The aviation sector is a significant contributor to the Indian economy. It contributes an estimate of 7.5 million jobs[i] to the economy directly and indirectly and is expected to witness an investment of $15.52 billion (Rs 1 lakh crore) in the next five years. The International Air Transport Association (IATA) forecast for India highlights its sound fundamentals, signalling a bright future for the air transport industry in the coming years.
Private Indian carriers became an integral part of the aviation industry post liberalisation in 1994, ending the monopoly enjoyed by state-owned carriers. Presently, there are 13 scheduled airlines in India, of which only three are state-owned carriers[ii]. Low cost carriers (LCC) such as IndiGo and SpiceJet dominate the aviation market today. The former became the largest airline in passenger market share within six years of its incorporation and has one of the largest fleet sizes in the country. The private carrier has been eating into the market share of the bleeding Air India Limited (AIL).
Air India has been suffering losses for over a decade and has performed poorly on various fronts. Even with the industry upswing in 2016–17, the airline made a net loss of Rs 6,288 crore. Currently, the state carrier has accumulated debt and losses amounting to Rs 55,000 crore and Rs 30,000 crore respectively. A comparison of AIL with the aviation behemoth IndiGo Airlines sheds light on the inadequacies of the former. Both operators are among the top five carriers in terms of international passenger traffic. IndiGo, however enjoys a considerable advantage in the domestic aviation market, where it contributes to 41 percent of the passenger traffic, making it the biggest in the sector.
The demand-supply equivalents in airline operations are Revenue Passenger Kilometres (RPK) and Available Seat Kilometres (ASK) respectively. ASK, an indicator of the capacity of the carrier, is measured as the sum of the product of number of available seats in each flight by the corresponding distance travelled. It is a measure of the revenue generating potential of the airline. RPK is calculated as the sum of the product of number of passengers carried on each flight by the corresponding distance. Both metrics are higher for IndiGo than Air India, implying greater capacity and utilisation for the former. Over the past decade, IndiGo’s ASK and RPK have increased by six percent each, while Air India metrics have increased by less than one percent.
Table 1: Comparison of Air India and IndiGo
|Share of International Passengers (%)||5.3||10.4|
|Share of Domestic Passengers (%)||39.7||12|
|Available Seat Kilometres (Mn)||63,510||57,723|
|Revenue Passenger Kilometres (Mn)||55,524||46,027|
|Passenger Load Factor (%)||87.4||79.7|
|Operating Cost per Available Seat Kilometre (Rs)||2.9||5.7|
|Operating Revenue per Available Seat Kilometre (Rs)||3.4||4.0|
|Accumulated Debt (Rs)||2,641 crore[iii]||55,000 crore[iv]|
The Passenger Load Factor (PLF) is yet another important indicator. It is the ratio of RPK to ASK, which measures the share of available seating capacity that is filled by revenue generating passengers. Due to the high fixed cost and thin profit margins associated with the industry, carriers must have relatively high load factors in order to remain profitable. IndiGo has better capacity utilisation than Air India, as indicated by the higher PLF. It has also maintained a healthy PLF, above 80 percent, over recent years, while Air India has maintained a PLF of 75–79 percent in the same period.
Comparisons across airlines are often based on cost and revenue considerations viz. costs per ASK (CASK) and revenue per ASK (RASK)[v]. Due to the high fixed costs of airlines, the unit cost will decrease as distance increases. Thus, an adjustment of airline distance covered is necessary for a better comparison. CASK after adjusting for the average stage length[vi] shows that in 2016–17 IndiGo (Rs 2.9) had twice the cost efficiency of Air India (Rs 5.7). RASK sheds light on the revenue generating capacity of the carrier, the higher the RASK the more profitable the airline is. During 2016–17, Air India (Rs 4.0) was found to have a higher RASK than IndiGo (Rs 3.4), attributable to the higher operating revenue that it generated. However, a comparison between CASK and RASK of each carrier shows that IndiGo has greater efficiency, particularly due to the higher costs incurred by Air India.
All of these standard metrics are used for measuring the efficiency and profitability of an airline. Thus, it comes as no surprise that efforts to privatise the carrier were futile, mainly due to the perception of Air India as an albatross. The moderate improvements in efficiency and operational profits are insufficient to lure the private sector towards this dead investment. The potential revenues of Air India cannot service the massive debt that has been accumulated, more than 50 percent of which is working capital debt meant to tide over the short-term cash flow concerns. Under these circumstances, it also does not make sense for the government to continue pumping taxpayer money into a sinking ship. The disinvestment strategy for AIL adopted by the government must be revisited. Without a considerable decrease in the accumulated debt, the carrier will not attract significant buyers. The few profit making subsidiaries of AIL as well as the treasured international routes could be used to make the offer more attractive. The government should seriously reconsider the unending cycle of bailouts and critically analyse the costs and benefits accrued from pumping valuable resources into a failing enterprise.
[i] India’s Air Transport Sector, IATA 2018
[ii] Air India, Air India Express and Alliance Air
[iv] Transfer of Rs 29,000 crore of the accumulated debt to Air India Asset Holding Co. approved by the ministerial panel
[v] Total Operating Revenue/ASK
[vi] Average distance flown per aircraft departure (Total aircraft kilometres / Total number of departures)