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Rationalise or perish

Airline companies can justifiably feel aggrieved that they are being made to pay for the massive subsidies that oil marketing companies are doling out at the petrol pump. In fact, the International Air Transport Association (IATA) points out that average ATF prices in India are 20 per cent higher than elsewhere in the world.

     Print Edition: June 29, 2008

What ails India’s airlines? All of them, bar one, are awash in oceans of red ink; and there’s no silver lining in sight. It is quite easy to point fingers in the direction of aviation turbine fuel (ATF). The price of this refined form of kerosene, which powers aircraft turbines, has almost doubled over the past year. A litre of ATF costs Rs 67 in Delhi, whereas kerosene sold to those below the poverty line (and often used to adulterate other fuels) costs just Rs 9.

Empty seats: Cutting capacities may be the solution
Cutting capacities may be the solution
Airline companies can justifiably feel aggrieved that they are being made to pay for the massive subsidies that oil marketing companies are doling out at the petrol pump. In fact, the International Air Transport Association (IATA) points out that average ATF prices in India are 20 per cent higher than elsewhere in the world. But high ATF prices have plagued airlines across the world, most of all the large US airlines with their old, inefficient fleets. So, India’s airlines need to look inward and analyse the problem. Over the past five years, since the arrival of Air Deccan, the industry has seen a dramatic addition of capacity—over 300 planes have been ordered for the domestic market. Half a decade ago, barely 12 million Indians took to the skies domestically every year; in 2008, that number was achieved in the first three months alone. This massive addition of capacity, coupled with far more affordable fares, has led to the creation of a whole new segment of price-sensitive flyers.

But, while airlines tom-tom these numbers, they miss out another crucial one—of overcapacity. The 12 million passengers that flew domestically between January and March this year had 20 million seats to choose from. That, in airlines parlance, translates to a “load factor” of 60 per cent. This demand-supply mismatch means airlines cannot charge the fares that they have to charge to just break even. One large full-service carrier claims the “cost-revenue” gap, that is, the gap between the cost of servicing one seat and the revenue the airline earns from it, has hit Rs 1,700 per sector.

Airlines have no choice but to cut capacity. This will not only make financial sense, it will also give the over-burdened infrastructure a break. However, this will happen only when airlines realise that market share is not everything. Otherwise, we will once again see a replay of the scenario of 1996 when as many as eight airlines folded up.

But in the ultra-competitive, dog-eat-dog world of civil aviation, will individual companies be willing to fly down this route? That’s the million-dollar question.

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