The Unending Woes of Airlines As Fragility Of Aviation Business Is Back In Limelight

"The quickest way to become a millionaire in the airline business is to start out as a billionaire."

The quote, attributed to Virgin Group’s Richard Branson, sums up the airline business.

Airlines have consistently failed to create value for their shareholders despite adding immense value to human life. In the United States, apart from Southwest Airlines, almost every other airline has filed for bankruptcy at least once.

Even in India, most major carriers have either gone belly up once or have flirted with bankruptcy at some point.

Before the pandemic, investors had gradually developed a positive view of airlines as fuel prices showed no signs of rising for almost a decade.

Even well-known value investor Warren Buffett, who had criticised airline operators for their inability to make money, deployed a significant chunk of capital into airline stocks. But just as the airlines were recovering from Covid-induced low demand, they’ve been struck by high a global staffing shortage that has led to delays. In addition, high prices for aviation turbine fuel have resulted in margin pressure for airlines.

Just as investors had started to forget their rocky relationship with the business, the pandemic, high fuel prices, airfare caps and staffing issues have brought the fragility of the airline business into the limelight.

Stock prices of major global and Indian airline companies have lagged behind their respective market index over the trailing one-year period.

Staffing Issues

Indigo Airlines recently faced a massive take-off delay on Saturday, with almost 55 per cent of the flights departing later than scheduled. Meanwhile, Indigo’s peers such as SpiceJet, Vistara, Go First, and Air Asia saw delays for 23 per cent, 20 per cent, 14 per cent, 12 per cent and 8 per cent of their flights delayed, respectively. Around 50 Indigo flights had to be cancelled on Saturday.

The delays are attributed to the non-availability of staff. It is reported that Indigo’s rules require at least four cabin crew members to be present before the flight can take off.

Apart from Air India, Jet Airways and Akasa Air are conducting recruitment drives for various roles as well. According to insiders, some of these recruiters are offering significant salary increases along with joining bonuses to attract staff.

The competition for staff is hitting existing airlines hard, as they struggle against well-capitalised competitors for talent. Indigo has already faced salary-related issues with its staff after it did not restore pilots’ salaries to pre-Covid levels despite passenger volumes returning to pre-Covid levels.

Around ten pilots were even suspended by the airlines in April, as they reportedly tried to start a strike to protest against the non-restoration of salaries. Despite the staff taking salary cuts, the management received compensation through employee stock options worth crores, further angering the employees.

Apart from airline-specific issues, staffing issues have been exacerbated by the pandemic.

It is reported that after being laid off during the pandemic for a prolonged period, some of the staff with fungible skills went off into other sectors. Further, the supply of new talent remains constrained since several of the jobs require skills and a minimum training period.

It has also been quite difficult for airlines to manage staff since the entire scenario has remained quite uncertain for the last two years. But as the dust settles, airlines are now rushing to recruit employees and enticing them with monetary incentives. Hence, the current staffing shortage has both idiosyncratic and macro causes.

Airfare Caps amid Rising Costs

Along with demand that is recovering slowly, airlines have to deal with rapidly increasing fuel prices. At the same time, pricing remains constrained by airfare caps implemented by the government to prevent price gouging and pricing wars among airlines.

Since the beginning of 2022, aviation turbine fuel has hit an all-time high, rising by more than 50 per cent through nine separate hikes. Earlier, airlines could increase prices freely in line with demand and operating costs but now are required to set pricing within bands formed by the government. Hence, airlines might find it difficult to pass on increases in staff costs and ATF fuel costs to customers.

The effects of the staffing shortage and increasing fuel prices are already showing up in the numbers reported by publicly-listed airlines. While the aforementioned issues could possibly wreak havoc on airlines that had just returned to profitability, they certainly benefit employees who had taken sharp pay cuts during the pandemic.