State of Airlines in India

Introduction ...

The Indian airlines sector is buzzing back with activity, especially since the revival of Jet Airways and the formation of Akasa airways. Incumbent airlines, especially Indigo, are on track to pre-pandemic levels of operating numbers.

The future looks bright for the Indian airlines industry . Let's look at some facts ...

As per Indian Brand Equity Foundation (IBEF), the Indian aviation market is expected to become the world's third-largest market in terms of passenger traffic by 2024. Already in terms of domestic aviation, India is the third-largest market. AAI (Airports Authority of India) plans to build 100 new airports within 5 years, greatly improving interconnectivity between Tier II and Tier III cities. Then there is the huge spending outlay (CAPEX) earmarked by the AAI for airport infrastructure--the spending is expected to be Rs. 20,000 crores ($2.5 billion) over 5 years. As you can foresee, all these initiatives augur extremely well for the Indian airlines industry.

No wonder, Jet Airways, and Akasa Air are trying to grab a piece of the burgeoning pie in the sky.

Challenges ...

The Airlines Business has been historically fraught with problems ...

Warren Buffett famously said, "To become a millionaire, start as a billionaire and then buy an airline!". He goes on to say "The worst sort of business is one that grows rapidly, requires significant capital to engender growth, and then earns little or no money. Think Airlines!"

High fixed and variable costs make it difficult to squeeze profits or even maintain an operating profit margin (OPM) that keeps its head above water.

Here are some factors ...

• The largest operating cost for airlines is typically the Aviation Turbine Fuel (ATF). Airlines are particularly sensitive to changes in global crude oil prices, and the consequences can be disastrous to the bottom line. One way to mitigate the fuel price shocks is by hedging. Hedging fuel prices means that an airline expects the prices to rise in the future, and purchases large amounts of current oil contracts for its future needs.
• India also has some of the highest tax rates on ATF. Add to it the high airport charges and that makes India an expensive hub compared to other hubs in the vicinity like Dubai and Singapore.
• The Lease on aircraft and equipment are some of the highest fixed costs for the airlines.
• Other significant fixed costs include payroll expenses to maintain a large and complex crew.
• High competition in the industry, driven by the LCCs (lost cost carriers) like Indigo has driven the airline fare barely above cost. India is a highly price-sensitive market, so even a marginal increase in fare can have a disproportionate effect on demand.
• Airlines are also particularly vulnerable to exogenous events that affect the elasticity of demand, hence affecting passenger traffic. A recent example is a devastation to the industry caused by the pandemic. Some airlines have gone down under, while others have barely survived. As Warren Buffett said in a letter to shareholders, "The near-term reward to skill in the airline business is simply survival, not prosperity".

Best Practices: How can Airlines get around the constraints?

While it seems that all an airline can do is survive, there are some best practices to ensure that airlines not only survive but thrive. Here are some Best Practices ...

1. Fleet Uniformity

   This works well for LCCs, especially since they use a point-to-point model (instead of a hub and spoke). LCCs do not have much variability in passenger demand, and often don't need larger planes, unlike traditional carriers. Fleet uniformity results in a low transition cost that covers training/re-training of pilots, maintenance personnel, and flight attendants. A Common Type Rating is a big selling point for airlines. If airlines operate aircraft with a Common Type Rating shared by the new, incoming model, the transition is easier.

   Airbus, in particular, has a lower transition cost compared to Boeing. For example, even though the Airbus A330 and A350 XWB have different type certificates, their handling characteristics are so similar that they have been granted a Common Type Rating from the airworthiness authorities.

2. Optimizing Load Factor

   To understand load factor, let's first understand ASK and RPK.

   ASK (Available Seat Kilometers) measures the carrying capacity of an airline. It is calculated by multiplying the number of seats with the number of kilometers the airlines can fly.

   RPK (Revenue Passenger Kilometer) on the other hand combines the number of revenue passengers/filled seats aboard the plane (also known as paying passengers) with the kilometers flown by the airline.

   The Load Factor is thus derived by dividing the RPK by the ASK. Higher load factor values make the airline more profitable by spreading fixed costs across passengers. Strategic planning entails the use of break-even load factors. Premium players can get around a lower load factor since they charge more.

3. Optimizing Block Times

   Block time is the total amount of time a flight takes from pushing back from the departure game (off-blocks), the actual flight to arriving at the destination gate (on-block). Block times for airlines vary, even for the same route. If the airline schedules the block time too aggressively (too tight), the flight will more often fail to meet its schedule. On the other hand, if the airline schedules too conservatively (longer block times), the scheduled duration will be longer, making the flight less attractive to travelers.

   Many factors can affect block times--this includes the type of aircraft, seasonality, time of day, and traffic congestions at airports. Airlines can use sophisticated data analysis including that of competition to arrive at a sweet spot for the ideal block time. Careful schedule planning is important to the success of an airline.

4. Take the Example of Indigo

   Case in point is IndiGo, and how it has expanded its market share and established dominance. Their cost leadership is paramount to their competitiveness. IndiGo's cost-conscious, low-cost operating structure approach to business means that every Rupee saved ultimately gives it greater ability to charge lower fares, and stimulate higher demand. As is mentioned regularly in their annual report, IndiGo is guided by the core values of "Being on-time, Providing Lower Fares and being Hassle-Free".

   They are also ramping up on their cargo business, which has seen a surge in business. In fact, the cargo business offset some of the losses faced during the pandemic. As per their annual report, they have sourced 4 Airbus 321 (CEO) that have been converted to a full-freighter configuration

Final Thoughts ...

Whether it's established players like IndiGo or the recent entrants like Akasa, it isn't just enough to maintain cost competitiveness. It is also important to build the right perception through influence--perhaps by even reaching out to aviation influencers on social media like Sam Chui.

Building trust and aspiration, with a message that is distinct, will take an airline a longer distance than the fare alone.