Airlines need to veer towards new ways strategies to recover crisis
With the airfare cap on domestic airlines being removed from August 31, the last restrictions imposed during the pandemic will be lifted.
This should pave the way for airlines to regain most of the lost ground. According to various estimates, domestic airlines have suffered losses of around $4.1 billion in 2021-22 (about $10 million per day) and are expected to reach the pre-pandemic level by the end of FY2024.
But what are the building blocks that the airlines should put together to recover from the worst crisis the airlines have suffered? Here are a few critical parameters that domestic airlines should work on:
1. Be a constructive collaborator. The airlines should work with the Government to solve their problems. They should negotiate with various states to lower excise duty on aviation turbine fuel for domestic flights. As a first step, the airlines have succeeded in getting the Government’s nod on exempting them from paying 11 per cent basic excise duty on ATF when it is used to refuel aircraft for international flights.
2. Focus on return on invested capital (ROIC) – which is the amount of money a company makes that is above the average cost it pays for its debt and equity capital. According to an airline analyst, Pankaj Narayan Pandit, while IndiGo has retired its debt and is using its capital, there is no cost of funds, and it is safer than most. The Tatas are well-capitalised, and therefore, the portfolio of airlines, including Air India, will have access to enough funds.
3. Revenue Management: The two critical parameters of revenue management are Stifle and Spill. In the airline industry, spill refers to passenger demand turned away from a flight because demand has exceeded capacity. Pankaj Narayan Pandit pointed out, that even at the lower end of the airfare cap, the airfares were relatively high and to recover costs, the airlines will continue to increase fares. The passenger traffic during 2019 was at a high of 140 million, but today, it has not even crossed 100 million. Hence, the demand has to outstrip the supply to sustain higher fares. Otherwise, it will end up stifling the flights. Revenue management aims to strike a balance between load factor and yield. An airline selling rock-bottom fares might fill seats and lose money. During the last few months, Air India has been increasing its airfares. Even though Air India is a full-service carrier, low-cost carriers in India have been able to offer airfares at the same level because of better scheduling and better on-time performance. , which most passengers opt for. In the era of dynamic pricing, there is little difference between full-service airlines and low-cost carriers. Hence, Air India’s market share has reduced to 7.5 per cent from 14.9 in January-June (see graph). Either it is because the Tatas have reduced capacity for Air India or it is stifling the airline. As a result, cannibalisation is possible among the Tata Group’s portfolio of airlines. A former director with Air India said, the airline should be able to increase the fares gradually. “Reckless increase in fares will only kill whatever demand there is in the market. Two years of losses cannot be made up in six months,” he said.
4. The Four Cs: Calendar, Clock, Capacity and Cost. The calendar is about the year’s seasonality (year-wise seasonality). During the peak season, the airlines should hold capacity and not offer all of them at lower fares, which is when revenue management kicks in. Clock: The 7 AM and 9 AM slots (day-wise seasonality) at airports are the most sought after by airlines. Therefore, the airlines must manage them well and release more capacity during the two-hour slot. Capacity: The airlines should be careful in deploying capacity on specific routes. There is no point in flying a 200-seater aircraft when the demand, even at its peak, is not more than half of that. Cost: The airlines should be able to select the correct aircraft type with the right configuration. Analysts say that the Cost per Available Seat Kilometer (CASK) parameter doesn’t always yield the right results. The airlines should be able to investigate how cost differentials add up by considering unit costs, volumes and productivity of their cost buckets. Almost everything that goes into a flight should be examined thoroughly, including whether the cabin crew’s deployment is at the right level or is it more. Also, by resorting to better rostering, developing targetted training programmes and planning the crew effectively, the airlines can reduce or manage more costs.
5. Reputation management: The airlines should not only manage the airline’s reputation among the passengers but also internally. Dissatisfied employees can completely derail the airline’s revenues or bleed it to such an extent that turning it around might become extremely difficult later.
Most domestic airlines are fighting for survival while financial institutions are watching from the sidelines on whether they are taking the suitable measures to turn around. From now on, the airlines that will sustain their operations for a longer time will focus on best business practices and not resort to short-term measures.
August 21, 2022