Biman registered net profit of USD 31.5 million in FY 2014-15. The organization's continued existence is hotly debated, in view of the necessity of periodic capital injection in the past and accumulated loss since conversion to a public limited company. The airline's net profitability over the last 10 years is illustrated in figure 1. It is clear from the graph that profitable years for Biman have been few and far between. Nevertheless, given the complex dynamics of the aviation industry and an airline's multi-fold contribution to a nation's economy, Biman's continuity cannot be based on profitability alone.
COMPLEX RELATIONSHIP WITH FUEL PRICE: Figure 2 illustrates a counter-intuitive fact. Except for FY 2014-15, Biman made profits on loss-making years for the industry, and operated on loss, on profitable years. It is also clear that the aviation industry made money when crude oil prices were relatively low. This leads to a curious conclusion-- Biman profits when crude oil prices are soaring. The airline even managed to register some profit in FY 2007-08, when crude oil prices touched an all time high of USD 146 per barrel.
A major portion of Biman's revenue is generated through flights operated on Middle-eastern and Malaysian routes. Most passengers using these routes are migrant workers engaged in blue-collar jobs. In fact industry experts assume, 90 per cent of passengers travelling through those routes, excluding those for Hajj and Umrah, are guest workers. Since the economies of all these nations are heavily reliant on oil exports, they benefit from high fuel prices. Hence, demand for workers is high in those periods. This trend was finally reversed in the last fiscal year. In FY 2014-15, despite exceptionally low oil prices, Biman made profit. In fact, Biman's profit margin of 5.4 per cent exceeded the industry average for Asia Pacific region by almost 3 per cent. This was a result of Biman's recent success in attracting a more diversified group of customers and cost reductions achieved through use of fuel efficient aircrafts.
PERFORMANCE IN CONTEXT OF THE GLOBAL AVIATION INDUSTRY: Since the advent of commercial aviation, the industry has grown exponentially, yet, over the sixty year period, industry profit has remained below 1 per cent. In FY 2013-14, net profit for the industry was USD 16.4 billion, in FY 2014-15 this rose to about USD 29.3 billion, resulting in profit margins of 2.6 and 3.8 per cent respectively. As shown in figure 2, profit margin in FY 2014-15 is well below the interest rate offered on savings. While this may be considered the cause for concern in other industries; for aviation this performance is stellar.
Aviation experts have cited declining fuel prices, rising passenger numbers, increased demand for cargo services and development in technology as reasons for the unprecedented improvement in profit margins. However, a lion's share of this profit is received by a handful of airlines. In FY 2013-14, 10 of a total of 1,112 passenger airlines, earned 76 per cent of industry profit. The remaining USD 4 billion profit of the industry was shared amongst 1,102 airlines, leading to very low profit margins or even losses. For instance, only 1 of 16 Indian airlines registered profits in FY 2013-14. It should be noted, that the airlines making the largest profits are those, who benefit from economies of scale in terms of fleet size and network or those that have access to subsidized oil.
Airlines' performances also vary drastically depending on their region of operation. In FY 2014-15, North American airlines operated on profit margins of 7.5 per cent, whereas for African airlines it was a low 0.8 per cent. Table 1 shows the profit margins for each region in FY 2014-15. The variations result from size of economy, fuel price, debt servicing ability, currency fluctuation and demand.
Taking into account exogenous factors such as Bangladesh's developing economy, Biman's small fleet and restricted network, significantly higher than global average fuel price, and overall low-profit/ loss making trend in the aviation industry, Biman's performance, at least with regard to low profitability, cannot be completely attributed to inefficient management, though, management may be blamed for poor quality service.
PERFORMANCE IN CONTEXT OF BANGLADESH AVIATION INDUSTRY: Currently 5 passenger airlines-- Biman Bangladesh Airlines, United Airways, US Bangla, Regent Airways and Novo Air are registered with the Civil Aviation Authority of Bangladesh (CAAB). Other than Biman, all are privately owned and run. History suggests, private airlines are incapable of remaining profitable in the Bangladeshi aviation sector in the long-run. By 2013, GMG, Best Aviation, Air Bangladesh, Air Parabat, Aero Bengal and Royal Bengal Airways wound up business after suffering unsustainable losses. GMG and Aero Bengal still owe aeronautical and airport charges to CAAB. GMG even has outstanding arrears with the National Board of Revenue.
Of the ones that are still running, Regent and United owe CAAB USD 13 million each. United Airways remained unoperational for 3 days last year, after its pilots went on strike demanding their dues. The incident forced United's share prices down to its face value. Although such allegations are yet to surface against US Bangla and Novo Air, it is highly unlikely that they will survive in the market.
Other than factors affecting the industry as a whole, factors such as fleet size and aircraft play important roles in the profitability of an airline. In case of private airlines in Bangladesh, due to limited investment, fleet is small and aircrafts used are outdated. This leads to inefficiency in management as well as fuel. The older, smaller aircrafts often require higher operational and maintenance costs. In addition, private airlines mostly service domestic routes, due to government restrictions and resource limitations. The high number of airlines competing for a limited number of passengers creates unhealthy competition forcing airlines to operate at loss making fares.
In this backdrop, Biman has a few advantages, larger fleet than any private airline currently in operation in Bangladesh; fuel efficient aircrafts and relative liquidity. State ownership gives it access to capital in rough financial times; this option is not available to private companies.
AREAS REQUIRING IMPROVEMENT
Debt servicing: Due to its narrow capital base, Biman is forced to borrow externally. These borrowings result in substantial interest amount every year.
Inexperienced board: Being state-owned, the company is under the supervision of an external board. Board members usually have little or no experience or knowledge of aviation, yet have unchecked authority to manipulate Biman's management.
Corruption: Much of the company's losses are attributable to pervasive corruption. Purchase and lease of aircrafts, repair and maintenance activities, tender processes and sales have all reported multiple incidents of foul play.
Human resource: Despite the large workforce employed by the company, the company suffers from shortage of skilled human resource. The low remuneration and perception of not being an attractive employer fails to draw quality candidates. On top of that, the airline has fewer pilots than needed and is forced to recruit foreign pilots at salaries twice as high. This issue can be easily tackled by establishing a chain of internal pilot supply.
Political influence: Biman's managerial decisions are often subject to political influence. The company has been forced to operate domestic flights with unsuitable aircrafts, recruit undeserving candidates and continue flights to loss-making routes.
Service: Airline evaluation authority, Skytrax, rated Biman's service a 2 out of 5, the lowest in the region. This was mainly due to the airline's reputation for having unreliable flight schedules and poor customer service in and off the plane.
Fuel price: In FY 2013-14, 47 per cent of Biman's total costs were for fuel. It meets half of its fuel needs by lifting fuel from abroad and the other half from Bangladesh. On the other hand, fuel sourced from Bangladesh costs 30 per cent more than when it is sourced from other countries. This leads to raised costs, making it harder for Bangladeshi airlines to compete.
Code sharing agreements: Most successful airlines have large networks, allowing them to serve a large customer base. Biman however, does not have these. Hence, it would be beneficial for Biman to enter into code sharing agreements. These agreements eliminate the need for connecting flights. Airlines entering these agreements often synchronize their schedules and coordinate luggage handling. Code sharing allows airlines to gain exposure in unserved markets through display of their flight numbers. However, due to Biman's low service quality, most reputed airlines are hesitant to enter into such arrangements.
Policy support: Airlines of most countries receive policy support from their respective governments. Policies in Bangladesh, relevant to tax and management, do not always match them making it harder for Bangladeshi airlines to compete. For instance, 0.3 per cent tax is levied on revenue. This creates enormous burden on the high investment- low return industry.
WHY KEEP BIMAN: Return on investment for the aviation industry is low. The industry survives due to the catalytic role it plays in the economy. Hence, even with its low-profitability, the government of Bangladesh has vital reasons to keep Biman in operation. The reasons are:
Contribution to national economy: Biman's chief contribution to the nation is the economic, political and social growth it stimulates through facilitating travel. By offering competitive prices, the airline has attracted tourism and business to Bangladesh. The airline also carries a large fraction of remittance earners to their respective destinations.
Taxing the poor: Biman's largest customer base is migrant workers. Biman currently charges relatively lower fares than other airlines to fly these workers to their destinations, e.g., travelling to Malaysia costs BDT 18,000 by Biman and BDT 23,000 by Malaysian Airlines. Shutting Biman down would allow other airlines to discourage workers from going abroad and thus reducing remittance stream to Bangladesh. Additionally, Biman's baggage allowance on these routes is almost twice that of other airlines. This is an important incentive for migrant workers.
Impact of absence of national airline: In the event that the national carrier is shut down, international carriers will be free to exploit travelers flying to and from Bangladesh by implementing unjustified price hikes. This was exemplified by the rise in fares for flights to and from Nigeria, Uganda and Somalia, all 3 of whom have had their national carriers wiped out.
Liquidity: The substantial amount of liquidity required and the intrinsic loss-making nature of commercial aviation is going to discourage new entrants and drive out most, if not all, current players. Given that those private airlines have little incentive to stay in the market in the long-run, Biman will have to bridge the gap.
Employment: Biman along with its subsidiary companies-- Biman Flight Catering Centre, Biman Ground Handling, Biman Engineering, Biman Airlines Training Centre and Biman Poultry Complex-- employees about 5000 people.
Mariha Tahsin graduated in Economics from the University of Essex and currently works as an associate at a business consultancy firm.
tahsin.mariha@gmail.com