Why Do Indian Airlines Keep Failing?

Since 2014 India has been the fastest-growing economy in the world, surpassing China and maintaining an 8% GDP growth rate every year. India’s pace of economic growth has been at least 6% per annum since 1991, and with the second largest population in the world, coupled with a growing middle class, you would be forgiven for thinking that one of the world’s fastest-growing aviation markets had a more positive outlook.

With the bankruptcy of Jet Airways earlier this year, and Kingfisher Airlines having their air transportation licenses revoked in 2012, the past decade has seen two of India’s major players fall by the wayside. Incredibly, that leaves India with just two full-service carriers. The long-standing Air India, and the newly established Vistara.

With a population of over 1.3 billion people, Air India’s fleet of 136 aircraft by no means make them a comparatively large airline. When compared to the 3 major U.S. carriers with nearly 3,000 aircraft between them and a population of less than one-quarter of India’s, there seems to be a huge gap in the Indian aviation market. Similarly, when pipped against the rapid growth of the three major Chinese airlines, who have 2,000 aircraft between them, the question has to be asked; with such a large population and increasing demand for air travel, why do we keep seeing Indian airlines fail?

The pressures on the Indian aviation sector can be attributed to rising fuel prices and the Indian rupee depreciation in part, however, the elephant in the room has often been government intervention in the sector, and the continued protectionism of Air India, which is now just one of two full-service carriers left in India.

Prime Minister Modi implemented a price cap of just $35 for regional domestic flights, and so it has been unsurprising that many routes remain underserved, unprofitable and even non-existent. The only model that can survive such a price cap, is a low-cost model, which is why so many full-service airlines have failed in recent years.

Kingfisher Airlines

Kingfisher looked like one of the most positive aviation projects to emerge from India in years. It was also the first and only Indian airline to order the mammoth A380 superjumbo. The airline proposed strong competition on London routes with the double-decker aircraft and was even admitted into the One-World alliance in 2011. However, a common theme in Indian aviation began to emerge. When companies raise cash to expand they can either look to debt or equity markets. Lenders and creditors are first in line before the actual equity holders in the event of bankruptcy, and when Kingfishers financial situation began to worsen, the airline was forced to convert some of its debt to preference shares. The airline saw a rapid erosion of its equity value, and in such a situation, if the company has no value, then raising cash through loans and debt will endure crippling interest rates. That is what happened to Kingfisher, but not before the company took out a loan with their brand value as collateral. An unusual step certainly, but catastrophic when the loan was valued at three times the valuation of the company.

After poor results in November 2011 the airline could not keep up with high-interest payments on the debt, and after failing to receive support from the government in the form of fuel and tax reductions, the Airport Authority of India began with recouping $37 million of unpaid fees from the struggling carrier. At the time, Kingfisher was paying its fees where it could, daily, which incurred $120,000 in charges each day.

The walls closed in on Kingfisher from all angles. Multiple banks were asking the airline for payments on loans and debts, lessors claimed the airline fell behind on aircraft payments, and with pilots striking and protesting that they had not been paid in two months, there were even in-flight announcements from pilots and crew explaining the dire situation, which did little to assist Kingfisher in turbulent times, especially with their brand value as one of their few remaining financial assets.

Piece by piece the airline started grounding aircraft as it simply didn't have the crew to fly them, as they had not been paid, and with reducing revenue and consistent costs, the airline had nowhere left to turn. In October 2012 the airline had its licence suspended by the Directorate General of Civil Aviation.

In summary, Kingfisher failed due to over-expansion and poor financial management.

Jet Airways

Domestic traffic in India rose by a staggering 18.6% year-on-year to 138.97 million in 2018. Despite this, Jet Airways always had greater international ambitions. The reason being, with just Air India as Jet’s main full-service carrier competition, the international and long haul routes were where there was the potential for profit margins. Indian government regulation has not helped in facilitating a competitive international environment, maintaining a 5/20 rule until only recently. This rule stipulated that an airline must be flying a domestic fleet of at least 20 aircraft and have been operating for a minimum of five years before it can begin international flights. Of course, with hugely increasing domestic demand, this has led to a flooding of supply from low-cost domestic carriers. The Indian domestic passenger market is very price-sensitive, and so margins remained very low. This meant that for Jet Airways, and Air India alike today, international routes are their only real push at profitability and margin.

With 124 aircraft, Jet Airways were, until their grounding earlier this year, one of India’s largest airlines. Etihad Airways had bought a 24% stake in the carrier, however, the airline began to cut back international routes over the last few years as price competition put pressure on Jet Airways.

With over $1.2 billion in debt and declining revenue, Jet Airways came under pressure to repay lessors, similar to Kingfisher before them. With losses in eight out of the last ten years and resurgent domestic low-cost competition, the walls began to close in on Jet Airways until it was eventually grounded earlier this year.

IndiGo

IndiGo has been one of the recent success stories to emerge from the Indian aviation sector. However, with the much-respected airline declaring their first quarterly loss last year since going public in 2015, it appears that IndiGo is also starting to feel the pinch that many Indian carriers have felt before them as they begin to expand. Fuel prices and rupee depreciation only explain a part of the pressures faced by airlines in one of the most populated countries on earth. Where IndiGo and similarly SpiceJet have succeeded in a domestic low-cost model, the fact remains that state intervention and the ever lingering Air India drag on the sector. IndiGo and SpiceJet are the countries hopeful candidates to expand into the future, if they can abstain from making the mistakes that defunct airlines before them have made, of over-expansion and crippling debts. More importantly, the Indian government will have to allow the private aviation sector to flourish independently.

Air India

The state-owned airline has been over-staffed and inefficient for years. Often afforded luxuries that other private carriers have not. Firstly, the 5/20 government-imposed rule has meant that for many years, any new airline has been required to operate a fleet of at least 20 aircraft domestically for 5 years, before being allowed to fly profitable international routes. This rule has stifled competition and meant that in part, Air India has run a quasi-monopoly on the sector. With taxpayers largely funding the airline's losses, new entrants have been unable to compete on price as well, with lower domestic fares meaning that the airline continues to bleed cash, yet stifle competition.

With a booming economy, one would be forgiven for thinking that the aviation sector in India should be flourishing. Similarly to how Emirates expanded so rapidly, with substantial and increasing demand for air travel in India, if the supply is created, the demand should follow. Emirates managed to make the Dubai to Fort Lauderdale 15 hour route (somehow) work after all. The unfortunate contrast to this in India is that until the government allows the sector to develop by itself, it will remain inefficient and unhealthy for competition. There is hope now that IndiGo and Vistara will begin to expand and offer competitive and expansive offerings to passengers in India and beyond, but the unfortunate reality is Kingfisher Airline and Jet Airways before them, which also had incredibly positive outlooks.