“The worst sort of business,” wrote Warren Buffett, billionaire investor and Berkshire Hathaway chairman, to shareholders in 2008, “is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.” He then came straight to the point: “Think airlines.”
Buffett, who had earlier “participated in this foolishness” when Berkshire bought US Air before getting “lucky” and making a hefty gain on the sell-off, then joked that “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down.” (At Kitty Hawk, in 1903, Orville Wright created history by becoming the first to fly an aeroplane.)
There isn’t much from the Indian experience that could be used to disprove Buffett. In the last seven years, airlines in India have lost more than $10 billion, according to consultancy CAPA Centre for Aviation.
Toward the end of last year, when the Kalanithi Maran-controlled SpiceJet was close to a collapse, it did seem that the failure-ridden history of India’s aviation industry was going to repeat itself. The government then threw SpiceJet a lifeline, so that it could live to fight another day. It remains to be seen what comes out of this eventually.
But the big question is: what will it take to make aviation in India a meaningful business?
“SpiceJet is a symptom. You must treat the disease at a larger level,” says Captain Gopinath, founder of Air Deccan, India’s first low-cost carrier that he later sold to Vijay Mallya’s Kingfisher Airlines. Both brands are history now.
They are now part of a long list of once-hopefuls who eventually bit the dust. The list includes Damania Airways, noted for being the first carrier to offer alcohol in domestic flights; East-West Airlines, which was grounded not long after its managing director was shot dead; and Paramount Airways, whose focus was business travellers.
The list also includes Sahara Airlines, bought over by Jet Airways; and NEPC Airlines, which was grounded after it ran out of cash. Of the airlines that came into being following the government’s open skies policy two decades ago, only Jet remains.
It isn’t an easy business to be in. Globally, the industry is notorious for its inability to generate decent returns for its investors. In the U.S., for instance, economists estimate a loss of about $60 billion for the domestic industry in the three decades following deregulation in 1978.
The International Air Transport Association (IATA), the trade body for airlines, pointed out in its annual review that the industry made a profit of $12.9 billion on $708 billion revenues in 2013. That’s a measly over $4 for every passenger, though higher than the previous year’s number of $2.5. That kind of margin is fragile, at best. And India has its own problem areas, making it worse.
Today, most Indian airlines continue to bleed cash. SpiceJet is teetering on the edge. GoAir has been reportedly asked to clear its dues. Then, there’s the Government-backed loss-maker Air India, whose future will be deliberated upon by an expert panel.
At the same time, there’s reason to cheer. Crude oil prices have never been this low in five-and-a-half years. Aviation turbine fuel, which accounts over 40 per cent of an airline’s operating cost, is now cheaper by 12.5 per cent. A well-run company can still make profits, as Indigo has shown.
The industry continues to fascinate outsiders; many such as liquor baron Vijay Mallya, media magnate Maran and poultry farmer Parvez Damania have entered it in the past. But increasingly, in a sign that there could be a firmer handle on operational matters, more experienced players are getting a look in. Also, airport infrastructure is way better than it has ever been, though a lot more has to be done.
Given this, Gopinath reckons the Narendra Modi government should be setting targets, such as “how to make the percentage of those who travel by air grow from three per cent to, say, 25 per cent in the next five years.” He then makes a comparison with the car industry. “Today, we have come to believe that the car industry is integral to the economy, even though 95 per cent of the people don’t own cars.” Treat aviation likewise, he says.
More comparisons follow. About 60 million tickets are sold annually in India, which is comparable to sub-Saharan Africa’s numbers. Just three per cent of Indians fly; more than half the Malaysian population does. Indonesia has 57 scheduled airlines; India has only about a handful. His point: there’s huge potential.
That’s the big reason why, despite the industry’s poor financial past and wobbly present, half-a-dozen new players are waiting to take off. Their belief is that India’s aviation future would be significantly better than the past.
But, then, the carriers may want a few key things to change, including high airport-user charges, a result of the much-admired swanky new private airports. Gopinath even has this to say about them: “Earlier, it was the inefficient public sector, which was a monopoly. Now, there are efficient private sector monsters.”
One of the most important changes the industry wants has to do with aviation fuel pricing. Aviation turbine fuel is far costlier here than many other parts of the world, due to a slew of central and state taxes that are charged on it. Marketing margins of oil companies add to the price. Some states have brought down their taxes in recent month.
Then, there’s what is called the 5/20 rule, according to which only those carriers that are at least five years old and have 20 aircraft will be allowed to fly abroad. “The 5/20 rule is a great disadvantage,” says Dhiraj Mathur, Partner and Leader, Aerospace and Defence, PricewaterhouseCoopers. “You don’t make much on domestic flights. It is in the international flights where you make money. That’s where you don’t have insane price competition.”
There is also the complaint that there is a real lack of a maintenance and repair ecosystem, making this process costly and time-consuming. All these issues form part of the draft aviation policy, released last November.
Phee Teik Yeoh, CEO, Vistara, the joint venture between the Tata Group and Singapore Airlines and the most-recent entrant into the market, believes, “The new draft aviation policy reflects the government’s intent to introduce a more accountable and responsible system.”
The market potential, “pro-business and growth-oriented approach of the new government,” and an in-house own study revealing unaddressed need have “made us confident that there couldn’t have been a better time to launch Vistara,” says Yeoh.
