Mid-air Muddle!

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 !!

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