Air travelers in India let out a collective sigh of relief on Sept. 13, when Jet Airways, the country's second-largest private airline, negotiated an end to a five-day strike by nearly half its pilots. But for the rest of India's airline industry, that just might be terrible news. In an industry plagued by too many planes and too few passengers, the past five days may end up being its most profitable. As soon as Jet Airways started canceling flights on Sept. 1, competitors moved in hungrily on its 25% market share, doubling and even quadrupling ticket prices for last-minute buyers. "Break even? We raked it in," says the chief operating officer of a competing airline, who asked not to be named because India's airline regulator had frowned on the practice. "All the industry needs is for one major airline to go out of business, and the rest of us will be fine."
That's a dire—albeit accurate—prognosis for an industry that was once the fastest-growing in the world, capturing the public imagination as passenger traffic doubled every two years, new airports opened across the country, and airlines wooed economy passengers with tickets at throwaway prices. They wowed business-class travelers with private helicopter rides from airports to city centers, lavish meals, and fancy lounges. "These airlines, they treat you like a king," says Jagdish Chattra, a 52-year-old U.S.-based businessman who took an Aug. 27 business-class flight on Kingfisher Airlines, India's largest private carrier. His lunch included salmon, spinach-and-brie soup, French pastries, and fresh-baked bread for an $80 economy-class ticket that he spent a further $50 to upgrade. A valet carried his bag to a plush lounge, and a flight attendant polished his eyeglasses before landing.
Carriers Overexpanded in Boom Times All the luxury did little to cover the red ink every time earnings season came along. India's airlines, with a total fleet size smaller than that of Singapore Airlines or American Airlines (AMR), lost $2 billion in the fiscal year ended March 2009, a fifth of the global total for the airline industry. Jet Airways, which was once occasionally profitable, had operating losses of $268 million, and Air India, the aging and stodgy state-run carrier, flew its nearly 100-plus planes half-empty, losing more than $1 billion. "It's definitely going to be a long time before Indian carriers reach the kind of efficiencies needed for long-term stability," says Kapil Kaul, the India CEO of the Center for Asia Pacific Aviation (CAPA).
The biggest problem is overcapacity. India's airlines simply bought far too many planes, far too early. As the Indian economy scorched between 2003 and 2007, carriers added planes and destinations in a frantic race for the largest market share, losses notwithstanding, in the hope that as passengers got hooked on air travel they would eventually pay enough for tickets to produce profits. Gurgaon-based IndiGo placed a record-breaking order for 100 Airbus A320s in 2005, agreeing to a total list price of $6 billion. Bangalore-based Kingfisher placed orders for five of Airbus' double-decker A380s, at $350 million each.
The expected surge in profits, however, never happened. Indian passengers turned out to be addicted not to air travel, but to cheap air travel. By late last year, as struggling airlines started to raise prices, passengers went right back to the welcoming arms of the state-run Indian Railways, where subsidized tickets on air-conditioned coaches mean a Delhi-Mumbai train ticket could be had for as little as $15. In April 2009, airlines sold about half a million fewer airline tickets than in April 2008, the lowest number in more than two years. By last month, the trends had improved only marginally, as airlines started to drop prices again. "Look, I will fly for business if the ticket is about $100," says Agneesh Yadav, a 27-year-old accountant who lives in Delhi, a 16-hour train ride from his family in Pune, near Mumbai. "But to go see my grandmother? If I can get a ticket for $30 or so, fine. Otherwise, I take a train and enjoy the scenery."
Competing with a State-Run Airline The airlines insist the problem lies with an overregulated industry where they are forced to compete with the deep-pocketed state-run Air India, circle crowded airports for hours waiting for a spot in the landing queue, and deal with exorbitant parking fees. In August, they threatened to go on a one-day strike unless the Indian government lowered taxes on jet fuel—they eventually capitulated but continued to grumble. "Our losses are no longer sustainable," Kingfisher Chairman Vijay Mallya, who has funded the airline's losses from the seemingly never-ending profits of United Breweries, his beer and liquor empire, told reporters last month. "It costs us more to fly than to stay on the ground." (Kingfisher did not respond to e-mailed questions.)
The Jet Airways strike, which cost the airline about $2.2 million a day in lost revenue, underscored the fact that Indian skies could do with fewer planes. Air India, the much-maligned state carrier, absorbed as many as 70% of Jet's passengers. The airline, which could receive $500 million of a nearly $4 billion government-sponsored bailout, is often pointed to as the chief villain in India's airline industry. In 2006, the government spent about $11 billion on 111 new Airbus and Boeing (BA) planes for the carrier, which has tried hard to shake a reputation for late arrivals and indifferent customer service. The carrier has about 15% market share and monopolies on several foreign routes but has been a perennial loss-maker, prompting private carriers to single it out as a price-spoiler; for instance, Air India often sells last-minute tickets at throwaway prices, bucking a global ticketing practice and forcing private carriers to drop last-minute prices, too. "If Air India goes out of the system, it will be good for the industry in the short term," says Kaul, the CAPA analyst. "But it isn't clear that the private airlines are healthy enough to take over the very important role of a national carrier."
Years of losses have meant that the airlines have burned through much of their equity and must now sell stakes to keep flying. Jet Airways, which shelved a fund-raising plan as the global markets melted down last year, has revived a $400 million equity-for-cash offer that might come through qualified institutional placements, a common practice in India where companies sell small stakes for as little as $10 million to help fund operations. Kingfisher has been on the lookout for about the same amount of money, but complains that foreign investment rules that limit overseas ownership to 26% make it difficult for it to find buyers.
With Air India propped up by the government, the coming year could be tougher still. Indian passengers are overwhelmingly choosing low-cost carriers for travel, helping IndiGo to break even and even post meager profits. The larger private airlines, which have staked their reputations on lush, full-service offerings, must convert more and more of their flights to the lower-revenue, low-cost, no-frills options such as Jet Airways' Jet Konnect or Kingfisher's Red service. Eventually, that would mean a smaller—in terms of revenue—Indian airline industry. It may not be glamorous and include salmon lunches prepared onboard, but it might just be profitable.