Why Indian Airlines FAIL | Business Case Study

Summary

The Indian aviation market is experiencing rapid growth, yet many airlines struggle to survive. The script discusses the bankruptcy of Go First, attributing it to engine failures and management issues. It also explores the downfall of Kingfisher Airlines due to poor governance and strategy. Factors like fluctuating oil prices, currency devaluation, and the high cost of aviation turbine fuel (ATF) in India are highlighted as challenges. Despite these hurdles, the market's potential remains vast, with increasing demand and government initiatives like Udan aiming to connect small cities to larger ones. The script questions government intervention in airline bailouts, suggesting that efficiency improvements in the sector could be a better solution.

Takeaways

• 🌐 India's domestic aviation market is experiencing rapid growth, with 450,000 people taking domestic flights in a single year, marking an all-time high.
• 📈 Despite the growth, many Indian airlines are struggling financially, with Go First filing for bankruptcy in May, highlighting the challenges in the industry.
• 🛫 Aircraft and engine procurement is crucial for airlines, with Go First leasing from Airbus and buying engines from Pratt & Whitney, which later faced engine failure issues.
• 🔍 Engine failures led to significant operational disruptions for Go First, with half of its aircraft grounded by May, impacting the company's financial stability.
• 💼 Management instability and family disputes within the Wadia family, who owns Go First, contributed to the airline's failure, with key executives resigning and staff leaving for other airlines.
• 💡 Competitor IndiGo managed to mitigate engine issues by switching engine suppliers and seeking compensation, demonstrating a proactive approach to crisis management.
• 💸 Financial mismanagement and unpaid debts contributed to the downfall of Kingfisher Airlines, which despite its initial success, faced severe financial and operational challenges.
• 🌐 The Indian aviation market's unique challenges include high operational costs due to factors like expensive aviation turbine fuel (ATF) and fluctuating crude oil prices.
• 💼 Poor corporate governance has been a recurring issue in Indian airlines, affecting strategic decisions and financial stability, as seen in the cases of Kingfisher and Air India.
• 💡 The Indian government's policies, such as the National Aviation Policy and Udan scheme, aim to promote the aviation sector but also highlight the need for efficiency and self-sustainability in the industry.
• 🌟 Despite the challenges, India's aviation market continues to boom, with the potential for significant growth and contribution to the country's GDP, emphasizing the importance of addressing the sector's issues.

Q & A

What was the all-time high number of domestic flights taken in India this year according to the Aviation Ministry?

The all-time high number of domestic flights taken in India this year is 450,000.

Why did Go First file for bankruptcy in May of this year?

Go First filed for bankruptcy due to engine failures, which led to a significant portion of their aircraft being unusable, and despite this, they were still incurring costs for these aircrafts.

What was the main engine supplier for Go First and what was the issue with their engines?

The main engine supplier for Go First was Pratt & Whitney. The issue with their engines was that they started failing, which affected the operation of Go First's aircrafts.

How did IndiGo handle the engine issues with Pratt & Whitney compared to Go First?

IndiGo, upon noticing problems with their engines in 2016, changed their engine supplier to CFM International in 2019 and also sought compensation from Pratt & Whitney for the unusable aircrafts.

What is one of the main reasons for Go First's failure besides engine issues?

One of the main reasons for Go First's failure, besides engine issues, was management failure, including instability and family disputes over the management of the airline business.

What was the market share of Kingfisher Airlines at its peak?

At its peak, Kingfisher Airlines had a 26% domestic market share, making it the biggest airline in India at the time.

Why did Kingfisher Airlines start incurring losses from its premium segment?

Kingfisher Airlines started incurring losses from its premium segment because they acquired Air Deccan and rebranded it as Kingfisher Red, a budget airline, which led to a shift in their customer base towards the budget option.

What was the impact of the global recession on Kingfisher Airlines?

The global recession led to an increase in fuel prices, which had a devastating impact on Kingfisher Airlines, contributing to their financial losses.

How did the Indian government's National Aviation Policy of 2016 change the rules for domestic airlines to start international travel?

The National Aviation Policy of 2016取消了 the old 15/20 rule, which previously required domestic airlines to fly domestically for 5 years and have a maximum of 20 aircraft before they could start international travel. The new policy allows new airlines to take international routes as well.

What is the Udan scheme, and how does it affect air travel in India?

The Udan scheme, which stands for 'Ude Desh ka Aam Nagrik', is a government scheme that subsidizes some routes to connect many small cities to big cities, making air travel more accessible and affordable with ticket prices ranging from Rs 1,000 to Rs 2,500.

Why hasn't the Indian government bailed out struggling airlines, and what is the debate around this issue?

The Indian government hasn't bailed out struggling airlines because they lack trust in the airlines' management, especially after the Kingfisher Airlines incident. The debate revolves around whether the government should help by providing financial support or by creating sector reforms to improve efficiency and reduce costs.

Outlines

00:00

📈 India's Aviation Boom and Struggles

The script discusses the paradox of India's aviation industry, highlighting a record 450,000 domestic flights taken in a year, marking an all-time high and positioning India as one of the fastest-growing airline markets globally. However, it also points out the struggles faced by Indian airlines, including the bankruptcy of Go First, despite its previous expansion and IPO launch. The narrative delves into the operational challenges of airlines, the importance of aircraft and engine providers, and the impact of engine failures on Go First's operations. It contrasts the fates of different airlines, with some ceasing operations abruptly, while others, like IndiGo, manage to navigate challenges by changing suppliers and seeking compensation.

05:04

🛫 The Downfall of Go First and Kingfisher Airlines

This paragraph examines the collapse of Go First and Kingfisher Airlines in detail. Go First's failure is attributed not only to engine issues but also to management failures and family disputes within the Wadia family. The resignation of key executives and a mass exodus of staff due to stagnant salaries and lack of promotions led to operational inefficiencies and financial losses. Kingfisher Airlines' story is also explored, from its rapid growth and luxury service to its eventual downfall due to poor governance, unclear strategy, and the global recession's impact on fuel costs. The paragraph underscores the importance of effective management and strategic clarity for the success of airline businesses.

10:06

💡 Lessons from Kingfisher's Strategy and Air Deccan's Beginnings

The script contrasts Kingfisher's failed strategy of targeting both budget and luxury segments with Air Deccan's successful low-cost model. Kingfisher's attempt to rebrand Air Deccan as a budget airline and later increase its prices led to its failure. In contrast, Air Deccan's affordable tickets and dynamic pricing model, Dynafares, attracted a large customer base, increasing its market share significantly. The narrative also touches on the challenges faced by Air Deccan, including a near-disastrous first flight and the competitive pressures from other low-cost airlines entering the market.

15:07

📉 The Impact of External Factors on Indian Aviation

This section of the script discusses the various external factors affecting Indian airlines, such as fluctuating oil prices, geopolitical issues influencing crude oil imports, and the strength of the Indian Rupee relative to the US Dollar. It explains how these factors can significantly impact operational costs and the financial health of airlines. The script also addresses the complexities of aviation turbine fuel (ATF) pricing in India, the benefits of bringing ATF under the GST system, and the challenges posed by currency valuation in international transactions.

20:12

🛫 India's Aviation Market Growth and Government Policies

The script outlines the growth of India's domestic aviation market, its contribution to the GDP, and the government's role in promoting the sector through policies like the National Aviation Policy and the Udan scheme. It highlights the removal of the 15/20 rule, allowing new airlines to operate international routes, and the government's reluctance to bail out struggling airlines due to past experiences with Kingfisher. The narrative emphasizes the need for airlines to learn from past mistakes and for the government to consider sector-wide reforms to improve efficiency.

25:14

✈️ The Global Challenges of the Airline Industry

The final paragraph of the script acknowledges the inherently challenging nature of the airline industry, which is subject to a myriad of uncontrollable external factors such as wars, pandemics, and political instability. It also notes the varying fates of different airlines, with some being highly profitable while others face bankruptcy. The script concludes by encouraging airlines to learn from the mistakes of the past and by suggesting that customer satisfaction and strategic management are key to success in this volatile industry.

Keywords

💡Domestic Flights

Domestic flights refer to air travel within a country, as opposed to international flights. In the context of the video, the script mentions that 450,000 people took domestic flights in India, indicating a significant increase in domestic air travel. This is a key indicator of the growth of the aviation market in India.

💡Airline Markets

An airline market refers to the industry or sector that involves the operation of commercial flights. The script highlights that India is one of the fastest-growing airline markets in the world, suggesting a dynamic and expanding industry. This growth is both a challenge and an opportunity for airlines operating in the country.

💡Bankruptcy

Bankruptcy is a legal status where an individual or company is unable to repay their outstanding debts. The script mentions Go First filing for bankruptcy, which is a critical event in the company's history and signifies a failure to meet financial obligations, impacting its operations and reputation.

💡IPO (Initial Public Offering)

An IPO is the process by which a private company goes public by offering its shares to be traded on a stock exchange for the first time. The script notes that Go First had launched its IPO a year before filing for bankruptcy, indicating an attempt to raise capital and expand its operations, which ultimately did not prevent financial failure.

💡Market Share

Market share is the portion of the total market for a particular product or service that is controlled by a particular company. The script mentions Go First having a 10% market share, which shows its significant presence in the Indian aviation market. However, the company's financial struggles and eventual bankruptcy highlight the challenges of maintaining market share in a competitive industry.

💡Engine Failures

Engine failures in the aviation industry refer to malfunctions or breakdowns of aircraft engines, which can be catastrophic. The script discusses how engine failures, specifically with Pratt & Whitney engines, led to Go First grounding a significant portion of its fleet, ultimately contributing to its financial collapse.

💡Management Failure

Management failure refers to the inability of a company's management to effectively run the business, leading to poor performance or collapse. The script points out that Go First's management instability, including the resignation of key executives, was a major factor in its failure. This highlights the importance of strong leadership and stable management in the success of an airline.

💡Aviation Turbine Fuel (ATF)

Aviation turbine fuel, or ATF, is a type of fuel used in aircraft engines. The script discusses the high cost of ATF in India and its impact on airline operations. The cost of ATF is a significant factor in an airline's operational expenses, and its fluctuation can directly affect profitability.

💡National Aviation Policy

The National Aviation Policy is a strategic framework introduced by the Indian government to promote the growth and development of the aviation sector. The script mentions the policy's impact on allowing new airlines to operate international routes, which is a significant change that can influence the competitiveness and growth of the industry.

💡Udan Scheme

Udan, or Ude Desh ka Aam Nagrik, is a government scheme in India aimed at making air travel more accessible and affordable by subsidizing certain routes. The script highlights how this scheme connects smaller cities to larger ones, making air travel more affordable and thus expanding the market for domestic flights.

💡Corporate Governance

Corporate governance refers to the system of rules, practices, and processes by which a firm is directed and controlled. The script discusses poor corporate governance in airlines like Kingfisher and Air India, which contributed to their financial struggles. Effective corporate governance is crucial for the long-term success and stability of a company.

Highlights

In 2023, a record 450,000 people took domestic flights in India, marking an all-time high according to the Aviation Ministry.

India's aviation market is one of the fastest-growing globally, with Prime Minister Modi acknowledging its rapid expansion.

Despite market growth, many Indian airlines face struggles, including Go First's bankruptcy filing in May.

Go First had launched an IPO a year prior, showing initial signs of expansion with new aircrafts and a 10% market share.

The company's downfall began with engine failures from Pratt & Whitney, leading to a significant reduction in operational aircrafts.

IndiGo, a rival airline, managed a similar engine crisis by switching suppliers and seeking compensation, unlike Go First.

Go First faced payment issues with Pratt & Whitney, resulting in a lack of spare engines and further operational challenges.

Internal strife within the Wadia family and management instability contributed to Go First's failure.

Kingfisher Airlines, once a top company, shut down due to poor governance and unclear strategy, despite initial success.

Jet Airways and Kingfisher Airlines exemplify the challenges of the Indian aviation market, with 13 airline closures in 20 years.

Air Deccan's low-cost model initially succeeded but faced sustainability issues as operational costs increased.

The Indian aviation market is price-sensitive, with consumers prioritizing cost over in-flight services or loyalty.

High fuel prices and the fluctuating value of the Indian Rupee against the dollar pose significant financial challenges for airlines.

The Indian government's National Aviation Policy and Udan scheme aim to promote growth and connectivity in the aviation sector.

Despite the growth, the Indian government has been hesitant to bail out struggling airlines due to concerns over management and promoters' wealth.

The aviation industry worldwide is inherently challenging, with even top airlines facing bankruptcy due to external factors.

Successful airlines like Singapore Airlines and IndiGo demonstrate that profitability and customer satisfaction are achievable with the right strategies.

Transcripts

This year, 450,000 people took a domestic flight in India.

According to the Aviation Ministry, it's the all-time high in India.

And India is one of the fastest-growing airline markets in the world.

Prime Minister Modi talked about the same thing.

But along with this, many Indian airlines are also struggling.

In May this year, Go First filed for bankruptcy.

But surprisingly, a year earlier, Go First had launched its IPO.

This was the news from last year.

Go First was expanding its operations, buying new aircrafts,

and preparing for its IPO.

They also kept their operating and maintenance costs low.

Go First also had a 10% market share.

So basically, Go First's position was very good in our market.

And Go First is not the only airline in India that has recently failed.

In the last 20 years, 13 airline companies have shut down.

Some of them were top companies like Jet Airways...

"Jet Airways will cease all its operations from midnight."

...and Kingfisher.

"30 Kingfisher flights have been cancelled since morning."

And there were a few small companies whose names

you may not have heard of.

Like Air Carnival and Air Pegasus.

If we add Cargo Air Companies, the list will get even longer.

The question is, why are so many airlines failing at a time

when India's aviation market is growing so fast?

First, let's talk about what happened to Go First.

According to the company's official statement,

the company had to shut down due to engine failures.

Engine failure can crash an airline.

But how did it cause an entire company to shut down?

To understand this, we need to understand how an airline company works.

Go First is owned by the Wadia family, a famous Parsi

business family with many businesses across the country,

like Britannia.

The company stepped into the Indian aviation market when

the son of the family, Jai Wadia, launched Go First in 2005.

To build an airline, you either need to buy or lease aircrafts.

There are two main companies in the world that provide these aircrafts

– Boeing and Airbus.

But to build an aircraft engine, you need to go to other companies

like Pratt & Whitney, CFM International, and Rolls-Royce.

When you have both the aircraft and the engine, you have an airline.

Obviously, you need licenses,

but for now, let's focus on aircrafts and engines.

Go First leased its aircrafts from Airbus.

They had a particular model of Airbus – Airbus 320 neo.

They bought their engines from Pratt & Whitney.

Go First's problems started when Pratt & Whitney's engines started failing.

Due to this, they couldn't use many of their aircrafts.

In 2018, they had to stop 10% of their aircrafts.

By the end of 2021, this number was 30%.

And by May this year, this number was 50%.

So the company wasn't using half of its aircrafts.

But remember, they were still paying the price for these aircrafts.

We should also know that Go First was not the only airline

that had a problem with Pratt & Whitney's engines.

Go First's rival, IndiGo, also had similar problems.

But IndiGo did something that Go First didn't.

IndiGo noticed a problem with their engines in 2016,

after which they couldn't use many of the aircrafts.

But when they realized how big the problem could be,

they changed the engine supplier.

In 2019, they signed a $20 billion deal with CFM International.

Not only that, they also asked Pratt & Whitney for

compensation for the aircrafts they couldn't use.

The CEO of GoFirst said he watched many of Pratt & Whitney's

That's why they ignored the problems with the engines

and trusted Pratt & Whitney.

Now you might ask, what if the engine fails?

Go First could ask for a spare engine from Pratt & Whitney.

But there was a problem.

Last year, Morning Context reported that Go First couldn't

use 20 of its aircraft because of payment issues with Pratt & Whitney.

That's why Pratt & Whitney gave the spare engines to Indigo

because of the payment issue with Go First.

Go First's executives say that there were no payment issues

and they paid on time.

But the truth is that we can't blame Go First's failure on the engines alone.

One of the major reasons for their failure was management failure.

The Wadia family had a fight over the management of the airline business.

Because of this the company's management was unstable.

In 2021, Go First's head Jai Wadia resigned as the airline's MD.

Last year, Go First's chief financial officer,

airport services head, and many executives of the revenue management

and the network planning department also resigned.

By September 2022, half of the revenue management team had left their jobs.

Pilots and cabin crew also took on other airlines' jobs,

like Air India and Akasa Air.

The major reason for this is that the staff's salary hasn't increased

and they haven't been promoted.

As the airline's staff decreased,

This resulted in financial losses.

In 2022, within a few months, the loss of Go First went

from ₹1800 crores to ₹3,500 crores.

Engine failures, management instability, and family issues

led to the failure of Go First.

Did other Indian airlines face the same problem?

What were the problems of Indian Airlines?

We can take an example of that.

Kingfisher Airlines was founded in 2005 by Vijay Mallya.

This airline saw a boom in a very short time.

It sponsored an IPL team...

...hosted parties

and created a reputation of being a world-class airline.

Hot food, in-flight entertainment, and comfortable seats.

And the guests were being treated like gods.

These airlines became popular among business-class travellers.

In 2008, the company started international operations

with the launch of a flight between Bangalore and London.

Kingfisher became the first Indian airline to get a 5-star Skytrax rating.

Only 7 airlines in the world got this rating.

Kingfisher became the biggest airline in India.

Along with 250 daily flights, Kingfisher had a 26% domestic market share.

This is considered a huge market share in the airline business.

Today, Vistara and Spicejet are the second and third

biggest domestic operators in India.

And their market shares are 10% and 7%, respectively.

The story of Kingfisher Airlines was doing well.

But all of a sudden...

In September that year, Kingfisher Airlines told the Bombay Stock Exchange...

that the company had been running at a loss.

"As people are reluctant to fly, the situation is worsening."

"In the first 18 months, you have incurred a loss of Rs 347 crores."

In February 2012, the Airports Authority of India sent

a notice to Kingfisher Airlines that it hadn't paid $32 million.

It even faced legal action for evading taxes.

"The service tax department has seized one of Kingfisher's planes."

"A service tax of Rs. 77 crores has been imposed on Vijay Mallya's company."

So how did this happen all of a sudden?

There were two main reasons for this.

The Kingfisher Airlines didn't have a good governance structure,

nor did they have a clear strategy.

Kingfisher started as a premium, business-class, luxury airline

where good food and entertainment would be provided.

He believed that the Indian middle class craved luxury.

And Kingfisher would provide them with that.

In 2007, they acquired an airline, Air Deccan.

They rebranded it and called it Kingfisher Red.

If any of you have travelled in Air Deccan, you know that

Air Deccan is not about luxury.

G.R. Gopinath, the founder of Air Deccan, said,

Air Deccan was a common man's airline.

You didn't get seats in Air Deccan.

Like an Indian bus, it operated on a first-come, first-served basis.

You might ask, what was Kingfisher's logic for buying Air Deccan?

Their logic was that Kingfisher would serve luxury travellers

and Air Deccan would serve cheap travellers.

So they would take over the entire market.

But Kingfisher Airlines had another logic.

When an Indian passenger tries a budget option,

they would also try a luxury option.

So a customer who had never flown in a plane would

start with Kingfisher Red and gradually opt for Kingfisher Premium.

But unfortunately, the opposite happened.

Kingfisher Airlines customers started using Kingfisher Red.

This meant that Kingfisher started incurring losses from its premium segment.

Kingfisher was winning many awards but the problem didn't start in 2011.

It started in 2008 when there was a global recession...

'There is a recession in the U.S."

"And because of Wall Street's slow start this week"

"the whole world will face a slowdown."

"The global economic downturn has had a devastating impact"

"on the aviation sector."

...which increased the airline's fuel prices.

In 2011, the airline announced that it had lost ₹1,000 crores

in three consecutive years.

Kingfisher Airlines realized that they had made a huge mistake.

Kingfisher tried to rectify their mistake.

What did they do?

They increased the price of Kingfisher Red.

They tried to make their budget airline premium.

But a year later, they had to stop operations for

Kingfisher Red.

In 2005, Kingfisher's first CEO was Alex Wilcox.

He stayed with Kingfisher

for less than the time it takes to complete a summer internship.

In just two months, he resigned from his position.

"It was a difficult decision for me, but I took it because"

"our long-term business vision was not the same anymore."

The exact reasons for his resignation have never been made public.

But according to some reports, Alex believed that he was

going to set up a good airline in India.

"He had a vision, and the aim of that vision was to give a"

"new life to the dream of a common man in India."

"I said, I'll help them start Kingfisher Airlines."

But when he arrived in India, he found out that Vijay Mallya

had already devised the airline's strategy.

He thought if I'm not given independence as a CEO,

what will I be able to do here?

Alex was also told that Kingfisher would be a low-cost airline.

But when he arrived, he found out that Kingfisher was going

to be a premium airline.

"At that time, I understood that the vision of a low-cost"

"domestic carrier had been abandoned."

"I realized that I did not have the experience of leading such an airline."

After Alex's resignation, Kingfisher Airlines didn't have a CEO for 5 years.

This meant that Kingfisher Airlines was running on Vijay Mallya's wishes.

And Vijay Mallya didn't have much time either.

This was the time when he faced several accusations.

One allegation was that he took ₹6,000 crores from Kingfisher Airlines.

And we've seen this poor corporate governance in other

Indian airlines as well.

An example of this is Air India.

Air India also had the same problem – poor governance.

For example, in 2005, Air India ordered 111 planes from Boeing.

But this wasn't in their plan.

In fact, Vinod Rai, India's ex-CAG, wrote in his book that

Air India's original plan was to order 10 aircraft from Airbus.

But instead of ordering 10 Airbus, they ordered 111 Boeings.

So what happened?

This:

In 2005, India was negotiating a nuclear deal with the US.

In 1998, when India conducted a nuclear test,

the US imposed sanctions on India.

This made it difficult to build nuclear power in India.

But there was a condition in the deal.

India would get nuclear cooperation from the US and in return

the US would get an order for a Boeing aircraft from India.

Boeing is an American company, while Airbus is a French company.

This nuclear deal put pressure on Air India to buy

aircraft from Boeing, not Airbus.

In fact, India's Planning Commission also voiced its

support for this deal.

Some of you may ask, even though an airline can change its supplier,

how did Air India change its order from 10 to 111 planes?

In fact, this is a huge controversy since 2011.

The then CAG, Vinod Rai, has raised several questions.

In 2017, the government started an investigation.

Ex-Aviation Minister Praful Patel said that this order was

extended because there was a merger between Air India and Indian Airlines.

We don't know if this order change can be justified or not.

But we do know that Air India's finances worsened after this deal.

Governance is not the only reason behind airline failures.

Another reason is India's unique aviation market.

This is Captain G.R. Gopinath, who built a low-cost airline, Air Deccan.

He only had one vision.

that air travel would be cheaper in India and many people

could travel by air.

But the beginning of Air Deccan was a bit of a mess.

On 24th December 2003, a month after the launch, Air Deccan

was flying from Hyderabad to Vijayawada for the first time.

There were 23 passengers on the plane, including BJP President Venkaiah Naidu

and Aviation Minister Rajiv Pratap Reddy.

A few seconds after take-off,

the engine caught fire.

Thankfully, the fire was extinguished and all the

passengers were safe.

But many people started asking if the low cost would mean less safety.

Thankfully, the story of Air Deccan started changing.

A month later, they started their first flight again.

In December 2003, they announced that they were buying more planes.

Air Deccan tickets were 40-50% cheaper than other airlines.

In July 2004, Air Deccan introduced Dynafares.

Under this, the ticket prices changed dynamically on a first-come,

first-served model.

So if you buy a ticket early, it would be cheaper for you.

This meant that the price of Air Deccan tickets in big

cities was just Rs. 700.

While the price of other premium airlines was between Rs. 6,500-10,000.

That too, for the economy class.

Many people started using Air Deccan instead of trains.

This increased the market share of Air Deccan by 22%.

Remember, Jet Airways was the biggest airline in India at the time.

Its market share was 25%.

Air Deccan became so popular that a movie was made on it.

But there's another twist in the story.

Air Deccan started expanding very quickly.

By 2007, it started operating 380 flights a day from 67 airports.

Air Deccan's operational costs increased.

But it couldn't compensate for this from the consumers because

their prices were low.

Many new low-cost airlines like SpiceJet and IndiGo also entered the market.

As a result, Air Deccan's popularity tanked in 2007.

Eventually, Kingfisher bought them and rebranded them as Kingfisher Red.

Journalist Pranjan Pande says that there was a big problem

with Air Deccan because its consumers were price-sensitive.

That's why they couldn't increase their prices.

This problem isn't just with Air Deccan.

Today, low-cost airlines have a market share of 80%.

Experts like Pranjan have said that Indians are ready to

fly any airline as long as it's the cheapest.

Loyalty and in-flight services don't matter.

If you give them expensive food, they'll bring it from home.

What matters is how cheap the ticket is.

Many claimed that's why Jet Airways failed because they

wanted to target the premium segment in the Indian market.

But not every low-cost airline will perform well in the Indian market.

Last year, Indigo suffered a loss of ₹29 per passenger on some routes.

For every passenger, they charged ₹4.69 per km.

They had to spend ₹5.08.

The problem is that the consumer wants the ticket to be cheaper.

But the airline's cost isn't under their control.

There are several factors that keep their costs going up and down.

One of these factors is oil.

In fact, oil for Indian domestic airlines, which is

called aviation turbine fuel or ATF, is the most expensive in the world.

There are many problems with this.

First, ATF is outside the GST network.

Why does this matter?

Basically, the GST system is a unified system.

This means that state taxes are the same.

If a product is outside the GST network, it means that

every state can levy taxes in its own way.

The ATF has an excise duty from the central government of 11%.

The state can impose a value-added tax on it,

which is different for each state.

There's another complication.

In Maharashtra, where the VAT on ATF is 25% at Mumbai and Pune airports,

it's 5% at other state airports.

Similarly, in Tamil Nadu and Gujarat, the VAT on ATF at

Trichy and Rajkot airports is 5%.

Whereas, the VAT on other airports in those states is 39%.

Because of this, the cost of any airline changes from

airport to airport.

According to the Niti Aayog, the cost of ATF in India is 60%

higher than that in Southeast Asia and Middle Eastern countries.

ATF constitutes 30% of an airline's operational cost globally.

In India, fuel amounts to 45% of an airline's operational cost.

There are many benefits in GST.

First, there's less complication.

Due to GST, the cost of ATF reduces due to the tax rates.

In addition, GST also has an input tax credit system.

Because of this, airlines can save a lot of taxes.

That's why many airlines are requesting the government to

bring ATF under the GST system.

There's another problem with the ATF.

India imports crude oil due to several geopolitical reasons.

The price of crude oil keeps fluctuating.

Last year, oil prices skyrocketed.

Why?

When the oil problem is solved, another problem arises,

which is...

"In comparison to the dollar, Indian Rupee has crossed 81.50 mark."

"For the first time in history, the Indian rupee"

"has exceeded crossed the mark of 80 compared to the US dollar."

Now you might ask, even a domestic passenger pays in rupees.

So if the valuation of rupees is decreasing,

what impact does it have on an airline?

Let me explain.

As I said, many airlines rent aircraft from foreign manufacturers.

And these rental agreements are in dollars.

So if the valuation of rupees is decreasing, an airline keeps

getting money in rupees from the passengers.

But the Airbus and Boeing have to be paid in dollars.

As we said, when Go First shut down their airline, it was found

that they hadn't paid the rent of their 10 planes for 2 months.

The creditor had to file a complaint with the DGCA so that they could recover their money.

But even after these problems,

India's aviation market is booming.

So what's the riddle?

"India's domestic air traffic and passenger growth are"

"setting a new record."

This is PM Modi, who was speaking in the US 2 months ago.

And he's right.

India is the 3rd largest domestic aviation market in the world.

Its contribution to the Indian GDP is 5%.

And 40 lakh people work in this sector.

And there's a major reason behind this.

In 2010, there were 8 crore passengers in India,

which doubled in 7 years.

It is estimated that by 2037, this number will be 52 crore.

As people's income increases, so will the demand for aviation.

You must have seen many people on Twitter complaining that

the airport lounges are overcrowded at Indian airports.

This is the result of this.

Now, if we talk about the percentage, the Indian middle

class is very small.

We talked about this in a previous video.

In India, the population is so large that even a small

percentage in aggregate terms is very large.

Apart from the increasing middle class, the Indian

government is also promoting the aviation sector.

"This is the first time in India that the aviation policy"

"has been implemented after our government came into power."

In 2016, India introduced the National Aviation Policy.

This policy changed the old 15/20 rule.

According to the 15/20 rule, domestic airlines can only

start international travel when they've been flying

domestically for 5 years and have a maximum of 20 aircraft.

But the new policy cancelled this rule.

This means that a new airline can also take international routes.

For example, Vistara started its operations in 2015.

But at that time, it was pondering whether to extend its operations or not.

Because it didn't know when it would fly international routes.

But now this policy has made it easy for an Indian airline

to fly international routes.

In addition, the Indian government has introduced another

policy called Udan.

Not this Udaan.

It's Ude Desh ka Aam Nagrik,

a government scheme that subsidizes some routes.

This connects many small cities to big cities.

This scheme connected Tamil Nadu's Salem to Chennai,

and Andhra Pradesh's Kadpav to Hyderabad.

The price of air tickets is also very reasonable, from Rs 1,000 to Rs 2,500.

Now you'll ask, if the government can subsidize some routes,

why doesn't it bail out the airlines?

This will save many jobs.

After the pandemic, many governments throughout the world

have bailed out their airlines.

In fact, $123 billion was given to the airlines, of which

$26 billion was given to Asia-Pacific.

But the Indian government didn't do anything about it.

In fact, the Director-General of the International Air

Transport Association said that the Indian government should help.

But according to top government officials, they don't want

to help because they don't trust these airlines.

And this lack of trust came after Kingfisher.

The government believes that the airlines failed,

but the promoters were still rich.

First, the promoters should help.

Then, the government will help.

On the other hand, there are those who say that the

government should help.

This sector is very important for our development.

And 40 lakh jobs are at stake.

In fact, the government has already helped.

For example, the government bailed out Air India for Rs 30,000 crores.

But people say that the government should bail out for specific reasons.

If a company is failing because of its management,

why should the government help?

And others say that the government should help.

But not by giving money, but by making the sector more efficient.

For example, bring ATF to GST and create other reforms so

that companies can earn money on their own.

We should also realize that this business is very

challenging all over the world.

There's a famous saying that if you want to become a

millionaire, first become a billionaire and then start an

airline company.

America's top airlines like American United and Delta

have filed for bankruptcy at least once.

Airline businesses are so challenging because their

operations depend on several external factors.

They can fluctuate at any time.

If there's a war...

The fuel prices will go up.

If there's a pandemic or political instability,

all the airlines will shut down.

"Because people are avoiding travelling due to the fear of coronavirus"

"which is directly affecting flights."

After the 9-11 attacks, the U.S. airline industry suffered a loss of $7.7 billion.

But along with this, there are many airlines that are very profitable.

And customers love them.

Like Singapore Airlines, Emirates, or IndiGo in India.

If airline companies don't repeat the mistakes that

Kingfisher and other Indian airlines have made,

they won't be mentioned in such videos.

If you liked this video, you'll also like this business video.

In this video, we talked about Ambani's business strategy

to dominate the Indian economy.

Do watch it.