The business of flying: Sexy enough, but needs more brains?

Even as airlines around the world continue to lose money, flying has become more popular than ever.

FP Editors February 16, 2012 10:25:59 IST
The business of flying: Sexy enough, but needs more brains?

Aviation seems to be a notoriously hard business to make money in.

On Thursday, Kingfisher Airlines, the troubled carrier that has been making news since the second half of last year, posted a wider third-quarter loss as fuel costs surged and a reduction in flights amid a cash crunch.

The airline announced a Rs 444 crore loss for the three months ending December, up from Rs 254 crore a year ago.

A combination of bad business models and tough operating environment has conspired to keep all local carriers, barring one - Indigo - in the red.

According to the Centre for Asia Pacific Aviation, an industry consultant, domestic airlines, including Air India, will probably lose $2.5 billion in the year ending March 2012. On top of that, their debt might hit $20 billion as well, the aviation ministry said last month.

The business of flying Sexy enough but needs more brains

A combination of bad business models and tough operating environment has conspired to keep all local carriers, barring one - Indigo - in the red. AFP

Those numbers will surprise nobody. But it's not just in India that airline operators are finding the going incredibly tough. Even globally, very few airlines are actually making money.

The latest international airline to provide proof of that was Australian airline Qantas, which this week said it will close some international routes and cut almost 500 jobs after its profit slumped a whopping 83 percent.

Falling profits are also troubling Singapore Airlines, the world's second-largest carrier, which announced a worse-than-expected 53 percent fall in its third-quarter net profit.

In Europe, earlier this month, 66-year-old Hungarian national airline Malev folded after its financial situation became unsustainable. Like Air India, the airline had been on government life-support for the past few years. Another government-owned airline, Spanair, Spain's No.4 airline, also collapsed after the government said it could no longer afford to pump more money into the loss-making airline.

And America, of course, is no stranger to airline woes. In the past decade, US airlines have lost a combined $54.5 billion and failed to make money in seven of 10 years, according to a USA Today report. The most recent one to fall again into trouble is American Airlines, which announced that it was cutting 13,000 jobs as part of a bankruptcy plan. USA Today said it marked the 189th time a US airline had applied for bankruptcy protection since the government deregulated the industry in 1978.

So why are so few airlines making money? Because of a host of reasons.

One, oil prices are highly volatile and affect an airline's operating costs dramatically if they move too sharply, up or down. Fuel cost is the biggest operating expense for airlines (going up to 50 percent), as we can see from the operating costs of Kingfisher, Jet and SpiceJet.

Two, buying planes is an expensive proposition. As the USA Today article notes, "A Boeing 737's list price is about $80 million; leasing one costs about $300,000 a month."

Three, airlines have to hire pilots and aircraft maintenance crew, which are highly specialised jobs that require above-average salaries.

Four, their fortunes are directly linked to those of economies. When economies slow down, so does demand for international travel. Right now, the global economy is in a blue funk.

Five, they also tend to be immediately affected by natural disasters like earthquakes and floods, volcanic ash clouds (it happened in Europe last year), disease outbreaks (SARS, etc) and even terror alerts. All of these are happening quite frequently now.

Six, there is just too much competition globally right now - about 1,000 airlines or so- and several market suffer from rivals who don't think twice before undercutting prices. Unfortunately, if one carrier cuts fares, everyone else follows because otherwise, they know they will lose passengers. Air India did the same here: by cutting ticket prices below cost last year and forcing rivals to follow, it blew a hole in almost every airline's finances.

Here's the irony...

Yet, even as airlines around the world continue to lose money, flying has become more popular than ever. Between 2000 and 2010, the number of passengers carried worldwide increased by 45 percent. But it seems inevitable that more airlines will fold before the industry becomes a lean money-making machine.

For now, the future holds no promise of a better life. A new carbon tax scheme being implemented by the European Union this year, which penalises airlines if they exceed their permissible emission limits, has raised the heckles of several airlines as well as foreign governments, India's included. But the EU is pushing ahead nevertheless. Adjusting to those limits will raise the costs of airlines in financially tough times.

In Asia specifically, there's the threat of oversupply of aircraft, which is expected to keep passenger and cargo yields depressed.

The medium-term future seems quite bleak for airlines in general. And yet, why do some people persist in thinking that aviation is a sexy business?

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