Why do airlines struggle to stay afloat?
Why do some segments in aviation make money while the ones who operate the aircraft bear the brunt of financial difficulties?
What are the plausible ways to mitigate these challenges and ensure the sustainability of the airline industry?
Why could the aviation business not reach its full potential despite witnessing an unabated, undiluted surge in demand?
Despite witnessing a surge in demand for air travel, mankind has already seen several examples of failed airlines that went bankrupt or closed down.
Examples include the collapse of Pan Am in 1991, which was once a major player in the industry, and the demise of Thomas Cook Airlines in 2019, which struggled to adapt to changing market dynamics. Flybe, a regional carrier in the UK, tried to expand rapidly to increase its market share. However, this strategy backfired, leading to overcapacity and financial losses that eventually resulted in the company’s bankruptcy.
The US government had to bail out several airlines, like American Airlines and Delta Air Lines, during the COVID-19 pandemic to prevent bankruptcy and maintain their operations. The bailouts were necessary because the airlines experienced a significant revenue and passenger demand decrease due to travel restrictions and lockdown measures.
These cases highlight airlines’ vulnerability and the need for effective strategies to ensure their sustainability. They also highlight the importance of adaptability and strategic decision-making.
Several factors contribute to the struggles faced by airlines in staying afloat. One of the main challenges is the high operating costs associated with running an airline. Airlines must manage a complex web of expenses, from fuel expenses to maintenance and personnel costs. Additionally, intense competition in the industry puts pressure on airlines to offer competitive prices, further impacting their profitability.
For example, legacy carriers often face challenges from low-cost carriers that offer cheaper fares and attract a significant portion of the market share. This can lead to decreased revenue and profitability for the larger airlines.
Another issue is the cyclical nature of the aviation business. Economic downturns or geopolitical events can lead to declining air travel demand, causing airlines to experience financial difficulties. This was evident during the global financial crisis in 2008 and during the pandemic, where several airlines faced significant losses, and some even went bankrupt.
Furthermore, the airline industry is highly regulated, with strict safety and security standards that require continuous investments. Compliance with these regulations adds to the financial burden on airlines.
Such so-called ‘challenges’ are, in fact, mere excuses or attempts to cover up the company’s shortcomings and lack of adaptability to changing market conditions.
For instance, fuel costs factor. This is not as menacing as it is made out to be. Even when fuel becomes twice as costly as it is today, people will still fly and buy tickets, and the necessity to fly will never diminish. Hence, it is up to the concerned airline to find innovative ways to cope with increasing fuel costs and maintain profitability.
However, despite trying to manage through strategic planning and cost-saving measures effectively, nearly all airlines have ended up with minimal profits, losses, and disappointment. The situation has become a major challenge for the industry as a whole.
Besides, fuel, which significantly impacts airlines’ profitability, can no longer be used as an excuse for poor performance.
This is just one factor among many that airlines must navigate. They must also contend with increasing competition, changing consumer preferences, and the constant need for innovation and cost management.
From a business perspective, it is crucial for airlines to adapt and find strategies to thrive in this challenging environment. In order to stay ahead and remain profitable.
Various strategies can be employed to mitigate these challenges and ensure the sustainability of the airline industry. This includes cost-cutting measures such as improving operational efficiency, optimising route networks, and reducing excess capacity. They can also explore new revenue streams like ancillary services or partnerships with other aviation stakeholders to reduce operational costs.
Additionally, investing in technology and innovation can help improve operational efficiency and the customer experience, ultimately boosting profitability. Moreover, embracing sustainability practices can enhance the company’s reputation and attract environmentally conscious customers.
From the manufacturing perspective, consider the case of Airbus. It produced the best aircraft, the A380, a 500+-seat aircraft. Yet, it could not break even and could not find enough buyers. The high production cost also included the amount spent on R&D, which deterred the buyer. Besides, its operational costs and runway and tarmac requirements further led to significant financial losses, rendering the whole exercise futile in the long run. In conclusion, the company’s inability to generate enough revenue and the substantial financial losses ultimately made the venture unsuccessful and unsustainable.
Imagine the plight of people associated with the A380 at Airbus who spent their entire service lives working on it, from concept to commissioning, only to see it fail miserably in the market. While they must have been left devastated and disheartened, billions, if not trillions, went down the drain. It is a harsh reality that they will have to live with for the rest of their lives, as a constant reminder of the immense financial loss their company experienced. Although the money lost can be recovered to some extent, the impact of the loss will always linger. The better part of their youth can never be regained or relived. The money recovery process would be done by non-aeronautical means, but that is another story, dealt with later.
Similarly, Boeing’s 737-Max series aircraft faced significant setbacks and controversies, including two fatal crashes. These crashes resulted in a global grounding of the plane and a loss of trust in the brand. Boeing lost more money than it could gain, which begs the question of whether it was all worth it in the end.
Among the 200 countries in the world, India lifted both Airbus and Boeing from the depths of their financial losses. India even earned a grateful ‘thank you, India’ from the heads of state of France, the UK, and the USA. India’s contribution to Airbus and Boeing’s financial losses has proven invaluable. It proved to be instrumental in revitalising the financial positions of both aerospace giants. Indian airlines like IndiGo, Air India, Spicejet, and Akasa have recently ordered hundreds of aircraft from these companies, keeping them occupied for the next three years and ensuring their survival. These orders have boosted the economy and secured thousands of jobs.
Such instances apparently indicate something organically wrong with the aviation business. But what is intriguing is that not all segments of the aviation ecosystem suffer losses during a crisis.
Recently, both Airbus and Boeing have seen the logic in producing planes or aircraft components in India under a collaboration. Airbus Helicopters will partner with the Tata Group to establish a final assembly line for helicopters in India, which will help boost indigenous manufacturing activities. It would be interesting to see how this collaboration impacts the aviation industry in India and whether it can help mitigate the losses faced during times of crisis.
Boeing has a notable presence in India, involving both manufacturing and collaboration activities. The aerospace giant has engaged in partnerships and initiatives to contribute to the country’s aviation and aerospace sector.
One significant development is Boeing’s joint venture with Tata Advanced Systems Limited (TASL) to manufacture aircraft aerostructures. Established in 2015, this partnership aims to enhance India’s aerospace capabilities and support Boeing’s global supply chain. The facility in Hyderabad manufactures various components, including fuselage sections for Boeing’s AH-64 Apache helicopter.
Having dwelt upon the plight of airlines and manufacturers, we must broaden our view. Under a certain scenario, you will notice them struggling with their finances as they try to navigate these challenges. But, under the same conditions, other segments associated with aeronautics, however distantly, continue to merrily make money and thrive even in the face of adversity.
For example, begin with, the bureaucracy. The officials of the various departments responsible for airports, operations, safety, quality, security, and so on continue to enjoy benefits, career progression, and job security, regardless of the challenges that may arise for the people directly involved in manufacturing, maintaining, or operating aircraft. If an airline has to ground one of its aircraft, it will swiftly plunge into losses, but that will make little difference to the well-being of the officials. They will still continue to enjoy their benefits and job experience. For the airline, every passing day without its aircraft in operation is detrimental, but for the officials, that would be inconsequential; instead, that day would add to their seniority.
This bears testimony to one fundamental fact: There is nothing wrong with aviation as such, but rather with the individuals and the system involved in managing it.
Imagine the scenario: an engineer from the airline going to an airworthiness officer to request inspection and certification. The engineer explains the situation’s urgency, while the official cites such ridiculous reasons as the day of the week, working hour, weather conditions, workload, piled-up files on his desk, and staff availability.
While the official’s experience, pay increment schedule, and seniority continue to tick, the airline bears the brunt of the system’s inefficiencies and is forced to deal with their consequences.
This needs to be addressed and reformed, and this write-up attempts to illuminate the necessary changes to improve the aviation industry’s workings and ensure its long-term sustainability and efficiency.
The first logical step in this direction would be to conduct a comprehensive analysis of the current practices and regulations in the aviation industry, the gainers and losers of these practices and regulations, and the potential areas for improvement. This analysis would help identify the key areas that require proactive, far-sighted government intervention to achieve long-term sustainability and efficiency in the aviation industry.
The positivity around aviation activity stems from its significant contributions to global connectivity, economic growth, and the tourism industry. Some people always make money, irrespective of prevailing conditions, while less fortunate entities struggle to make ends meet. In such a scenario, the logical solution is to implement policies and measures that equally distribute the benefits and losses to ensure fairness and stability in the economy. If not equally, then at least in a way that reduces the disparities and provides opportunities for the less fortunate entities to improve their financial situation. This can be achieved through proactive government interventions and comprehensive social welfare programmes.
Read ‘airlines’ for less fortunate entities. Returning to other segments of aeronautics, which reap rich harvests through aviation activity, is a crucial first step to identifying those segments. Invariably, these are grouped as ‘non-aeronautical revenue’. These revenue streams include commercial activities such as retail, food and beverage, parking, and advertising. The most important among them is real estate, which is unfortunately untapped. This can alone provide the necessary cushion for airlines and other less fortunate entities, especially during times of economic downturn or unforeseen circumstances. But to capitalise on the potential, it is necessary to identify such segments first, formulate some sane policies, and implement strategic measures accordingly. This will ensure a solid foundation for growth and success in the long run.
Case Study. India’s flagship carrier, Air India, was ruined by 2022; all its aircraft had turned into either scrap or barely worthy to operate. That is, its aeronautical assets had become non-productive and devalued to the extent that the lenders evaluated were no longer of any value to the company. However, the assets that stood out as the saving grace were the company’s extensive real estate holdings and non-aeronautical things like paintings and artefacts. The Air India building in Nariman Point has experienced a remarkable appreciation of over 1,000% over time, which is a testament to its enduring value. It continues to offer excellent value to its buyers, and those who have purchased it at this appreciated value are now reaping significant returns.
Case Study. Navi Mumbai and Jewar. These two areas have seen a surge in real estate development, just by virtue of the establishment of airports. In Navi Mumbai, the development has led to increased property prices and attracted major companies to set up their offices. Meanwhile, in Jewar, the development has sparked interest from investors and boosted the local economy. The point to be noted here is that not a single aircraft has appeared here. Even before an aircraft flies, billions, if not trillions, have exchanged hands in anticipation of the potential growth and opportunities that the airport will bring. And the irony is that all this is being done in the name of aviation. The real aircraft operators are yet to be rewarded.
This highlights the nature of real estate, as not every asset can offer such benefits. In comparison, aeroplanes, which require years of research to conceive, top-class workmanship to manufacture, the most stringent quality and safety procedures, and tonnes of money, depreciate rapidly in value over time. It’s a harsh reality that we must accept and work with as we continue to innovate and create new business models.
Besides real estate, several profitable avenues can be deployed in aviation activity, the discussion of which is beyond the scope of this write-up. That is coming up in book form, titled “Aviation Ventures: Exploring New Opportunities and Profitable Avenues.”
It explores the need to bring diversification and innovation to the aviation industry, besides considering policy implications and regulatory frameworks.
Can an aircraft do other tasks besides flying passengers and cargo and bringing in revenue? Can it make liquid air while it flies high? The product has a significant monetary value.
Can an aircraft work as a communication transponder while it flies and link with mobile phone operators to provide seamless alternate connectivity?
What are the various non-aeronautical verticals that can be attached to an aeronautical company using the same resources?
Why can’t an avionics MRO, with the same resources, look after other non-aviation items like mobile phones, computers, and other household electrical and electronic appliances?
How can an aeronautical company claim a share in the proceeds from non-aeronautical ventures? Can a car parking leasee at an airport share its revenue with the airline operator?
Joining the dots can help create a stable ecosystem that supports the survival and growth of aviation in general and airlines in particular by establishing effective regulations and fostering collaboration within the industry.
ABOUT THE AUTHOR
K. Siddhartha is one of the rare breeds of polymath, having wide scale, in-depth knowledge, and command over many domains and subjects.
His range includes Astrophysics, Space Science, the entire Earth Sciences, Experiential Economics, Civilization and Sanatan economics, Nature-Centred Development, Geography and Geopolitics, Perception Management, and Cultural Heritage.
His diverse domain knowledge and ability to integrate them have made him a strategic thinker, knowledge and perception management consultant, and advisor to several international and state governments. He assists policy making at the national and International level in creating and developing narratives that integrating core and critical Bharatiya values across domains of Science, Heritage, Economics, Geopolitics using AI and Perception Management to build strategy for a Bharatiya perspective of Vishva Guru oriented new world order.
He has written books on a wide range of subjects—49 books to date. Apart from that, he has been a mentor to 1600 civil servants, film personalities, entrepreneurs, and policymakers.
Naleen Chandra has been an Aircraft Maintenance Engineer since 1994, and for the most part of his career, he has headed several MROs as CEO. He served in Air India and IndiGo for several years based in Delhi. He has also undertaken an Aviation Management stint at the HAL Management Academy, Bengaluru. His specialisation has been Avionics.