Richard Branson, the founder of the virgin group, once said, “if you want to become a millionaire start with a billion dollars and launch an airline.” He was merely talking about the risk involved in launching an airline. When a man brave enough to drive a car across the English channel talks about the airline industry is risky, you know he’s right. Now let’s take a look at the airline industry from India’s point of view and, in specific, the coronavirus pandemic.
Indian airline companies offer some of the cheapest flights across the planet. They do this by cutting costs such as free food or other luxury services. Now, of course, you could have luxury services such as extra legroom or even other freebies, but that would mean a higher fare. A price that most Indians are not willing to pay. I don’t know about you guys, but when I book a flight to travel anywhere in India, the only thing that I would look for is a cheap flight that would land in the place that I want to travel to at a suitable time. I wouldn’t be looking for premium services.
So how do airline companies make their money when they do not offer premium services? For this, we must familiarize ourselves with a term known as the passenger load factor. Passenger load factor measures the extent to which a flight can fill a flight.
A flight flying with a high passenger load factor would mean that the flight has many passengers. Take, for instance, two airline companies that most Indians have traveled in at some point in their lives – Indigo airlines and Spicejet. Though indigo airlines and Spicejet offer nearly rock bottom prices, they still manage to profit because they fly their aircraft at a high passenger load factor.
Let’s think of it this way when you’re flying a plane, your costs are more or less fixed. You have the same price that you’re going to pay for fuel, and you’re going to spend your cabin crew and the flight crew a fixed amount. This is regardless of the number of passengers on the plane, which means that the cost to add an extra passenger is nothing.
So, to make a profit, the best bet is to fill the plane with as many passengers as possible. However, this took a massive hit because of the coronavirus pandemic. Initially, when flights were given the clearance to fly, the body that regulates civil aviation, a body known as the directorate general of civil aviation known as the DGCA, said that flights could fly as long as the middle seats these flights are left unoccupied.
This would mean that flights would reduce 33% in filling seats, which would result in a massive loss to the airline industry. Luckily for airlines, courts intervened, and flights were allowed to fly with a total capacity. Now is this enough to help airlines make profits? not at all; even though permitted flights to fly with full power, flights still flew with only half of its seats that were occupied. During a corona, virus-like people like you and I would not want to fly unless it’s an emergency.
This has resulted in flights flying with minimal occupancy. The question remains – how can we make flying more profitable for the airline industry if we can’t fly flights at total capacity? Maybe we could charge a higher price on tickets. Since a few people buy tickets and ticket prices are high, airline companies can probably make their money. Let’s take the case of Vistara airlines. Sitara airlines fly its planes at a lower passenger load factor than industry standards, but it still makes its money by catering to business customers and international travel. However, because of the coronavirus pandemic, both of these factors are affected. Business travel has significantly reduced or almost come to a standstill as most business meetings happen online via zoom or skype or any other online meeting application. International travel has also come to a halt because of the pandemic, but what if airlines price their tickets at a high amount?
This is not possible because, as of May 21st, 2020, the government has capped the airfare prices at rupees 18,600. So even if airlines want to charge a high amount, they would be restricted by this regulation of fares.
So how are airline companies coping with these blows?
Let’s take the case of Indigo and Spicejet. Indigo and Spicejet have asked the companies that have leased their aircraft to them to defer these lease payments. Spicejet’s case; Spicejet has converted many of its passenger aircraft to freight carriers because freight carriers are more in demand than passenger carriers. On the other hand, Indigo has fired 10 percent of its staff to protect its rapidly reducing reserves.
This is not all. There is also a purchase order problem when an aircraft is bought. It has to be ordered in advance now because of the airline industry’s unpredictable nature. During a boom, many aircraft are collected, and a lot of purchase orders are issued in this process, and these may be delivered during a crisis such as this pandemic. What about those aircraft that have been ordered before the pandemic and have to be provided during the time of this pandemic? Let’s take the case of AirAsia.
AirAsia has a purchase order of 326 aircraft, but because of the pandemic, they had to defer the purchase order of 78 aircraft. These blows to the airline industry are not just in India; it is across the world. Latam airlines became one of the biggest airline companies to go bust after losing 700 million dollars and debt of seven billion dollars. It had no other option but to file for bankruptcy. Different airline companies across the world had no further opportunity to do the same thing because there was no way they would make profits or even stay afloat during this crisis. Governments across the world have done their part in announcing relief packages to rescue this beleaguered airline industry.
The US is offering 25 billion US Dollars. The Swiss have offered 2 billion US dollars, and in a similar fashion, countries worldwide have collectively provided 123 billion dollars to rescue the airline industry. However, in India, the government is yet to offer a relief package to save the airline industry.
This leaves us with an industry flying its aircraft with half its capacity, with a crew that is risking their lives in the face of this deadly pandemic. If this continues for longer many airlines would not recover from the losses and go bust. If many airlines go bust, this will bring us to a lousy monopoly because if there are only a few players in the game, those players could charge how much they deem fit, and people like you and me would have no other option pay those exorbitant fares. This would significantly affect India’s progress in making air travel affordable for regular people like you and me. And now you know what’s happening with airlines.