26 June 2020
Commercial freedom can deliver a quick-win for India’s struggling airline industry
CAPA India’s recent webinar on ‘Reinventing the Airline Business Model’ highlighted many critical strategic reforms that are required to make the Indian aviation system sustainable and profitable. Key pivots of this change include:
- Strengthening of corporate governance and risk management;
- Improving institutional know-how;
- Developing a more balanced buy/lease approach to aircraft ownership;
- Reducing costs and increasing productivity;
- Enhancing revenue, with a particular focus on ancillaries;
- Investing in consumer insights, data and analytics;
- Strengthening balance sheets;
- Recognising the value of training and knowledge building.
We recognise these changes will take 18-24 months to start showing results. However, a start needs to be made given the precarious state of the industry in light of COVID. CAPA India urges the government to pursue the following initiatives as a matter of priority:
- Providing airline management with the freedom to take commercial decisions;
- Requirement for airlines to have at least 3 months cash reserves for AOP application and renewal.
Providing airline management with the freedom to take commercial decisions and unlock a USD400 million opportunity
Airlines in India are primarily focused on the ticket price and neglect ancillaries. This ultimately serves to drive down yields as passengers tend to be more sensitive to the base fare than to subsequent add-ons.
Ancillaries generate up to USD50 billion of revenue for global carriers and have proven to be key to profitability for those that have a clear understanding of their potential.
One of the reasons that ancillary revenues are not better developed in India is that carriers face unnecessary regulatory hurdles that prevent them from maximising such opportunities. For example, airlines are not permitted to offer fares with zero baggage allowance, or non-refundable fares. And currently they have to comply with fare caps and floors.
CAPA India estimates that Indian carriers could generate an incremental USD400 million per annum if they were able to offer zero baggage fares. This will also result in passengers with no baggage having access to lower prices.
Allowing complete commercial freedom is a must for the revival of airlines in India. No other major aviation market in the world imposes such barriers on their own carriers.
Requirement for Indian carriers to have at least 3 months cash reserves for AOP renewal
Introduction of a requirement for airlines to be able to meet expenses for at least three months in the absence of any revenue will have a very positive impact on industry dynamics. CAPA has repeatedly recommended this since 2010.
Most airlines today are technically bankrupt and are starved of cash to be able to operate. This is what drives them to discount fares, locking them in a cycle of instability. Unfortunately, this is not recognised at a policy level.
Failure to implement this condition will ensure that the industry remains vulnerable. The Ministry of Civil Aviation should consider giving incumbent airlines 12-24 months to comply with this requirement, with the 1.5 months cash threshold to be met within 12 months, and 3 months cash within 24 months. This will be a critical policy decision.
A roadmap for the recovery of Indian aviation
CAPA India is preparing a roadmap for the successful recovery of Indian aviation post-COVID. This is based on our research in India, globally and in active consultation with the industry. We will cover each and every strategic issue across the value chain.
The Honourable Prime Minister has called for structural reforms in policy and regulation across the economy. This has encouraged us to formally present critical change-enablers to the government and industry that will fundamentally strengthen Indian aviation.
We, therefore, urge the Ministry of Civil Aviation to take the appropriate steps to grant commercial freedom to Indian carriers. This would represent a quick and welcome win during this difficult time and should be addressed immediately.