The two happenings will help the sector breathe a collective sigh of relief. At no point since the pandemic have things reached such a head for the industry. In June, things had become so grim that the airlines mulled a collective one-day strike. Almost all airlines are flying far below their approved scheduled flights to save money. In July and most of August, Air India has flown 65-68% of its approved schedule, while AirAsia India, Go First and
have flown 40-55%. Only Vistara is operating around 80% of its approved summer schedule.
Where Logic Takes Flight
So, why are airlines in India always on the brink of collapse? Every few years, why do we have a new set of carriers dominating the skies? Over time, India has landed itself into a situation where airlines are caught in a vicious cycle of profitless growth. Most do not make much or almost no money from their core business of flying passengers. Airlines fly on various routes, tot up losses from core operations, and then order more aircraft to fund the losses through sale and leaseback of planes. Along the way, they occasionally earn some revenue through non-aeronautical activities. Even those who run their businesses quite well rarely turn in a profit. IndiGo last reported a full-year substantial profit in 2017-18.
The pandemic, and the war in Ukraine, sent oil prices into a tailspin globally. Carriers in India have borne the brunt of this with air turbine fuel (ATF) prices rising almost 542% since May 2020. But what is less known is that while traffic has rebounded, it is still almost 75% lower on a daily basis than February 2020, a lean month by itself. Airlines are, in fact, selling most seats at below cost. That is precisely why of every ₹ 100 earned in revenue, ₹ 75-80 is being paid to oil companies, the biggest cost head.
This and other factors have led to a situation where the airlines have totted up combined losses of ₹ 16,777 crore in FY2021, ₹ 20,000 crore in FY2022, and will exceed this number in FY2023.
An absurd anomaly has made airline economics unviable, peculiar to India. Airlines in India pay more for fuel than their foreign counterparts do to refuel in India, as the former are charged the import parity price. Moreover, taxes on fuel for the sector remain quite high. An 11% excise duty is charged by GoI, which is compounded by the state value-added tax (VAT) over and above. This varies between 3% and 25%, which on an average works out to around 20% since the rates are 20-25% in states where the offtake is high like Delhi, Maharashtra, Tamil Nadu and West Bengal.
Pleas to bring ATF under GST have fallen on deaf ears. In most other countries with developed aviation sectors, if and when a similar tax is applicable, airlines are able to get input credit on the tax paid. India remains an anomaly in this regard.
To finance the losses they routinely make through operations, airlines in India place aircraft orders to make some money from sale and leaseback of planes. This leads to more and more capacity being added in the market, which lowers fares further, making the economics even more unviable and resulting in more aircraft orders. This is the vicious cycle of profitless growth.
On every aircraft ordered, the difference is around $ 5-9 million. This helps some airlines fund their losses from flying. It has never been clear how many of the airlines bring this income on to the books of the company. The result of this has been that, often, airline promoters get richer even as the airline goes broke. When companies go broke, the losers are usually the lenders, vendors and employees, not the promoters or founders.
This also partly explains why businessmen continue to run airlines or start them. Most new founders or promoters feel they can do it better than their rivals. Previous has shown them that they have nothing much to lose personally. As such, the business is relatively debt-free, with no requirement of even working capital loans as fares are collected in advance.
Government officials routinely dismiss the woes of the airlines as exaggerated, and argue that the businesses are often poorly managed, blaming either the model or the management. But there’s no denying that airlines in India need to make money from their core operation, not from buying more aircraft. This is a structural problem the industry faces that only a constructive dialogue and follow-up actions between government and industry can resolve.