The consequences of using standalone metrics in aviation

The Indian aviation market is poised to scale new heights. A growing middle class, rising urbanisation and a forecast of five hundred million passengers till 2030 make for very compelling prospects. Passenger growth numbers are touted each month, load factor numbers are consistently advertised and fare levels that make “rail-air parity” make for great content. Yet, for investors and managers alike, all of these stand-alone metrics are inconsequential.

In highlighting the market growth, passenger traffic numbers that compare to previous years are often cited. Indeed, India’s domestic traffic has multiplied 2.75X over the last decade while international passengers have increased by 1.8X. While these do point to more travellers taking to the skies, for investors they do not indicate the quality of the growth. And they do not highlight the market dynamics that led to this growth. To put it in context, during the same time, Indian aviation saw $10 billion+ in combined airline losses, two large airline failures and another seven regional airline failures. Further, during this time while liquidity rose and fuel prices after an initial few years trended downwards, the rupee consistently depreciated at a compounded annual rate of 5 percent. Margins compressed and the market dynamics changed. Supply-led demand and price sensitivity rose. In such a scenario, to simply highlight passenger growth as evidence of market success is misleading.

Similarly, fleet growth is often cited as evidence of India being a very attractive market. From 383 aircraft in 2010 to 650 aircraft in the beginning of 2020 the fleet has almost doubled. Speak to policymakers and they cite these numbers as evidence of success. Speak to airlines and they will indicate that this growth has happened in spite of policy challenges. Again while the growth has been phenomenal, stand-alone metrics do not paint the right picture. When looking at variables that have led to this fleet growth, they include structural challenges in the market coupled with liquidity on aircraft types and financing structures.  Arguably, the financing structures have as much to do with the massive fleet growth as have other variables.

Focusing on stand-alone metrics poses a challenge for airline leaders as well. Financial metrics such as EBITDAs continue to be a hotly debated. Indeed as Warren Buffet puts it, “People who use EBITDA are either trying to con you or they’re conning themselves.” But this has not stopped management from highlighting them as evidence of success. On operational metrics as well, on-time performance (OTP) and load factors, both key metrics for airlines, are regularly advertised. While the former is indicative of the efficiency and reliability of the schedule, the latter indicates how much of the capacity is being utilised. Yet these stand-alone metrics simply cannot give a comprehensive picture. Give an airline operations head enough spare aircraft or generously lower your asset utilisation and one can immediately improve OTP. Similarly, empower the sales teams to lower prices and dole out incentives and one can achieve any load factor target. The metrics have to be seen in conjunction with others. For instance, OTP has to be seen in conjunction with asset utilisation and cost impacts. Similarly, load factors must be seen in conjunction with yields. Together they may paint a very different picture than otherwise portrayed. Stand-alone these metrics are inconsequential.

This challenge of using stand-alone metrics steps from linear thinking which has been perpetuated by the focus on all things quantitative. An over-reliance on single variable models; management mantras like “what is not measured cannot be managed”; and a failure to recognise complex and dynamic systems has exacerbated the issue. New paradigm shifts, a focus on behavioural aspects and design thinking are attempting to change this slowly. But not all have embraced this yet. And as new variables are added, it will necessarily require leaders who can think laterally and comprehensively. Perhaps best summed up in this quote by Nobel laureate Friedrich August von Hayek: “…the social sciences, like much of biology but unlike most fields of the physical sciences, have to deal with structures of essential complexity, i.e. with structures whose characteristic properties can be exhibited only by models made up of relatively large numbers of variables.”

Finally, as the market grows, complexity is also evolving. Behavioural shifts are evident, concepts such as green equity are slowly but surely gaining ground and the past can no longer be a predictor of the future. As such looking to understand the market requires an integrative approach that combines several factors.

To sum up, stand-alone metrics simply don’t suffice. Using these as evidence of success in many cases portrays a misleading picture. As such, the agenda behind these metrics much be questioned by investors and managers alike.

When it comes to understanding the success of Indian aviation, the consequences of using stand-alone metrics may make the final analysis inconsequential.

Satyendra Pandey is the former head of strategy at a fast-growing airline. Previously, he was with the Centre for Aviation (CAPA) where he led the advisory and research teams. Satyendra has been involved in restructuring, scaling and turnarounds.