Why leading an airline in India requires unique management capabilities

Hedging via financial instruments is not an option as that requires expertise and carries additional risk. However, there are other aspects of hedging that can be initiated. Specifically, volume discounts from the oil marketing companies; pre-payment commitments towards an even higher discount; leveraging lower tax rates in states towards fuel uplift (known as tankering); efficiency procedures both on the ground and in the air; and creating a cost focussed culture. Other more complex measures include the direct import of fuel, network optimisation.

The goal is not only to minimise cost but also to have a more predictable cash outflow which then can be addressed via tactical interventions.

From 44 million domestic passengers in 2008 to 121 million domestic passengers in 2018, Indian aviation has come a long way. This growth is forecast to continue with India becoming the 3^rd largest aviation market by 2030. But to sustain this growth, airport capacity is required. And airport expansion is lagging far behind.

Airport capacity now poses an imminent threat to Indian airlines. The country has a total of 449 airports but metro airports continue to be key to aviation traffic with about 61 percent of the domestic traffic and about 73 percent of international traffic still originating from the 6 metro cities of Delhi, Mumbai, Bengaluru, Hyderabad, Kolkata and Chennai. With the exception of Bengaluru which will see the addition of an additional runway this year, the capacity expansion at other airports lags or is non-existent. Airlines are wanting for peak slots to fly aircraft and for parking infrastructure. Use of dynamic parking on a network basis is not sustainable.

For airlines, this means: optimising existing slot portfolios towards generating yield premiums from prime-time slots. Additionally, a re-evaluation and rethink of simply flying unviable routes. Airlines that do not have the required marketstrength will be forced to pull out of some markets completely or move towards a more connected network to generate traffic. Larger aircraft may also be an option but the challenge is filling these up during non-peak hours, which is not done is a cash-drain (think of filling up 22 percent more capacity with a marginally higher cost base but without an uptick in fare levels).

Above all airlines have to work collaboratively with stakeholders including airports, air traffic control and government to see how more capacity can be delivered from the existing resources.

These decisions require courage, conviction and intense collaboration. All three are in short supply.

After ATF, the largest expense item for airlines is the maintenance and repair (MRO) of aircraft. Taxation on MRO in India remains very high.  With an 18 percent GST levy on sale price, providers have to compete with overseas players that only pay 5 percent - that too at cost price. This gap works out to 20 percent - 22 percent. Consequently, most airlines contract their maintenance overseas.

But the MRO has to be provisioned for and negotiated adequately. Flying empty aircraft to cities outside India, if planned well, can be done in an integrative manner with network planning. The goal is simply to not have empty aircraft being ferried. Contractual provisions can further limit down-time of each aircraft ensuring higher asset availability.

A second option is the setup of MRO facilities (captive facilities) which tie in with the strategic goals of the airline. Indeed, one has seen Indigo going ahead with a Bengaluru facility which is both a fit with its network, a fit with the talent requirement (engineering pool that can be pulled) and addresses predictability of expenses. Other airlines may not have the wherewithal and/or the cash to imitate this.

Ensuring adequate provisioning cost competitive contracts and a integrating the maintenance work with on-going network patterns is the need of the hour.

Airlines are unique businesses. Talk to a banker and he will indicate that theoretically, the airline should have zero working capital requirements as airline tickets are sold in advance of delivering the service (transport from one city to another). But factor in the cyclicality, competition and costs and the reality is much different.

Lending to aviation has become severely constrained – both due to the history of Indian airlines and the low margins of the industry. Bankers don’t want aviation assets – they want predictability on interest payments which can only come via adequate provisioning and planning.

For Indian airlines, the sale-and-leaseback model has been generating cash and helping with liquidity. This is, where an aircraft is sold to a lessor at a profit and leased back to the airline for a period of 6 – 8 years. Yet this is a measure where in the long term, the balance sheet has few assets and banks cannot secure their lending against any asset base.

External commercial borrowing (ECB) lines are extremely hard to access and with the recent default by Jet Airways on a $140 million ECB loan, this situation will get worse before it gets any better

In such a situation, managers have to be working towards shoring liquidity in all possible ways and preparing for black swan events. Yet the narrative seems to centre largely on India being a growth market and the aircraft orders by Indian airlines. Where the capital will come from to fund this expansion is anybodys guess.

For airline management, the need of the hour is to shore up as much cash as possible. Via forward sales, via contracts, via clawbacks, via strategic funding and via additional bank lines.

A second Jet-Airways like situation may not be sustainable for the industry as a whole.

161 million people travel by rail each week compared to 121 million that travelled by air in 2018

The term “rail-air parity” is often touted in the context of Indian aviation. Ergo: airfares are at similar levels as railway fares (in AC1 and AC2 categories). In reality, there are many cases airfares are lower than railway fares. This stimulates additional traffic which otherwise would not have travelled and airlines are counting on the fact that one a passenger travels by air s/he is likely to stick to this form of travel.

However, the rail-air parity is an after-effect of intense competition and speaks to the lack of pricing and marketing discipline by airlines. A commodity business that prices at levels that do not cover costs is unsustainable.

For airlines, these woes are not limited to pricing but also the increased quality, convenience and availability of other forms of transport. The explosion of app-based taxi’s and buses has led to road-travel becoming an extremely viable option on short distances such as Mumbai-Pune, Delhi-Chandigarh and even Bengaluru-Hyderabad. For longer distances, trains have become a great option with increased availability, modernization of rail stations and a focus on passenger convenience. If the rwilaways were to add free wi-fi to services, they will likely also start eating into of the business travel segment (which currently goes by air).

Pricing discipline is found wanting in the business. Yet again, this requires managers with an intuitive reading of both capacity and demand trends and also a reading of anticipated regulatory interventions.

As India prepares to lead Asia and to play a dominant role globally, the aviation sector cannot be overlooked. The multiplier effect of aviation both on economic output and jobs is 3.25 and 6.10 (per ICAO) and accordingly, the sustainable growth of aviation is critical to the country. However, for this growth to materialise structural changes are required. Input costs to aviation have to be lowered. Via policy measures, via competition especially amongst airports, and via unique management capabilities.