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Time for consolidation in the skies

Photo: Ch. Vijaya Bhaskar

Sustainability issues: Even as airlines were inducting new aircraft and expanding their fleets, rising costs hit them hard. —

At a point in time when the domestic airlines were set for a take-off, and the aviation infrastructure was beginning to take shape, a crisis of costs seems to be gripping the industry. Airlines around the world have meanwhile run into a financial crisis with the rise in oil prices.

The cost increase in aviation turbine fuel (ATF), which is amongst the purest and costliest forms of petroleum products, is in particular responsible for this situation. Even with galloping oil prices, the airlines have somehow managed to keep their fares down because of the continuing fare wars — in the domestic as well as international segments. As a result, the bottom lines of most airlines have taken a beating. Unable to take the burden any more, most of them have announced an average 18 per cent increase in the fuel surcharge component of the fare. This works out to about Rs. 300 to Rs. 550, depending on the travel distance.

In India, it is not just a problem with fares or ATF costs. Airline managers explain that there has been a huge “price spiral” in which input costs have risen manifold. The fuel surcharge covers only a part of the rise in ATF costs.

Says the regional manager of a private airline: “When all the airlines have been offering rock-bottom fares in varied packages, the airport tax, the fuel surcharge and other levies work out to a minimum of Rs. 2,600 a ticket in the short-haul sectors. But the actual fare may be anywhere from Rs. 3 to Rs. 700 to Rs. 1,500 for these sectors. At one point of time, it was costlier to travel from Chennai or Bangalore to Delhi, than to Singapore. All that is now in the past.”

With the entry of greenfield airports, an additional charge has been added, as of now for international passengers. The private players want to levy a service fee for domestic passengers too, but the government has resisted this till now. The Airports Authority of India (AAI) has issued a guideline freezing airport charges in a bid to help the airlines.

Even as airlines were inducting new aircraft and expanding their fleets, connecting new destinations, and increasing frequencies in congested routes, rising costs hit them hard. Some of them are now planning to defer the delivery schedules or aircraft purchases till their finances stabilise.

The operations managers of most airlines say there is a drop in occupancy this summer — normally considered the peak of the holiday season.

“We expect an occupancy of 60 to 80 per cent during the summer holidays, depending on the sector and the time schedule. But in April-May this year, some of the airlines barely managed 50 per cent occupancy. Of course, there are some crowded routes, but that was the exception, not the rule, this year,” a commercial manager explains.

Sources in the travel trade confirm this trend. They say the opening of airports in Bangalore and Hyderabad at faraway locations has also cut into traffic to these prime destinations. Reasons R. Balasubramanian, who manages a travel agency in Chennai: “Many of our customers feel that the time taken to commute to and from the airport, and the cost of travel from the airport to the hotel or house they go to in these two cities, work out to more than the travel time, and the fare. So they take the train.”

From the days when there was just one early morning flight on the Chennai-Delhi sector, there are now at least six services operated by different airlines. While some of them have the frequent fliers sticking to them, the occupancy level is neither uniform nor optimal. With lower fares and lower occupancy levels, the airlines feel the pinch. The time for optimisation of flights and services has come, but because of the market dynamics none of the airlines wants to take the first step in that direction. This could ultimately result in some kind of consolidation.

As airlines find it difficult to sustain their operations with the domestic services alone, they are waiting to qualify for the international routes. After Jet Airways joined the national carrier, Air Deccan, now under the Kingfisher wings, is taking to the international skies. Still others are waiting for the rules or norms to be further relaxed so that they can try to cross-subsidise their domestic operations with international flights. But even there, competition has crept in to lower the fares and offer more attractive packages in tandem with the travel trade.

Civil Aviation Minister Praful Patel has promised to take up with the Prime Minister and the Finance Minister, a bailout package for airlines. Wednesday’s package includes a duty cut of 5 per cent on ATF too. But he also wants to relax the norms for domestic airlines to fly international routes — they have to be in domestic service for at least for five years before they can qualify to operate to foreign destinations. The question is: should the government think of a bailout for the industry? Obviously, Mr. Patel is more concerned about the aviation industry as a whole and the investment in its infrastructure that is now being made.

More than ever before, the need for a regulator in the civil aviation sector is being felt by all sections of the industry. While the Directorate-General of Civil Aviation looks at the aspects of safety, security, and flight operations as well as the regulatory system, the regulator will have to look at fares and disputes, and monitor the functioning and services at airports. The airlines can be brought under some discipline in both financial and operational matters only when the government appoints such a regulator.

The Telecom Regulatory Authority of India has played a useful role in the phenomenal growth of the telecom sector. Similarly, the aviation sector needs a body to prescribe and adjudicate. It can also ensure a level playing field for all operators and segregate operations between the major airlines, the low-cost airlines and the proposed regional ones. The lines have to be drawn clearly for all these operations. And, unethical practices or undercutting of fares, that will ultimately lead to a collapse of the airline, have to be prevented.

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