Cost optimization strategies for airline operators in India

Abstract

“If you want to be a millionaire, start with a billion dollars and launch a new airline” is the quote used by Mr. Richard Branson, Founder, Virgin Group to encapsulate the dynamics of the oligopolistic airline industry. The global airline industry with an annual revenue of $828 billion in 2019 is characterized by intense competition, heavy regulations, cyclicity, high exposure to economic activities, and most importantly low margins. The global passenger traffic has increased in the last decade due to growing disposable incomes, globalization of international business & commerce into developing countries, and low airfares offered by low-cost carriers. The Indian airline industry is expected to be world’s third largest market by 2025, as it has already recorded a YoY growth rate of 18.6% in 2018. The sector is expanding, boosted by the low-cost carriers, state of the art new airports and increased FDI in the domestic airlines. The convergence of rail and air fare is increasing the air traffic and a massive outlay of INR 4,500 crores proposed by the Indian government in for the year 2019-20 is further expected to boost the sector further by focusing on increasing the regional connectivity. Indian airline industry has also undergone turbulent times, where Jet Airways had to shut its operations & Air India suffering massive losses and heavy debt payments. These instances highlight the paramount importance of cost optimization in order to keep the bottom line positive and keep the firm “in air”. The top line of the airlines has been increasing, and so is their cost items, due to the oil price fluctuations, older fleet leading to higher fuel consumption, and rising interest burden. The industry where many of mid and high cost carriers had shut down, it is fascinating to study how low-cost carriers can take a share of the pie with sustainable business model and positive cash flows. Going forward we aim to analyze the inherent inefficiencies in the Indian low-cost airline segment by using common-size financial statements and benchmarking it against the global low-cost airlines to identify Industry best practices. We shall also highlight its feasibility and impact in the Indian context in order to build recommendations to capitalize the positive outlook of the Indian aviation industry.