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The sad story of airlines

Apr 17, 2009

Aviation is arguably among the most difficult industries from the owner's perspective. It suffers from disadvantages in both input costs and pricing power. The highly capital intensive nature of operations and vagaries of crude oil prices make costs hard to control. The presence of many competitors and commoditisation of tickets due to travel portals exert a great deal of pressure on ticket prices. Little wonder then, that bad news continues to pour out from the Indian civil aviation sector. As per DNA Money, airlines have not hiked fares despite 3 hikes in aviation turbine fuel prices in the last 45 days to the tune of 18%. Airlines fear any hike will reduce air traffic which has already declined on a YoY basis. Basically, any hike in prices in nullified by decline in volumes, a tell tale sign of a commodity market.

Another article in the Business Standard reports how foreign airlines are pulling out of India. Apparently, high airport charges and a decline in premium inbound traffic has exerted a severe pressure on margins. In fact, leading international airlines have cut back on over 100 flights in the last 6 months. While the global slowdown has an impact on the aviation industry worldwide, the cost structure in India seems to be particularly bad. As per the article, airport charges are declining anywhere between 10% and 50% worldwide, but increasing in India to the tune of 10%.

In another story, The Economic Times reports that Jet Airways, one of the leading Indian carriers, is all set to cut nearly 400 jobs as part of a restructuring exercise. It plans to do away with offices in multiple cities and centralise back end operations to its Mumbai location. It also plans to automate services like passenger check in a bid to reduce the employee count.

While some of these factors might seem unique to the present circumstances, we believe the structure of the industry does not allow owners to breathe easy. During a boom, airlines suffer from over supply and skyrocketing fuel prices. During a bust, they struggle to fill the seats. Not the kind of business a long term investor would want to be in.


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1 Responses to "The sad story of airlines"

Mandar Vaze

Apr 20, 2009

Airline is a real bad business these days. Gone are the days when they were charging hefty price for carrying people around. Once schedule is announced, the aircraft has to fly. This puts downward pressure on prices airlines offer steeply discounted prices just to cover variable cost + tiny recovery of fixed cost (if they can). Its all good news for passengers as long as (and I hope so) they do not cut down on saftey related expenses.

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