D Murali and Kumar Shankar Roy

Chennai: Big airline carriers in India are facing tough challenges. Jet Airways is reported to post a loss for its just-ended financial year while others like Air-India and Deccan are fast losing market share. What could be done to swing a change in their fortunes?

“Airlines in India need to develop other income business models i.e. non-airfare related, take a hard look at their route and fuel strategy and focus on improving yields in order to survive,” feels Mr Kuljit Singh, Partner (Transaction Advisory Services), Ernst & Young (E&Y).

Recently interacting with Business Line, over the e-mail, Mr Singh is of the view that while airlines, especially the low-cost carriers, have been diligent in letting the common man fly, pricing pressure to maintain market shares will continue in the short-term.

Excepts from the interview.

E&Y had recently painted a bright picture for the future of Indian aviation sector. Do you feel the Indian government has the capability and intent to make the dream come true?

I think that the Indian Government definitely has the intent to encourage sector growth but would need to undertake several other initiatives to further boost the sector.

With domestic air traffic growing fastest in the world, many private players have entered. But when it comes to domestic players flying on foreign routes, considered lucrative, there seems to be a conscious restraint. Is the policy stance justified?

It’s a global observation that international routes are more lucrative than domestic routes because of the relatively higher entry barriers however it takes a lot of time to get established in an international route. Jet Airways is still making losses on its international routes.

ATF prices in India were highest in Asia Pacific region last year. Do you feel there is a pressing need to review the basis of price of ATF in India, which is based on international import parity prices, and directly linked to the benchmark of Platt’s publication of FOB Arabian Gulf ATF prices (AG)?

There is an absolute need to rationalise ATF prices as it is the single largest factor affecting the profitability of airlines on the costs side.

During FY08, airlines are expected to post $700 million loss. How do airline companies manage the five devils of rising fuel costs, aircraft payments, ATF costs, higher wages and declining fares in 2009-10?

Airlines in India need to develop other income business models i.e. non-airfare related, take a hard look at their route and fuel strategy and focus on improving yields in order to survive.

Haven’t passenger airfares, especially low cost carriers, hit a plateau currently?

Pricing pressure to maintain market shares will continue in the short term.

To connect 1.3 billion people, airlines are adding capacity. In Indian context, is there a disconnect between passenger air traffic and yields for companies? How do you see the situation panning out over the next few years?

Airlines will rationalise their capacity according to the market in order to survive.

You have said in the report that full service carriers will respond to the challenge posted by LCCs by leveraging their own low cost arms. Do you see more and more LCCs coming into operation?

The development of non-metro airports should encourage regional LCCs.

Indian carriers are collectively planning to raise $ 4 billion in FY09 from the US and the European credit agencies to fund their fleet expansion plans. With the volatile currency situation and credit crunch spread across the whole world, do you envision airline companies finding it difficult to raise money at comfortable rates?

Yes indeed. It is going to be difficult for airlines to raise money at this point in time. Indian carriers are likely to defer/cancel some of their aircraft deliveries.

The Government has recently announced the increase in FDI limits on maintenance, repair and overhaul (MRO) companies, flying and technical training institutes to 100 per cent. FDI caps have been raised to 74 per cent on cargo and charter airlines and ground handling services. What do these measures mean?

The current relaxations will mean higher international investments in MRO and ground handling services providers and cargo and charter airlines. It is good news for foreign companies.

Do you see Dubai MRO companies giving stiff competition to Indian ones? How could Indian counterparts compete with them without a softer tax regime, given that distance-wise they are pretty much not that apart from a customer’s point of view?

Indian MRO industry’s greatest advantage is low manpower costs (20 per cent lesser than in the Asia-Pacific region and nearly 50 per cent lesser than in the US). However, Dubai’s softer tax regime would give it an edge no doubt.

As per current route dispersal guidelines, a scheduled air transport service provider operating on Category-I routes is required to deploy at least 10 per cent and 50 per cent of ASKM (Available seat Kilometres) deployed of Category-I routes on Category-II and Category-III routes respectively. Are these requirements harsh?

The objective of the route disbursal guidelines is to ensure country-wide connectivity and development of backward and remote areas. With the emergence of more regional carriers and development of non-metro airports, the guidelines could be re-visited.

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