The downturn in the economy and the sharp uptick in oil prices are ruining the outlook for many industries, none more so than the airline business in which more than half of all operating costs are accounted for by aviation turbine fuel, or ATF.
The industry is expected to lose up to Rs 10,000 crore (Rs 100 billion) this year, a staggering sum when viewed against the size of the airline companies and the financial capacity of airline promoters, many of whom have no other businesses to draw cash from.
Even those who do, like Go Air, will wonder whether to throw good money after bad. The outlook is no better for state-owned Air-India, which alone is believed to have lost over Rs 2,000 crore (Rs 20 billion) last year, and is in debt to the horrific extent of up to Rs 10,000 crore.
The civil aviation minister as well as the airline companies have made the point repeatedly that the primary problem is the high cost of ATF in India, compared to other countries. This is true enough, but it is hard to see the finance minister listening sympathetically to their plea for international parity prices for ATF.
If he is to drop taxes on petroleum products to the extent of Rs 5,000 crore (Rs 50 billion) and more, Mr Chidambaram would much rather do it on other petroleum products so as to yield greater political mileage than he will get from the airlines and air passengers.
And the state governments have nixed the idea of cutting sales tax rates for ATF; indeed, of the two that have done so already, Kerala threatens to raise it back to the old level.
The correction, then, must come from elsewhere, and the only options within the airlines' control are to cut costs and raise fares.
The headlines suggest that cost-cutting has begun in earnest -- some uneconomic routes have been taken off the map, the number of flights has been reduced, expensive foreign pilots are being sent back, and merged airlines are lowering their headcount quite significantly.
There is also talk of withdrawing some elements of the service provided to passengers, but in a competitive market no one has dared take the first step in this direction.
As for fares being raised, most airlines have done so already (although in a collusive manner that invites questions from the Competition Commission), but they will have to do it again. At the moment, the correction has been largely through the abolition of low-cost fares that were competing with the railways. But air fares need to rise much more before airline operations stop making losses.
This will automatically mean saying good-bye to the first-time fliers who were traveling on their own account and who had contributed to the boom in the aviation business over the past three or four years. In other words, load factors will drop and there will be surplus capacity in the industry.
Most estimates suggest that the excess is 15-20 per cent of today's seats. The problem for the airlines is that, while they can delay the arrival of new aircraft on order, it is not always easy to send back leased planes (which account for two-thirds of their fleet) without incurring heavy losses. And sub-leases to other airlines are not easy in today's depressed market.
Nevertheless, it is only after setting their own house in order that the airlines can legitimately ask for help from the government. If they have raised fares, downsized to the extent possible, and reduced costs, and then if they are still losing money, they can legitimately ask the government to do its bit by reducing the cost of ATF.
But first, the airlines will have to do what they can to manage the turbulence on their own.
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