet airways has lost money in aggregate over the last 5 years. The other airlines are not doing much better.
If the above reasoning is not sufficient, read on
Let’s look at the competitive structure of the industry
There are some entry barriers in the industry in the form of capital requirements and license. These barriers make it difficult for a small time entrepreneur to start an airline in India, but any one with deep pockets and a desire to burn money can get the required permissions to start an airline.
The entry barrier may be tough, but the exit barriers are even tougher. Once you start an airline , it is not easy to unwind it. It is difficult to layoff the employees and sell off the planes. In most cases, airlines have generally been sold off to competing airlines for a fraction of the cost of setting it up.
Pricing and competition
Competition in the airline industry across the world is Kamikaze behavior. It is generally a race to the bottom as airlines compete on the basis of price. The majority of an airline’s costs are fixed – cost of an airplane, fuel and salaries do not vary with the number of passengers flown.
In addition the perishable nature of the product (an empty seat on a flight is a lost forever), the incremental pricing is generally based on the marginal cost of revenue which is the cost of the peanuts or snacks on the flight.
So an airline looses money whether it flies a half empty plane or drops the ticket price to fill it up. Finally in times of peak demand, a hike in the ticket prices has led to a lot of howling and pressure from the government to cut down the price hike.
In such an environment, is it a surprise that most airlines in india loose money ?
Power of suppliers
Who are the suppliers to this industry ? They are the aircraft manufacturers, the fuel providers and finally the unionized pilots and other employees. I don’t think most airlines have much leverage with the aircraft manufacturers or can negotiate the price of fuel . In addition pilots and other personnel are unionized, so airlines really cannot fire them or reduce their pay easily.
In terms of the cost structure, airlines are pretty much stuck between a rock and a hard place
Irrational behavior of the largest airline in India
I now come to an emotional topic (atleast for me ) – Air india !. You will have to excuse me for the rant and can choose to skip the next few paragraphs.
<start rant > Why the ***@@ is the government running an airline ? We are not a rich and developed country with too much money lying around. Air india has always lost money and now has accumulated debt of 45000 Crs and operating loss of 22000 Crs (there is no typo in these numbers !). The government is planning to pump in 10 billion dollars over the next 10 yrs into airindia !
Can you imagine the waste? . In a poor country like india this money can be spent on infrastructure (roads, schools) healthcare or education. Heck, even if the government decided to just give away this money to people below the poverty line, I would be fine.
The government in its infinite wisdom continues to run the airline run for politicians and babus. At the same Airindia prices tickets below cost on several route to increase the utilization factor (on which it is measured) without concerning itself with the profitability of such a decision. This kind of behavior has caused losses for the entire industry which has to match the pricing of the most irrational player.
By the way, an airticket priced below cost is an indirect subsidy to people like me (who don’t need it). < end of rant 🙂 >
Future of airlines in india
Any industry with such poor economics is bound to loose money. This has been the case for airlines in the US and other countries. In addition, we have the largest airline in india (air india) which is not run with any profit motive. In such a situation it is difficult to imagine if any airline will consistently make money over the next 10 years .
In investing, sometime discretion is the better part of valor. I will buy a ticket to fly (kingfisher is my favorite 🙂 ), but will never invest in an airline.
Atleast when I fly by jet or kingfisher the flight is good and the airhostesses are pretty 🙂 . That is money well spent !