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Shutting down of airlines

  • Category
    Economy
  • Published
    24th Apr, 2019
  • Jet Airways announced a temporary halt of its operations as funds to keep the airline going dried up.
  • Despite intense lobbying by the bankrupt airline, banks stood firm on their decision to not release emergency funds to sustain operations.

Issue

  • Jet Airways announced a temporary halt of its operations as funds to keep the airline going dried up.
  • Despite intense lobbying by the bankrupt airline, banks stood firm on their decision to not release emergency funds to sustain operations.
  • The government is maintaining distance from the Jet affairs citing the matter is a commercial decision of banks.

More on news:

  • Rival airlines are targeting various assets of the grounded Jet Airways, including airport slots, highly-trained employees and aircraft, making the lenders’ task of reviving the debt-laden carrier by finding a suitable buyer a more difficult task.
  • Two low-cost airlines are aggressively hiring employees of the financially-crippled airline at much lower salaries and inducting aircraft to fill the vacuum created by Jet Airways, which was a significant player in the international and domestic markets till recently.
  • Mostly, it is 40 to 50% discount. Some are even offered 25% of the salary they were drawing at Jet Airways. The service conditions and work culture at those places are completely different.

Analysis

Airlines Have An Insanely Small Profit Margin:

  • They have profit margins of less than 1% on an average. In monetary terms they make profits of only $4 for every passenger they carry.
  • The rest of the money goes to fuel (29%), salaries (20%), ownership costs (16%), government fees and taxes (14%), maintenance (11%) and other (9%).
  • The biggest thing eating away at profit is fuel, which has grown steadily more expensive.

What are the reasons for shutting down of Jet Airways?

  • Jet Airways wasfounded in 1993 after India ended a state monopoly on aviation in the early 1990s. It has consistently been one of India’s top three airlines in the past decade. It controlled 13.9 per cent of India’s aviation market.
  • The crisis started in the mid-2000s. A slew of budget carriers started flooding the market, offering nounnecessary extra feature and yet on-time flights.Price-conscious Indian travellers refused to pay a premium for on-board meals and entertainment.To keep up its market share, Jet Airways began dropping fares, some to below cost.
  • Besides this, provincial taxes of as much as 30 per cent on jet fuel added to its expenses.
  • Hence, Jet Airways lost money in all except two of the past 11 years and had Rs 72.99 billion ($1 billion) of net debt.

What are the similar examples in recent times?

  • State-run Air India Ltd:
    • It is surviving on bailouts worth thousands of crore. It was revived up with government support.
    • It has been making losses since the merger with Indian Airlines in 2007.There are too many employees after this merger and the government is reluctant to downsize. Around the world, there about 120 staff for every aircraft. Air India has 256.These extra people and salaries are a huge drain. A normal airline spends only 10% of its revenues on salaries and benefits, whereas Air India spends 20%.
    • Like any government organisation it is not professionally managed. It is run by civil servants, who might or might not have the necessary business experience and industry knowledge.
    • Ithas to run on a lot of unprofitable routes. This step isaimed at making air travel affordable and inclusive rather than making profits.
    • According to its audited accounts, the airline was estimated to have a debt burden of more than Rs 48,000 crore, making it the worst performer among public sector enterprises. This debt causedhuge burden on the taxpayer’s money. This prompted the government to go for a divestment bid. But this attempt to divest failed.
    • Further it was on the brink of defaulting on bank loan repayments. The aviation ministry hadto sought Rs 500 crore from the finance ministry on an urgent basis to deal with the crisis.
  • Kingfisher Airlines:
    • It was founded by Vijay Mallya in 2003 and started its operations in 2005 with a fleet of four new aircrafts.
    • Since its operation in 2005 year by year the airlines continued to have less income and more cost. Hence its loss kept accumulating year by year.
    • In 2010, the airlines completed restructuring of ?8,000 croredebts, with all 18 lenders agreeing to cut interest rates and convert part of loans to equity.The airlines needed capital infusion to remain viable and this has pushed shares to near historic lows.
    • In 2011 the airline released poor financial results, indicating that it was drowning in high-interest debt and losing money. The owner of airlines wanted the government to reduce fuel and other taxes.
    • It was found that airlines was operating on cash basis hence it defaulted on paying the Tax Deducted at Source from the employee income to the tax department.It also had service tax arrears of Rs. 60 crore.
    • In 2012, it received a letter from Airports Authority of India regarding accumulated dues of ?255 crore.
    • State Bank of India in 2012 declared the airlines a non-performing asset. SBI was the largest creditor and leader of the consortium of banks in the DRP (Debt Recast Package). Later the airlines was declared NPA by other lender banks-Bank of Baroda, Punjab National Bank, IDBI Bank, Central Bank of India, Bank of India,Corporation Bank.
    • It ended operations in 2012 after failing to clear its dues to banks, staff, lessors and airports.
  • SpiceJet Ltd almost collapsed two years later before its founders returned to gain control and revive the company.
  • Outside India - Etihad, Singapore Airlines Ltd. and AirAsia Bhd have also set up local ventures, but they are all loss-making.

What is the impact of this shutting of airlines?

  • Shutting of airlines causes removal of those many aircrafts from the aviation sector. This causes a lesser number of planes in flying condition leading to rise in the fares. Thisincreases the expenditure of the passengers.
  • In addition lesser number of aircrafts decreases the frequency of flights leading to more crowdedness and availability of fewer choices for the passengers.
  • It will affect the employment of the thousands of people associated with the airlines- trained pilots, cabin crew, technical staff and ground staff. They will become jobless.
  • It decreases the tourism in the country causing a loss to the income of the local people in the tourist destinations and to the national income as a whole.
  • It is the fastest mode of transport. It is free from physical barriers. It follows the shortest and direct routes where seas, mountains and forests do not obstruct. Its closing down will force people to take other modes of transport- railways, roadways taking up the precious time of people.

Way forward:

What are the efforts to minimize this issue?

  • The board of directors of the airlines and the government both should take corrective action as soon as the airlines starts making losses and not wait for the time when huge debt gets accumulated.
  • For the state run airlines the government should appoint the professionals having business experience and industry knowledge rather than the civil servants.
  • The government should review fuel taxes and surcharges apart from airport levies, which the airlines complain are too high. A healthy airline industry can only be good for government revenues over the long term.
  • It is notable that airfares have largely stayed stable over several years, benefiting passengers but biting airlines. It is time that airlines took stock of their collective plight and stopped undercutting each other on fares.
  • The airlines should efficiently manage its staff- how many number of pilots, cabin crew, staff it can pay, how much it can pay and how long it can pay. It should also manage the number of aircrafts, parking lots and air routes it can afford. It should make changes in its operation well before it goes into loss making.

Learning Aid

Practice Question:

Recent closing down of airlines shows that it is a riskier business. Discuss with examples why airlines are failing, its impact on people and economy and what efforts should be taken to solve this.

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