A brief history of hard landings

The year 2006 could well be considered a turning point for India’s aviation sector. IndiGo took to the skies that August, following the footsteps of SpiceJet and GoAir, which had started a year earlier. The internet boom fuelled the launch of online travel portals, which made bookings easier.

This, however, was not the industry’s first brush with disruption. A decade earlier, deregulation had spawned the growth of private airlines. But, except for Jet Airways, not one survived. Their demise was blamed on factors such as high cost structure, unfriendly policies and lack of effective management.

“When we began in 1993, government policies towards private airlines were restrictive. Importing aircraft was difficult. Initially, we were given permission to run air taxi services and could not publish flight schedules. The government wanted to protect Indian Airlines and we were treated like step-children. However, that was not the case in 2005-06 when the it encouraged private airlines,” says Parvez Damania, who founded Damania Airways in 1993.

The government repealed the Air Corporations Act in 1994 and allowed private air taxi services to operate as scheduled airlines. In the same year, it introduced route dispersal guidelines, making it mandatory for carriers to deploy 10 per cent of capacity on metro routes to Kashmir and northeastern states.

Damania sold his airline to Chennai-based NEPC Airlines in 1995, which folded up in 1997. Air Sahara began operations in 1993 and was acquired by Jet Airways in 2007 after months of litigation (which continues till date) over the purchase price.

East West Airlines, the first private carrier which began service in 1992, closed down in 1996. ModiLuft, a joint venture between industrialist S K Modi and Lufthansa, which was in operation from 1993 to 1996,  shut shop after the latter terminated the partnership.

Besides financial problems, airlines also found it difficult to find competent managers. “Airlines need strong leadership with stable and consistent management, and the relevant experience. Barring Jet Airways, none of the other start-up airlines of the 1990s had effective management,” says K G Vishwanath, aviation consultant and former investor relations head of Jet Airways.

Damania adds, “The sector was in a nascent stage and hiring an expatriate CEO in 1990s was not easy.”

Other issues that crippled small regional players like Archana Airways and Gujarat Airways were pilot shortage, lack of support from government and competition from bigger airlines, says consultant Anurag Jain.

Domestic traffic is now growing about 20 per cent a month, but in the early 1990s growth was modest. In 1995-96, domestic airlines flew 12.19 million passengers, which grew to 15.25 million in 2003-04. Capacity addition and demand growth were modest and airlines could regularly raise fares.

The situation changed with Air Deccan’s entry in 2003. The airline founded by G R Gopinath introduced rock-bottom fares. The number of carriers in the domestic market increased from three in 2003 to nine in 2007. In four years till March 2007, total fleet size of all airlines rose from 133 to 305. In 2006-07, airlines flew about 35 million passengers. But they soon felt the pinch with continued addition of aircraft. Average load factor during the period remained slightly under 70 per cent.

“Overcapacity coupled with cost increase impacted airlines in the 2005-2007 period. Also they did not get bank funding easily and could not restructure debt because of stringent Reserve Bank of India guidelines that did not allow conversion of debt to equity,” says Gopinath.

Gopinath sold Air Deccan to Kingfisher in 2007, which eventually shut down in 2012.  He says more airlines could have survived if the government had enacted a bankruptcy protection law similar to that in the US.

Airlines had a good year in 2015-16 aided by low jet fuel prices. However, Gopinath says: “Regressive government policies and high costs continue to pose problems.” While privatisation of airports has eased the congestion witnessed a decade ago, it has substantially increased costs.

While jet fuel price is still 3.8 per cent lower on a year-on-year basis, it has risen 23 per cent since January. On the other hand, airlines are indulging in a price war as they chase traffic and revenue with discount fares, and experts say this is not healthy. Rising costs and lower yields are bound to hurt profitability.