For spicy stories , there is no better place than Airline Industry . Latest spice(jet) saga is yet another sputter in the struggling airline industry . Rarely has any industry been so notorious for churning out so many failed ventures . Richard Branson’s famous quote “ if you are a billionaire , the easiest way to become a millionaire is to invest in an airline business” is a hard to break rule in this industry . Yet , for many high profile businessmen , there is no stop to seductions by the glamour and exterior grandeur of this industry.
Much has been written or debated about what ails this industry . There is no prize for guessing . Usual suspects like high fixed costs , microscopic margins , low pricing power , volatile input costs and poor return ratios are of course the bane of this industry. But many industries suffer from such ills , yet do not foster failed ventures in such remarkable succession as airline industry does . That leaves something for munching on what lies at the root of this ruin.
The puzzle does not stop with airline . It goes even further . Poor economics is not only the bane of airlines , but extends beyond in the industry eco-system . Take the case of aircraft manufacturing industry . It has all the ingredients to make it as one of the dominant business with flourishing financials . Controlled by two dominant players – Boeing & AirBus – ( duopolistic) with high entry barriers both on capital and technology front , it could easily qualify for an astonishing business . But , on paragons of profitability it hardly scores over an industry as mundane as steel-making with its microscopic returns.
Digging deeper , puzzle does seem to unravel . Underneath the glittering façade of airline industry lies the lurking reality that the industry is extremely vulnerable to the perils of capital misallocation . Unlike other industries , missteps in capital allocation can be deviously disastrous and can hit at the heart of business survival . The reason being the massively leveraged nature of the business and hence the risk of short-term cash-flow disruptions spiraling into long-term survival issues as happened in the case of Spicejet . As for the poor economics of aircraft manufacturers , recurring bankruptcies in the airline business on a regular fashion have ruined the industry profit pool and as a result have infected the otherwise healthy aircraft manufacturers .
Unfortunately , airline industry offers ample opportunity for fatal mis-steps in allocations unlike other capital intensive industries . Airlines indulging in aircrafts-buying-binge when capital is cheap during boom times ( blinded by bullish outlook on demand) is at the heart of the capital mis-allocation . In other industries , such missteps do occur during boom times , but less penalizing in its effects . However , in airline industry , such mis-steps have a spiraling effect because of low safety cushion ( due to high leverage , volatile input costs , high taxes, high fixed & operating costs etc ) . Operating discipline is extremely critical in this industry for long-term survival . Given the glamour and tabloid appeal of this industry , it has a notorious reputation to attract a novice , yet adventurous operator now and then . Being operationally less disciplined, but more macho , such glamorous operators do the damage to the industry by their uncanny ability to mis-allocate massively . Though Spicejet may survive by its new funding plans , this sagacious sickness saga may continue to haunt the airline industry for times to come .
Wish you all a very Peaceful and Happy New Year !!