Airline industry is affected by no. of factors such as fuel price fluctuations, high fixed costs, strong influence of external environment and excessive use of marginal costing by carriers. Recessions in the industry tend to last longer, while recovery periods are generally shorter. Over the past nine years, it is observed that industry has made losses for five years and during the profitable years margins were on a lower end. The airlines industry is acutely sensitive to external events such as wars, economic instability, government policies and environmental regulations.
Evolution of airline industry in India:- Civil aviation took its roots in India in December 1912 with the launch of the first domestic air route between Delhi and Karachi. In 1915, first Indian airline Tata Sons Ltd, initiated a regular airmail service between Karachi and Chennai. In 1953, the government nationalized the airlines industry, by enacting the Air Corporation Act. Subsequently, assets of nine existing airline companies were transferred to two new corporations - Air India International and Indian Airlines - creating a monopoly that perpetuated right up to 1993. In 1994, with the repeal of the Air Corporations Act, private carriers like Jet Airways were permitted to operate scheduled services, subject to fulfillment of certain criteria. However, some operators could not sustain and exited the business in 1997. The operating environment of the domestic airline industry underwent a substantial change between 1997-98 and 2011-12.
1997-98 to 2002-03: During this period, Indian aviation lacked focus, leadership and strategic direction, which kept the industry grounded. The sector was both, over-regulated and under-managed. No new entrants were permitted to serve the domestic market. Restrictive policies and delay in aircraft delivery starved state carriers (Air India and Indian airlines) of capital and consequently, made it difficult for them to operate on international routes.
2003-04 to 2005-06: Competition intensifies:- Establishment of the Ministry of Civil Aviation, liberalization with regard to private carriers having improved access to international routes, rise in foreign direct investment caps, accompanied by modernization of airports, resulted in significant growth for the aviation sector. The airport infrastructure policy allowed 74 per cent foreign equity participation in airport infrastructure with automatic approval and 100 per cent equity on case-to-case basis. The entry of Air Deccan, which offered tickets at competitive rates compared to other carriers, intensified the degree of competition substantially. A liberalized domestic open skies policy paved the way for many new carriers such as Spice Jet, Go Air, Kingfisher and Paramount Airways to enter the sector. 2006-07 to 2007-09: Deflating revenues and inflating costs:-Carriers could not pass on the increasing costs due to intense competition in the domestic market. Margins of all carriers,...