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    Posted on 05 January 2012
    Jitender Bhargava

    A year of turbulence ahead

    Jitender Bhargava foresees problems in the Indian aviation industry in 2012

    Illustration: Tim Tim Rose

    THE INDIAN aviation industry is unlikely to face any less turbulence this year. Impressive growth in passenger numbers notwithstanding, all airlines – except Indigo – have been registering losses, quarter after quarter. And the survival is at stake, at least in case of one airline. Most airlines the world over are assured of decent profitability if they can achieve an average occupancy factor of 75 per cent on flights. In India, unfortunately, even 80 per cent occupancy factor is not guaranteeing the airlines safety from losses. Why are the airlines in India so disadvantageously placed as compared to airlines across the world? Airlines in India are operating on a relatively high-cost platform, thanks largely to high taxes on fuel, which, for domestic operations is priced at almost 50 per cent higher than other countries in the world. Jet fuel prices in India range from Rs 61,000 to Rs 68,000 per kilo litre depending on the state it is uplifted from as compared to about Rs 41,000 per kilo litre in Kuala Lumpur; Rs 42,000 in Singapore and Rs 43,000 in Dubai.

    More significantly, as fuel constitutes the largest cost-head for airlines, this aspect alone has a crucial bearing on operating expenses, and thereby profitability. Compounding the crippling disadvantage on fuel costs is the recent depreciation of the rupee. It is a huge setback, considering that a large component of airlines costs – aircraft loans, interest repayments, lease rentals, etc. – are all dollar-denominated ,thus making Indian carriers, with most of their earnings in rupees, pay more for each dollar to be repaid. These are, of course, factors that are outside the domain of the airlines and they can thus do little except bear the brunt silently. The unprecedented sustained growth in traffic and impressive high load factors achieved by airlines should have logically served as good insurance cover against these adverse factors but sadly all airlines, in a bid to retain their respective market shares, if not vying to increase them, have been offering fares that do not fully recover the money spent on producing a seat on a flight. Though low fares considered affordable by the common man are ensuring growth momentum, they are also taking a heavy toll on the finances of all airlines.

    In the current Indian scenario we have the low-cost airlines such as Indigo, Spice Jet, Jetlite and Go Air and full-service airlines that include Air India, Kingfisher and Jet Airways. Ironically, due to excessive competition, the difference in fares on most sectors is only marginal either because the low-cost airlines are fixing their fares only a couple of hundred rupees lower than the full service carriers or the full-service carriers – particularly Air India – are charging fares that are only nominally higher than those being offered by low cost airlines. The Indian market is hugely price sensitive and low-cost airlines have gradually expanded their customer base over the years and most customers are unwilling to pay full-service carriers a significantly higher fare, than what the low-cost airlines are charging. Thus, for more comfortable seats and food, the full-service carriers will have to moderate their capacity deployment to keep the costs down for making the operations economically viable. The prevailing fare levels are certainly detrimental to the economic viability of full-service carriers as they operate with a higher cost platform as compared to low-cost airlines but do not get adequately compensated. The harsh reality is that the airlines, in their quest for enhancing market share, have themselves made the market a low-fare business. It will be difficult to cite an instance of another industry that sells its product at below-the-cost price and yet expects to be profitable. A hard look at the business model being followed, particularly by the full-service carriers, is thus imperative.

    As all the airlines are operating for a minimum of five years, they ought to be taking a more pragmatic view on their fiscal policies now than they have had in their initial years. While cartelisation may not be a good idea, some collective mature thinking is needed to strike a reasonable balance between ensuring decent market growth and economic viability of the airlines. If a reasonable increase in fares, to negate the impact of higher costs of inputs, mainly ATF, leads to a consequential reduction in passengers numbers because the fares can become less affordable for a section of the travelling public, so be it because losing some passengers in the short run is better than losing an airline due to bankruptcy arising out of sustained losses.

    THANKS TO the traumatic saga of Kingfisher that unfolded full blast in public domain last month, the airlines have realised the seriousness of the issue of economic viability. Some of the honchos of the airlines even met Prime Minister Manmohan Singh in the wake of the crisis but there is little that Singh can do to help reduce the flying costs. Sales tax is a subject in the domain of the states and all of them have steadfastly refused to yield on this count for years now. To expect the states to give up revenue, even if they are getting the moolah in their coffers without effort, would be preposterous. Therefore, the efforts to cut down costs will have to be concentrated in other areas.

    However, one possible way of circumventing the sales tax element and cut the ATF price is that the government start allowing airlines – individually or collectively – to import ATF for self use, a suggestion mooted by Kingfisher’s Vijay Mallya recently. The year should hopefully see the proposal of foreign direct investment (FDI) by foreign carriers in Indian airlines eventually fructifying, even though a couple of airlines are against it. However, one should not read too much into it as a relief measure due to the reluctance of the government to permit FDI of more than 24 per cent rendering it unattractive for potential investor airlines – both from the perspective of exercising a modicum of management control needed to safeguard their investment and also because the current environment is barely conducive for airlines to run their business profitably.

    Even as the airlines grapple with the fiscal problems, they ought to be wishing that the economic recession looming in Europe and the decline in India’s economic growth story does not take place. If that happens it would have a direct impact on the number of passengers travelling and that can be catastrophic, quite like what the aviation industry witnessed globally in 2008.

    Jitender Bhargava is a former executive director with Air India.
    [email protected]

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    Posted on 05 January 2012



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