The aviation business is now almost a century old. Yet, unlike for other businesses of similar vintage, its glamour has not worn off, at least for investors. This is in spite of the fact that ever since deregulation hit the business at about the same time as the advent of the Boeing 747, the return on investment in an airline for any 10-year period has rarely if ever exceeded a measly 1.5 per cent. Everyone knows the reasons. The cost of filling an extra seat on a plane that is going to fly from Point A to B is next to nothing; hence discounts have become the rage and driven down margins. And as air travel has become more accessible with lower fares, passengers treat it as a commodity shorn of the glamour of travel, which used to be standard selling patch in the days of tight regulation. Over and above this, the business is subject to all sorts of vicissitudes: terrorism, high oil prices, union trouble, shortages of all sorts ranging from ground infrastructure to pilots to spares, regulations for ensuring safety, etc. Above all, the business is severely cyclical—people choose to travel less the minute there is a downturn, or even the whiff of one. As risky businesses go, aviation has few peers. Yet the industry continues to attract capital, much of which gets wasted in the sense that an alternative use would yield not just higher private but also better social returns.
A stark reminder of the fascination with the business came again last week when Kingfisher Airlines and the budget airline it bought into, Deccan Airways, announced that their combined losses amounted to about Rs 2,000 crore, with almost half that coming in 2006-07. The two airlines between them also owe more than Rs 500 crore — and intend to borrow more. Some of the new borrowings will go into fleet expansion but a great deal of money is going to be needed to pay running costs. Jet Airways, a competitor, also reported a loss in 2006-07 but has just about turned around this year. Little is known about the financial health of the other budget airlines. However, given the intense competition on the major routes – 80 per cent of the seats are sold below cost — it is unlikely that any of them is making a real profit.
So when all the smoke has blown away, the intriguing question remains: who, apart from governments, has this kind of money to lose, and why? How transparent are airline balance sheets? The question is important for two reasons. One is that it cannot be financial returns alone that persuaded investors to put their money into airlines, at least in India. The other is that aviation, as an industry, is perhaps the most heavily scrutinised industry. If you Google it, for every hit on other industries, aviation returns five times as many. But only one aspect of it is under-covered — the financial. There is practically no useful information available on the ownership patterns of airlines and their sources of funds. In the case of private airlines in India, the fog is truly eerie. The time may have come for the government to ask for better disclosure because, if a major airline goes belly up, some of the money thrown at it will be public money. And if not, the question of whose money it is will become even more urgent.