Thread by @deepakj_tweet

India's second largest #Airline is Shutting Down. But Why? Let's understand the economics of Airlines threadbare.

Airlines Business Model Explained in 2 minutes👇

Go First has yesterday announced that they are cancelling flights scheduled for 3rd/4th May

Wadia group is winding down the business after incurring 1000s of crores of losses.

But Why was India's second largest airline making huge losses?

Had to dig through this.

I found that even Indigo (controlling 55% market share) made a loss of Rs. 1200 Crore in first 9 months of FY23 in spite of revival in Air Travel).

If market leader is making losses in a buoyant travel market

then WHAT IS THE FUTURE OF THIS INDUSTRY?

Cost Structure

Major variable costs are Fuel (30%), Airport Charges (15%) and Aircraft Maintenance (~20%)

In addition, there are fixed costs such as salary, admin & selling costs (20%)

Plus heavy Depreciation of Aircrafts and Interest (due to large upfront investment) ~ 30%

Heavy investment but still Very Very Low Gross margins @35%

Some Comparisons for Gross Margins:

Retail (own labels) - 70-80%
Software - 90-95%

EBIDTA - 10-15%

But Owing to high investment - Depreciation and Finance Costs are ~ 30% of Revenue

Leading to net loss @ 20%

Even market leader Indigo made a loss of Rs. 6,000 Cr in FY22.

Even in FY23 - Indigo has made a loss of Rs. 1,200 Cr in current year in spite of Air Travel Revival

#UnitEconomicsSummary

👉 High Upfront investment

👉 High variable costs - fuel cost (35%), airport charges (10%) and aircraft maintenance cost (20%)

👉 So Very low Gross Margins @35%

👉 High Fixed costs (20%)and high depreciation + finance cost (30%)

👉 Net loss of 20%

And most of these cost factors are out of airlines' control - Be it fuel cost, aircraft maintenance cost or airport charges. In fact, the demand also depends on Macro environment which is out of Airlines' control

Essentially, you make BIG INVESTMENTS AND THEY PRAY FOR THE BEST!

Warren Buffet has very famously said that a capitalist would have shot down Wright brothers when they first flew as NO AIRLINE HAS EVER MADE MONEY.

Mallya was running Kingfisher airlines and he was benefiting through getting free branding of Kingfisher breweries as by product.

WHAT ARE THE CURRENT AIRLINES GAINING OUT OF RUNNING A PERPETUAL LOSS MAKING BUSINESS!

Let us know in the comments.

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