What a difference a few years can make. In 2021, one of India’s oldest low cost airlines GoFirst, indicated to the street that it planned to go public. That very airline declared insolvency this week. The insolvency filing was preceded by a press release where the airline blamed their engine supplier for their woes. Specifically, the failure to deliver reliable engines and the failure to comply with an arbitration order.
As a result, the airline had over 50 percent of its fleet grounded and suspended operations with the announcement. Management maintains that the suspension of operations is temporary and that the airline will fly again. Even so, the numbers are humbling. They reveal an airline under significant stress. As more details emerge after the insolvency filing, the question on several minds is: what does it take for an airline to revive?
Airlines: complex, capital intensive and chaotic
Investors across many quarters including the legendary Warren Buffet have stated that airlines are a terrible business. With a return on capital that has been negative since the invention of the aircraft, it has come to be a sector avoided by most investors. Mostly because of complexity. And demands on capital. Add to it labour intensive processes, power of suppliers, concentration of suppliers, calls on capital, high attrition, fuel prices, airport security, terminal evacuations, mergers and restructuring. The irony: none of this can bear any consequence.
Because at its core the airline provides critical connectivity. It is about the young man going for his first interview, about the small business owner going to meet a client, about families getting together for a wedding, about school vacations, about the proud parents flying to attend a graduation – the list goes on… Connectivity also drives commerce and thus the multiplier effects of airlines are significant. Day after day, the flights have to depart -- preferably on-time -- and for the multiple flights arriving and departing out of airports -- onsite or offsite -- if there is any issue – the buck stops with the airline. The issues must be resolved. The launches (flight departures) must not fail. There is no luxury of time.
On the other side of the coin, leading an airline is a task of complex coordination. From winning the trust of thousands, ensuring adequate cash-flow to communicating repeatedly with customers – it is an exacting job. It involves successfully managing the convergence of technology and human capital. It involves anticipating and addressing new issues –-continuously.
Indeed, whether it is aircraft production delays or engine delays – almost all airlines have to face these issues at some point of time. And thus planning cycles which run into decades. And which by their very nature have to involve black swan events – events that are no stranger to aviation.
An airline grounding also means cash-flow disappears
For airlines, as with any business, cash is a lifeblood. Indeed it is famously said that airlines are great till one figures out the difference between gross and net cash-flow. Majority of the cash flow is secured via forward bookings. That is, passengers book in advance of the flight. These bookings generate cash which the airline can then use until the time that the actual flight takes place. At that time the same is reconciled on the profit and loss statement.
Prior to an airline grounding, cash-flow starts to dissipate. Mostly as forward bookings collapse. Some airlines also see a negative booking situation where refunds are greater than bookings coming in. And given weakness with the airline alternate sources of funds are few and far between. By the same token, restarting an airline means restarting cash-flow. But that is easier said than done as customers will be wary on booking with airlines. Especially higher yielding customers that come through travel agents and corporate offices. In such a situation, an airline has to provision for losses for several months on routes – losses that it may or may not be able to sustain with a fragile financial position.
Restoring trust is as critical as restoring cash-flow
An airline shutdown also leads to significant loss of trust. Between the airline and stakeholders alike. Most importantly, between the airline and its workforce. And given the labour intensive nature of airlines, the workforce just cannot be done away with. It has to be present, active and pleasant (at the very least). Because the customer has far too many options.
And contrary to claims made by some constituents, each booking counts. With razor thin margins, often one booking can make the difference between profit and loss. Multiple this across several hundred flights a day and several thousand per year and the impact is exponential.
Trust or the lack thereof also permeates through to other stakeholders. This is reflected in actions rather than words. Actions such as cashing in of bank guarantees, drawing down of letters of credit and repossession of assets. Here the regulator plays a key role. And indeed a long term view is critical. Because a short-term view may actually mean challenges for the entire aviation industry in times to come.
Overall the process cannot be surmised and lends itself to being a complex adaptive system. That is a system, where a perfect understanding of the individual parts does not end itself to a perfect understanding of the whole system and behaviour. Airline planners effectively have embrace complexity and work towards undoing the damage. One passenger at a time, one route at a time and one city at a time. It is a humbling task even for the most talented.
For any airline, no matter how successful or unsuccessful it was in the past, the fact remains that a grounded airline carries significant weight – all of which has to be addressed prior to a takeoff. For industry watchers looking for past precedents, unfortunately, Jet Airways which was once the most successful airline in the Indian skies remains grounded.
This too, 4 years after entering the restructuring process, with a bidder at hand and a management team (now dissipated). Comparisons whether fair or unfair are inevitable and the failure of the airline to takeoff despite efforts is likely going to factor in the minds of decision makers across the spectrum.
Finally, there is the challenge of credit and credibility. Any airline insolvency by its very nature means that several stakeholders are caught off-guard. How this is managed prior to the insolvency filing remains critical. And then there are the competitive dynamics – intense as always.
In the final analysis, an airline revival is more of an art than a science. Credit, cash-flow, credibility, customers, court decisions, competitive dynamics and capital infusions – all have to align. Whether this happens or not simply cannot be predicted.
— The author, Satyendra Pandey, is the Managing Partner for the aviation services firm AT-TV. The views expressed are personal.
Read his previous articles here (Edited by : C H Unnikrishnan)
