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Monday, 06 May, 2019, 10 : 18 AM [IST]

Not Losing Sight of Market Dynamics

The writing was on the wall for Naresh Goyal and it was only a matter of time that Jet Airways met its fate of shutting down operations. This incident is a harsh reality check for the government and airline companies in India. Despite new destinations joining the aviation map and massive growth in passenger numbers, which will continue for years to come, India continues to be a challenging tarmac for airline operators because of the price-sensitive nature of the market. That is the very reason for the popularity and dominance of low-cost carriers in India.

The success of LCCs is demonstrated by the business models of IndiGo and SpiceJet. No airline can afford to lose sight of market dynamics when an overwhelming majority of passengers prefer the low-cost air travel option. Moreover, it is no longer a viable to operate a full-service airline where meeting per seat operating cost is a difficult proposition when the market is dominated by LCCs. The cumulative losses sustained over a period of time forces the full-service carriers to trim amenities, default on paying lessors & banks, delay salary payments, expand debt exposure and eventually requires securing additional capital to stay afloat like in the case of Jet.

The urgent need of the hour is for FSCs to try and match the costs of the LCCs to the extent possible, and restructure and tweak their business models to stay relevant because fare difference between LCCs and FSCs is negligible; not enough to cover the cost of additional amenities FSCs provide. This holds true not only for Jet, but also for Air India. For airlines to be economically viable, there is requirement of concerted efforts from the government to take cognisance of the cost structure of airlines and revise taxation policies because India is an expensive aviation market to operate with astronomical airport charges, expensive ATF and costlier UDF. The aviation industry structure was formulated decades ago and since then technology has consumed the market in a big way, air capacity has seen a massive expansion and competition has grown multi-fold. To ensure airlines sustain in the business, the government needs to give some breather to the airlines to be able to at least recover cost of producing a seat.

What happened with Jet is extremely sad and with this India has lost a good airline – hopefully only temporarily. The indications of financial distress were there for some years, and Naresh Goyal should have taken the difficult call to step down from the very airline he created some months ago – after he failed to ensure fund infusion to enable a prospective investor in Etihad or Tata to bring in the capital required to keep the airline afloat. While it is a sorry state of affairs for its employees, the consequences of running the airline without any change in its operation model which has not proved suitable in an environment dominated by LCCs, is for everyone to see!

Jitender Bhargava
Former Executive Director, Air India & Author, The Descent of Air India

The views expressed within this column are the opinion of the author, and may not necessarily be endorsed by the publication.

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