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Last week we reported on the massive loses made by national carrier Air India on 57 of its 59 international flights.
Over the next few days we will bring you differing points of view on Air India’s international operations.
Today is from a professional analyst at one of the world’s leading aviation consulting and advisory practices. He cannot be named since he is not authorised to speak to the media.
Route Economics
Route economics is simple. At the fundamental level revenues of a particular route must cover the costs. Some airlines opt for loss making routes to feed traffic on the network. But even so, the network revenue must cover network costs.
Air India’s analysis leaves one wanting on both counts.
With ~30 international destinations, Air India carried in excess of five million passengers in the financial year ending March 2014.
Taking the international network into consideration, with a CASK (cost per available seat kilometre) ranging from Rs 3.8 to 4.2 and a RASK (revenue per ASK) of Rs 2.8 to 3.5 on the international segment indicates a loss of Rs 0.30 to as high as Rs 1.37 per ASK. With 30.5 billion ASKs, either way, the international segment is a total loss for the airline.
On a per passenger basis this equates to a loss of ranging from USD 32 or approximately Rs 2000 to as high as USD 148 or Rs 8,882 on international operations.
Airline costs breakdown
Independent estimates via industry sources indicate that the cost structure, as a percentage of total costs on the international operations are:
- Fuel: 43% – 51%
- Staff: 18% – 20%
- Maintenance: 5% – 8% (figure is low due to a newer fleet)
- Selling and distribution: 7%
These figures highlight that more efficient flying and better headcount management is critical from a cost perspective. Unfortunately, Air India’s penchant for placing wide-body airplanes like the 777 and 787 on short sectors like Mumbai Ahmedabad, New Delhi Hyderabad, or New Delhi Dubai only adds to its costs.
Network profitability
Air India’s break even load factor for the international segment being in the range of 77% – 85%. Compare this to the average load factor that the airline has achieved of 72.9%, yet only 2 routes cover costs. The two routes are ones where Air India is the only airline providing direct services thus help it capture a premium.
Often heard is the view that Air India is on a turnaround path, and the impressive load factor of ~73% is cited. Load factor as a standalone statistic us meaningless. Lower fares can logically lead to higher load factors and unfortunately Air India’s cost base does not allow deep discounting (it does so anyway but that’s the topic of another article).
Load factor also fails to indicate the airlines ability to capture yield premiums which highlights the strength of an airline network. Airlines leverage their market strength to capture a premium via strategies such as:
- Having maximum seat capacity out of an airport (ideally be the only carrier)
- Leveraging its airport presence to capture premiums
- Negotiating lower airport charges being a dominant carrier at an airport
- Having premium slots that translate into preferred schedules
- Dominating a particular route(s)
Examining the route-wise profitability, and comparing it against the above points it is evident that:
- Where Air India commands a premium is on two routes: Varanasi – Kathmandu and Kolkata – Yangon. Load factors on both flights are only 43%, but being the only airline servicing the routes direct it can capture premium. This highlights a weakness of the airline to effectively compete when faced with more nimble and/or powerful competitors.
- Top money losers:
Ahmedabad Mumbai Newark & vv Mumbai Delhi New York & vv Ahmedabad Mumbai London & vv Hyderabad Delhi Chicago & vv Amritsar Delhi London & vv Delhi Sydney Melbourne Delhi Amritsar Delhi London & vv Chennai Delhi Paris & vv Mumbai Chennai Singapore & vv Mumbai Delhi Shanghai & vv Combined (on average) these flights have a 71.9% load factor, an average RASK of 2.61 and an average CASK of 4.03; and a loss per ASK of 1.42. With 1.78 bn ASKms on these ten routes, the direct loss is Rs 252 crores or USD 42.1 million.
A cursory look at fares and competition indicates that because of the competition on these routes which not only offers a better product but more competitive prices (as it maximizes its revenue from cargo and premium passengers), it is extremely tough for Air India to compete.
While it could be argued that the New York and Chicago flights are covering cash costs and not total costs – the theory is flawed. The airline also contends that these routes feed the domestic network, the numbers are minuscule – also supported by the fact that if they did have multiple connections the flight would terminate in Delhi the routing would not necessitate a through flight to Hyderabad and Mumbai.
- Five routes with loss per ASK on the lower side i.e. in the 0.30 range:
233/234 Kolkata Gaya Yangon & vv 997/998 Kozhikode Sharjah & vv 962/963 Kochi Kozhikode Jeddah & vv 937/938 Kozhikode Dubai & vv 922/923 Kozhikode Riyadh & vv A quick analysis of these routes indicates that Air India is competing on price (on one route directly with its own low cost subsidiary Air India Express!). Thus while strategies for capturing premiums on these routes may be implemented, reducing the cost is the only way to turn these around (as opposed to increasing price which will have traffic migrate to other carriers). Negotiating better airport charges, more fuel-efficient procedures and better schedules could be a possible way to achieve this.
Conclusion
That Air India is losing money is an understatement. Yet, examining network and fleet strategy brings up some interesting questions. For instance, particular routings such as the 777 on a Hyderabad – Delhi route or the one-hop Sydney-Melbourne-Delhi flights don’t quite add up.
Idris Jala, the legendary CEO of Malaysian Airlines who was responsible for the airlines turnaround once said, “It’s crucially important to frame the problem in the context of the P&L (profit and loss) rather than something nebulous, like the culture, the structure, the processes, and all these other things. You must anchor everything on the profit and loss. I’m boringly consistent on that point.”
For Air India, the time is now. At some point the Indian taxpayer will say enough is enough. The longer tough decisions are delayed, the harder they become. An examination of the route level profitability indicates that there are only three ways if the carrier is to be turned around: cut the costs, improve the yields and develop an efficient network (the right aircraft for the right mission and the right schedule). If all three cannot be achieved, and quickly, a radical decision will have to be taken by the political leadership.
Great analysis. It is evident that there is scope in cost cutting especially in the areas of fuel and staff but more important is the generation of higher revenues. A restructuring of the network is a must in order to enhance revenues, one option is the dropping wide body operation of the domestic portion of the international routes and operate them using more suited narrow bodies. Another option is code sharing on certain routes with alliance partners. Things will tend to get worse as the fleet ages and maintenance costs increase.
I am not sure that there is a political will to do anything, other than protect Air India, at least in the near term.
First up very good analysis. Thanks. It probably makes sense to terminate US long haul at DEL/BOM and let pax connect normally to HYD/AMD on narrow body domestic flights. For most pax, it won’t be any different than what they would do with other carriers and the flight is probably going at least 50% empty to AMD/HYD. Even if AI markets the flight domestically and puts domestic pax on these flights, I doubt they are filling up an entire 77W. What about costs like airport charges? For e.g., AI arrives at 6:30AM at ORD and does not leave until 1:30PM while NH, JL, KE and OZ all arrive around 8-8:30AM and are gone by noon.
Air India needs to actually start using hubs like hubs. No tags. DEL as the main hub should take all North American flights, serve all European and North Asian destinations. Leave BOM to serve a limited selection of European and Asian flights and be the main gateway for Africa. Make MAA or BLR a hub to serve Southeast Asia and Australia with a limited amount of European and other Asian connections as required.
Get rid of the tags and run a three hub service with more frequencies to the Indian destinations which are normally tags. They’d see higher load factors and higher yields with such a plan.