What drives the economics of an airline and what decides whether it will survive through a crunch phase in the industry.

The refrain that it takes three years to turn around an airline’s account books from red to black never fails to intrigue. It is hard to corroborate with infallible reliability the veracity of this kind of voodoo economics. On the contrary, rise in maintenance costs on equipment and vehicles would indicate a trend towards increasing costs.

Eventually, survival will depend on deep pockets, deep enough to cushion recurring losses in the interim before profits start flowing in. But there are several potholes before reaching that stage—a fledgling airline could be done in by over ambitious planning or get gobbled up by competition.

The Indian aviation industry is at an interesting stage of consolidation with three major mergers orchestrated already—Air India and Indian, Jet Air and Jetlite, and Kingfisher and Air Deccan. Consolidation of these three entities together account for more than four-fifths of the total aviation industry in India even as a few others appear on the horizon.

So, what drives the economics of an airline and what decides whether it will survive, especially through a crunch phase in the industry? According to Centre for Asia Pacific Aviation estimates, the combined losses of Indian airlines for FY 2007-08 are Rs 1,979 crore ($500 million), with all airlines being in the red (although Spice Jet claims to have broken even during the year, its unaudited results for QE December 2007 show an operating profit as well as a net profit). An insight into the working of an airline is not a simple and straightforward exercise, especially when the airline under study is privately owned, where complete financial transparency is neither desirable nor forthcoming. The issue gets further obfuscated if the principal company has other (profit making) ventures that allows for accounting jugglery. A better understanding of the financial aspects is possible in the case of public companies as it has to publish audited results for the benefit of shareholders.