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Why are Indian airline companies doomed?
Tue, 12 Nov Pre-Open

Most Indian airline companies are finding it difficult to generate profits. Regulatory hurdles, high cost of fuel, depreciating rupee and declining occupancy amidst slowdown in business environment has made their life difficult. The situation is so grim that auditors of three listed airline companies namely Spice Jet, Kingfisher Airlines and Jet Airways have expressed reservations over their going concern status. In other words, these companies are well on death bed and can face bankruptcy if their financial position does not improve soon.

The trouble brewing at Kingfisher Airlines is in public. The airline is grounded. It has loads of debt which has been recalled by banks. Net-worth of the company is also in the negative. Continuing losses has wiped off the reserves on balance sheet. It's accumulated losses till date stood at Rs 160 bn. Thus, it is pretty evident that the company is on the verge of bankruptcy.

Similar is the case with Jet Airways, Spice Jet and Air India. The Jet-Etihad deal is in a limbo since long due to regulatory issues. And the company is struggling to generate sufficient cash and profits to operate the business. The accumulated losses at Spice jet have wiped off the entire net-worth of the company. Air India is also on a similar page and has been making losses since the last 5-6 years.

Thus, it can be seen that the entire airline industry is in a mess. Most carriers are bleeding. Now, in an industry if one or two operators are bleeding then it is understood. This could well be the case of inefficiency in managing the day to day operations. But here the entire industry is bleeding. And the entire industry cannot be inefficient! There is definitely something more to it. Let us understand what it is.

In the early days, Air India dominated the Indian skies. However, once the sector was liberated, private competition started coming in. Thus, competition intensified. This led to a problem of over capacity. Plain simple economics, isn't it? However, when an industry is characterized by competition from new entrants and there is over capacity, weaker players exit as it becomes unviable for them to continue.

But most Indian airline operators have deep pockets. Hence, they continued their existence. Take the case of Air India. Being government owned, it got bailed out every time it needed money. Also, Vijay Mallya, owner of Kingfisher Airlines has deep pockets. Thus, these companies have remained in existence for far too long. Stronger finance has kept them afloat. Also, strong financial backing means they can easily resort to under cutting to gain market share. This impacts other players in the industry as they need to cut pricing too in order to not lose their market share to others.

Another factor responsible for losses in the airline industry is the quantum of levy on aviation turbine fuel (ATF). It may be noted that ATF is way expensive in India than compared to other countries because of a host of taxes levied on it. With fuel prices rising and competition intensifying, it becomes very difficult for an airline operator to cough up profits. Yields are tight. Hence, lower occupancy results in losses.

The airline industry is in a complete mess. The only way it can get back on its feet is when the loss making entities are forced to exit instead of getting bailed out. This will ensure rational pricing and genuine competition.

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1 Responses to "Why are Indian airline companies doomed?"

Mandar

Nov 12, 2013

Warren Buffett says “Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results. It’s been a death trap for investors. If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success. I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: ‘My name is Warren and I’m an aeroholic.’ And then they talk me down.”

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