AVIATION INDUSTRY IN INDIA…….

The slow down in the economy did one favour at least as it exposed the weakness
of the sector which was till not very late boasting of the success of the low cost
airlines. What came out were the murky details of the economics of the sector.

“FLY the good times,” urges the slogan of Kingfisher airlines. But for India’s
commercial-aviation industry, these are far from good times. For Kingfisher and its
main competitor, Jet Airways, both full-service carriers, times are especially tough.
Kingfisher, which reported a net loss of 2.43 billion rupees ($51m) in the quarter to
June, owes more than 9.5 billion rupees in unpaid fuel bills and is surviving on bank
loans. Jet Airways recorded a net loss of 2.25 billion rupees in the same period.

Until recently India’s private-sector airlines, which carry more than 80% of domestic
passengers, were lauded as a symbol of the country’s spectacular economic growth.
But growth began to stall in 2007, when rapidly rising fuel prices pushed up fares
and the economy slowed. In the first half of this year, airline passenger numbers fell
by 8% to 21.1m. Last year India’s aviation industry lost more than $2.5 billion—
about 25% of total world airline losses despite accounting for only 2% of global
traffic. This year is set to be as bad.

The success of low cost airlines model was indeed predicated upon low prices and
high loads. So far so good, but once the loads started to wane off the chinks in the
sector appeared and the issue whether these many airlines are sustainable in the
Indian market has resurfaced. Excess capacity in the airline industry is putting
pressure on the industry and the current fares are not covering costs. With the large
capacity (through more airplanes) coming in, airlines are finding it difficult to reach
a break even load factor. But these were business decisions taken by private
players and if they go awry, they should bear the consequences. .

The attainment of efficiency is severely compromised by the impact of

government’s legacy and continued influence in the sector. This is what makes
things messier and it is difficult to lay the blame solely on the players. One of the
major source of inefficiency is that the upstream input i.e. Air Turbine Fuel (ATF) is
not available to the companies at competitive prices, which raises the operational
costs of these airlines. Supply of ATF is controlled predominantly by government-
owned oil companies, which have supported ATF prices, even without the taxes, at
considerably higher levels than that prevail internationally.

Second, this sector has been a “milch cow” for the State to milk in the form of
highly distortionary taxes. Central Government levies an excise duty of 8 per cent.
On the resultant price, the various State Governments levy local sales taxes ranging
from 4 per cent to 39 per cent, which on an average works out to 25 per cent
countrywide. The total Government levies thus work out to an add-on of 35 per
cent. Effectively the price of ATF in India is 60-70 per cent higher than international
benchmarks.

A Group of Ministers (GoM) was also set up to study the impact of high jet fuel
prices on the aviation industry and recommend measures to bring down its burden
on the operational costs of the airlines, which brought down the focus on the "very
high nature" of sales tax being imposed on aviation turbine fuel (ATF) by various
state governments as also its base price, which was "much higher" than most
countries.

Along with the above problem anxiousness to chase market share, the airlines
priced tickets well below cost. By some estimates, they bought twice as many
airplanes as the market could support. As competing airlines poached pilots and
mechanics, staff costs soared. “It was all about ego rather than business,” says
Captain G. R. Gopinath of Air Deccan, a low-cost airline.

Today those egos are badly bruised and, in line with trends elsewhere, it is low-cost
airlines that are taking an increasing share of the market. Of India’s three listed
airlines, a budget carrier, Spicejet, was the only one to turn a profit in the most
recent quarter. The other two are Jet and Kingfisher. Fighting back, Jet launched a
no-frills subsidiary, Jet Konnect, in May; last year, Kingfisher took over Air Deccan to
create Kingfisher Red. The budget carriers are hoping to ride the economic
downturn by offering better value to corporate travellers. But in the longer term
they are eyeing a much bigger opportunity: the 98% of Indians who have never
flown.

Companies have to manage overcapacity and deploy seats in tune with each
market. They have to be innovative while planning their route network and control
costs on a war footing. Few recent mergers and acquisitions like that of Jet-Air
Sahara and Kingfisher-Air Deccan will help in bringing some cost-efficiency to the
system. Plus, if additional sops are given to this sector in terms of FDI relaxations,
fiscal bailout and a lower interest rate regime, it could help the sector to recover.

There’s a silver lining behind every dark cloud. This holds true for the aviation
sector too as the turbulence which hit it in 2008 is likely to clear up a little this year.
International traffic, especially to West and South Asia, remains strong. Premium
traffic, however, has been declining and may seriously impact Indian carriers such
as Jet Airways, Kingfisher and Air India. Traffic to Europe and North America is likely
to remain weak due to the economic slowdown there and excess capacity on
UK/Europe routes. Inbound traffic too has been hit due to terror attacks. But all is
not doom and gloom, it predicts. Much depends on the economy, fuel prices and
political/security stability.