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A quick analysis of available numbers seems to suggest that the path to profitability for different domestic airlines will be different. Their problems are not just high fuel and airport costs

Much media real estate has been spent on the woes of the domestic airline industry and the huge losses that it is facing. Almost universally, the villain has been made out to be the high cost of Aviation fuel, the specialized petroleum-based fuel used to power aircraft. Some, from within the industry, have occasionally pointed an accusing finger at the high tax rate on Aviation fuel levied by some states as well as the high landing, parking and handling costs at some of our airports.

On the other side, low cost carrier SpiceJet literally surprised everyone by announcing a small operating profit for the last quarter.

We looked at some of the available numbers for the industry and came up with the distinct feeling that both the problem and its solution may not be the same for all the players. That is, the source of the current problems faced by airlines may not be just high fuel costs and taxes and that the solution may not be just a reduction in these two items.

Before we proceed further, do remember that this analysis is only indicative and uses publicly available data. Some of the data may be outdated or reasonably inaccurate.

Is the way to profitability through shorter hops rather than longer hauls? Would regional operators be more likely to be profitable than national ones?

Other things being equal, one of the key elements that determine the profitability of an airline is its Passenger load Factor – the average percentage of seats that are full in an airline flight. The current load factor for domestic airlines is in the 70-80 range. The other key element is the average realization per seat. For the purpose of this analysis, we took the fares of a morning flight around 8 am from Mumbai to Delhi five days ahead, less the taxes and Airport fees (User service fee, USF) as the earnings per seat. In the case of airlines that do not have Mumbai – Delhi flight, we took a flight of similar distance on a common route that they operate. We took Mumbai – Delhi because this route accounts for the bulk of traffic and operations in the country.

The table below is a summary of the data available and the basic calculations we carried out. We did not use the financial data for Air India because details for Indian Airlines was not separately available. Go Air, Indigo, Paramount and MDLR do not disclose financial performance.

Our first question was:
Can the airline break even by filling in more seats?
For this we calculated the additional amount that can be earned by selling one more seat in every flight. As can be seen from column 6, based on the number of flights that the airline operates per day, Indian Airlines (the domestic code for Air India) stands to earn as much as 10.3 crore per quarter if they can sell just one seat more in every flight they operate. By the same token, SpiceJet could afford to sell six seats per flight less and still break even. Kingfisher earns the highest per seat at Rs 11.3 crore per quarter.

From this, it can be inferred that for Jet Airways, the challenge is much more complex as it has to sell 49 seats more per flight to break even – virtually an impossible task! Similarly, Kingfisher, also will find it virtually impossible to make up for its losses by selling more seats as it will have to sell 21 seats more per flight at current realization to break even!

In real life, it may be more practical for an airline to focus on chosen flights and sell say 10 more seats in each of them rather than sell one more seat in every flight.

That took us to the next question:
Are the number of turnarounds optimal?
A given aircraft does more than one flight per day and the time between two flights, that the aircraft spends on the ground getting cleaned and with passengers disembarking and embarking, is the turnaround time. In the absence of exact data, we simply divided the number of flights per day operated by each airline by the number of aircraft they own. (In real life, this is not as simple, given that some aircraft may not be used because of repairs, etc. and longer flight durations means lesser number of operations per day). Column 9 gives the calculated average trips per day for the different airlines.

SpiceJet seems to be doing 10 trips per aircraft per day, while Indian Airlines is doing only 4.5 trips per day and Jet Airways is doing just 2.2 trips per day!

Now, if each airline were to be be able to do one more trip per day per aircraft, and have 100 paying passengers in this additional flight, what will happen? The results are astonishing to say the least and are available in column 10. Keeping operating costs aside, Jet Airways would almost wipe out their quarterly losses! And Kingfisher would reduce its losses by as much as 60 %.

More number of flights per aircraft per day automatically means shorter flights. So, is the way to profitability through shorter hops rather than longer hauls? Would regional operators be more likely to be profitable than national ones? Should the national players reorganize themselves into federations of regional plays, much like telecom is organized into circles? Is a multi-hub model the route to profitability for national players?

What about the fleet?
SpiceJet operates one type of aircraft, the Boeing 737 Next Gen. Paramount, which does not disclose financial performance, but claims to be profitable also operates on kind of aircraft – the Embraer. Kingfisher operates two distinct kinds of aircraft – Airbus and ATR, as does Indian Airlines – Airbus and Boeing. Jet Airways operates three types of Aircraft, the Airbus 330, Boeing 737 and ATR.

Operating multiple types of aircraft and multiple variants within them (Jet Airways for example operates thirteen 737-700’s, thirty one 737-800’s and two 737 900’s) means that you need people certified to maintain, manage and fly each one of them separately. Also your spare parts inventory has to cover all variants that you operate. All these lead to higher operating costs.

Conclusion
Even given external factors like high fuel prices and airport charges that they have no direct control over, different domestic airlines may well find their path to profitability to be unique and different from that for the others.

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good analysis
written by arpit, November 29, 2009

hi..this is a good analysis carried out ... very useful..
but wht is the answer to the following questions -

So, is the way to profitability through shorter hops rather than longer hauls? Would regional operators be more likely to be profitable than national ones? Should the national players reorganize themselves into federations of regional plays, much like telecom is organized into circles? Is a multi-hub model the route to profitability for national players?

These should also be explained

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