Aviation Crisis

New Delhi, 17 October 2008

AIRLINES FLYING IN TURBULENT SKYS

By Radhakrishna Rao

India’s robust civil aviation industry, not long back considered a “resounding success story and a sunrise sector of the Indian economy” is now flying through a turbulent sky.  The reasons are varied, including the “sky high price” of the aviation fuel. The outcome --  both the full service and low cost airlines are expected to log a cumulative loss of US$1.5-billion-US$ 2-billion, during the current year.

In this backdrop, the International Air Transport Association (IATA) has been making an impassioned plea to the Union Government to speed up the reforms in the civil aviation sector with a firm focus on reducing the cost of ATF (Aviation Turbine Fuel) sold in our market. As per the most recent estimates by IATA, for every dollar the price of ATF goes up, the airlines cost are likely to go up by US $1.6. We have just witnessed two airlines—Jet Airways and Kingfisher joining hands and the former sacking 1,900 employees to save “Rs five crore” per month, but reinstating them the very next day.

Interestingly, while the international oil prices are on a downward spree, Indian carriers are not in a position to pass on the benefit of the lower ATF price to their passengers for the simple reason that they have to make good the heavy losses they have sustained for almost a year now.  

Moreover, in the backdrop of the American Dollar appreciating steadily against the rupee, the possibility of ATF becoming available at a price on par with the international market trend appears quite bleak. In this context, Chief of Jet Airways, Wolfgang Prock-Schauer drove home the point that domestic airfares could only go up notwithstanding a steady fall in the global prices of the fuel.

 “The industry will have to see how the oil is priced in rupee terms and also look closely at the effect of Indian currency vis-à-vis other international currencies. Generally, I can say that there is discrepancy in the price that oil companies ask for and what they should be asking. Therefore, the room to manoeuvre as regards pricing of air tickers appears limited” Wolfgang has warned.

As things stand now, ATF in India is priced at least 40% higher than the international market prices. Because ATF accounts for up to half of the operational cost of a passenger aircraft, the Indian carriers are forced to keep their fares’ high, which, in turn, exerts a direct impact on the passenger load and ultimate profitability.

Clearly, the abnormally high price of ATF in India is traceable to high sales tax. Moreover, the pricing of ATF takes into account the high subsidies made available to other petroleum products. For the losses sustained by the State-controlled oil companies on account of this is planned to be made good by a higher ATF price. Against this backdrop, Indian carriers have been approaching the Civil Aviation Ministry to permit them import of ATF directly from the international market.

On another front, the Indian airlines industry has also sought relief.  While a committee has been set up to look at their demands it seems to be a no go. Civil Aviation Minister Praful Patel’s plea for a bailout by way of lowering of tax rates jet fuel prices is not being heeded to by colleagues Finance Minister Chidambaram and Petroleum Minister Murli Deora, leaving him disappointed.  

According to Director General of IATA, Giovanni Bisignani, the losses reported by the Indian carriers are second only to the losses posted by the American airlines industry. “The situation of India’s aviation sector is quite volatile with growth of just 1.9% this July as against 7.3% last year. It will post a loss of US$1.5-billion this year” he has warned. As pointed out by Rajeev Batra, Executive Director of the Marketing analysis and consulting firm KPMG “the single digit passenger growth that we have seen in the past few months does look worrying”.

Meanwhile, the IATA Chief has highlighted the need for taking effective measures aimed at reducing the cost of ATF in the Indian market. “India is among the most expensive places to buy ATF. In August, it was 58% more expensive to buy the fuel in Mumbai than in Singapore. Removing excise tax, implementing a standard 45 state tax for domestic fuel and a greater degree of transparency in overall pricing are needed” he said.  Not surprisingly he has also expressed concern over the poor and antiquated state of civil aviation infrastructure in the country. In particular, he finds that conditions at the Mumbai airport are quite critical.

For a sector that is already neck deep in troubles, the air traffic congestion has proved to be a “last straw on its back”. In many airports of India, the aircraft are required to hover in the sky for up to half an hour to get clearance of landing. This could result in the needless burning of fuel, adding further to the losses sustained by the airlines industry. And analysts note that it is the inadequate infrastructure which makes survival difficult for the Indian carriers.

Meanwhile, a study of the Indian civil aviation sector by the consulting firm Ernst and Young has expressed its concern over the “turmoil and turbulence” facing the Indian airlines industry. Falling yields, turmoil in the financial market along with the survival consolidation have put a question mark on the immediate future of the low cost carriers in India. “All carriers continue to bleed and would need infusion of funds to take care of their immediate needs” it says. Obviously, the decline in the passenger load due to rising fares has resulted in the air traffic growth slowing down to 5.1% in the first quarter of 2008.

In addition to the operational cost , the high salaries that many Indian carriers dole out to their expatriate pilots and technical staff  are also contributing to the  accumulated losses. Indian carriers are also in the process of cutting down their strength. On another front, many carriers have stopped flying on routes that are not profitable.

On its part the state-owned Air India is planning to carry out an assessment of its manpower situation with a view to identify the actual requirements and prune staff costs. “Though international air traffic from India will continue to grow, the domestic growth will be hit especially as airlines plan to hike fares” opines Kapil Kaul, Chief Executive Officer (CEO) of the Indian and Middle East chapter of the Centre for Asia Pacific Aviation (CAPA). In the backdrop of slow down haunting the Indian civil aviation sector, what our carriers plan will be keenly watched in the coming months.—INFA

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