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Trust Deficit

Industry insiders and chiefs are unable to comprehend why their pleas to various government authorities have fallen on deaf ears. The sector has always assumed that the primary reason is that the government does not want to appear to be siding with an industry that is perceived to be a luxury, which is a fallacy, to begin with, since almost 150 million passengers flew in 2019 domestically.

But former and present government and the ministry of civil aviation sources say this is only a partial truth. One of the reasons why the government remains quite unmoved by the pleas of the sector is that they are not convinced that the industry is as “loss-making or beleaguered” as it claims. This lot argues that most of the airlines that have gone bust in the past in their view are more a case of mismanagement by the founders/promoters/management, mal-intent or even a faulty model, rather than a hostile operating environment overall. They point to IndiGo’s success to buttress their point. “Jet operated in virtually a no competition era so taking its example might not be ideal but IndiGo has amply demonstrated how one can make money and build a strong business even when there are reasonably strong competitors,” says one official.

A senior ministry official points to three or four facts observed by them over the years. He argues that in good times, airlines can and do make good money, and in a debt-free and easy manner. For one, through sales and leaseback, airlines that go in for large aircraft orders straight away book a large profit as there is almost a discrepancy of $5-8 million per aircraft between the price at which the airline buys the plane from the manufacturer and at which it sells and leases back the asset from the leasing company. If the airline chooses to bring that money back into the company’s books, it has a good buffer, as IndiGo had done with its very first 100 aircraft order at the time of launch. This is what many argue gave the airline a headstart over others.

Another reason why government sources say they are not convinced about the sorry plight of airlines is unlike most other businesses, airlines do not need working capital loans as they open flights, and fares are collected in advance. “The moment a sector or flight is opened, fares begin to accumulate and they provide working capital for the airline,” explains an airline CFO who has been with three of the Indian carriers. This is a big advantage, he argues, which only a few other sectors have. Overall, debt is usually not a concern for most airlines as aircraft financing is also well-established and does not reflect on their liabilities as such. Unlike debt of say infrastructure companies and other similar businesses, there is no real gestation period for the asset (the aircraft) to begin to offer returns.

Three, most airlines – both in India and globally – earn revenues through ancillary businesses and this can be a significant portion of their total revenues. “In other words, as has been demonstrated by airlines like IndiGo in the past, the business can be profitable and quite remunerative even when the macro environment is not wholly favourable,” says this official. He argues that even if the airline loses some money through its core operation of flying, it can be more than made up through other avenues. “If this was not the case, why would many of the players continue in this business. Nobody is here to consistently make losses,” says he, pointing out that most in the sector are “pretty shrewd businessmen”. Moreover, why would new entrants like an Akasa come in, they ask.

An aviation industry veteran called it a “trust deficit” between the airlines and the government and said authorities were of the view that the industry – like many others – cries wolf at the drop of a hat. Be that as it may, there’s no denying the last three years have been a test of the sector’s nerves in more ways than one. Whether the airlines will prove to be Cassandra, the government, like the king of Troy, refuses to believe them, and will this lead to the downfall of one or more players, can only be known in due course. Readers should watch this space.

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