In the fight for control of the skies over India, Go First Airlines was the latest casualty in the month of May. Sadly, it appears as though it won’t be the only high-profile carrier to fail. The Mumbai-based Go First, formerly known as Go Air, filed for bankruptcy and announced flight cancellations. This has caused turmoil in India’s airline industry.
Amazingly, some of the top airlines in the sector, including Air Deccan, Kingfisher, Jet Airways, American Airlines (AAL), United (UAL), and others, have gone bankrupt. Probably, harsh competition is the first rational explanation that occurs in the mind.
Why, while providing a service that is absolutely necessary and playing a vital part in shrinking the world, is the airline industry linked to ongoing losses and insolvency?
The following are some of the difficulties that the airline industry is facing and the root cause behind its bankruptcy:
The cost and availability of aviation fuel have continued to be one of the main economic variables affecting the airline business for decades. An increase in jet fuel prices has an immediate effect on the financial health of airline firms. Due to fewer travel restrictions and a temporary rebound in demand for passengers worldwide, airline fuel expenses climbed by roughly 30%.
The number of flight departures, the market’s average fuel price, and the quantity of fuel used for each departure all affect how much fuel is used and how much it costs. All these factors are used to calculate the average daily fuel expense that an airline must pay.
2. Russian-Ukrainian War
As a result of the conflict between Russia and Ukraine, several no-fly zones have been declared, which has caused issues for the airline industry. The effects of the conflict are particularly felt by a few important markets and trading partners. Global oil prices rose when the Russia-Ukraine conflict broke out in 2022. Over the coming years, however, the chance to locate substitute fuel sources and market destinations will assist in balancing some of these possible effects.
3. INR Depreciation:
The INR/USD exchange rate has risen during the past five years. The USD accounts for approximately 35% of total airline expenses. Lease rentals, airplane service (engine and other), etc. are a few examples of such costs. The airline industry in India must spend more INR to make these payments when the INR is weaker relative to the USD.
The price of fuel in India has also gone up due to the strong dollar.
4. Interest costs:
Most airline firms are heavily indebted following COVID. In order to survive and cover costs such as rent, wages, maintenance, and other expenses, they have accepted these commitments. Consequently, their interest expense has multiplied.
5. Rent and Lease:
Leasing agreements cover the majority of the airline firms’ assets. Aerial vehicles, engines, spare parts, airport facilities, etc. are among its main assets.
6. Aviation Facilities:
To keep up with the increase in air travelers, airport infrastructure, including runways, hotels, terminals, concourses, shopping areas, and lounges, must be continuously improved. Aircraft must be routinely updated and maintained. The onsite facilities like aircraft ground handling systems must also be refurbished if the airline is to keep its image and stay ahead of the competition.
Although there are benefits to doing this, frequent upgrades might negatively affect an airline company’s profitability and the aviation market.
7. Low-cost flights:
Large companies like IndiGo provide incredibly low tickets on routes flown by competitors, exploiting their market share to recover expenses on less competitive legs and utilizing economies of scale to reduce overhead.
Future of the airline industry
Indian aviation sector has a very high potential for growth. Despite the industry’s fierce competition and problems, it has experienced double-digit growth. The government is building airports in many locations despite the fact that the road ahead is incredibly difficult to navigate.
Only time can tell how the airline industry will shape up in the future.