Why so many airlines are reeling even as the domestic airline sector sees double-digit growth
The dream run of the aviation sector is coming to a harsh end,not because of recession or lack of passengers,but mainly from two factors the role of government,and predatory/ excessive pricing through computer reservation systems (CRS). As a result,we see the strange phenomenon of double-digit growth in the domestic sector and mounting losses in various airlines.
Kingfisher Airlines entered with a bang as a luxury airline that boasted high passenger amenities even in the economy class. It diverged from the up-and-coming low-cost carrier (LCC) model. As passengers turned to LCCs,amenities were forgotten. Micro-management by the owner,Vijay Mallya,led to unnecessary expenditure. Even when the haemorrhaging started,the airline insisted its business model was fine,and did not change course. It ran into cash flow issues and held back payments. While the government claims no concession or bailout will be given to private airlines,as it has done for Air India at the taxpayers expense,it has already bailed out Kingfisher by persuading public sector banks to convert the sticky debt into equity at over Rs 60 per share,while the current share price hovers around Rs 25. This amounts to a covert subsidy.
Be that as it may,we need to analyse the bigger issue of what ails the airline sector (the airport sector is the next on the block). The government is certainly to blame for high taxes. The cartelisation of air turbine fuel (ATF) prices by a few public sector oil companies through their opaque policy of imports coupled with absurdly high sales tax on ATF in Mumbai (note,not Maharashtra) and Delhi between 25 and 30 per cent is unheard of in other countries or even in some Indian states. If ATF becomes a declared good under Section 14 of the Central Sales Tax Act,then state governments cannot levy sales tax exceeding 4 per cent. But there is no consensus on this and states like Maharashtra and Delhi feel that since airlines cannot do without picking up fuel from these airports,why not squeeze them? While direct import of ATF by airlines is considered an alternative to avoid high sales taxes (already approved and notified),it is hardly a good alternative as ATF will need to be purchased in advance and stored at airports. It is also possible the cartelised oil companies will stop storing ATF at various airports that they do now.
The Air Navigation Service is also controlled by the government through the Airport Authority of India (AAI) as a monopoly provider. It is a major source of profit for AAI but has not invested in the latest equipment and training,leading to long delays as aircraft are at times made to hover for even an hour,burning fuel. The number of landings per hour in metro airports has not kept pace with the modern trends permitted by the International Civil Aviation Organisation,as a result,airlines suffer. Sometimes they do not get the appropriate height for cruising,adding to their costs. There is,however,no compensation for any deficiency in service. AAI,on the other hand,invests in airport modernisation,which is more visible.
The non-governmental problems of the airline industry are the result of intense competition. While the growth in domestic passenger traffic is in double digits,it is very price-sensitive. Like the telecom sector,ticket prices in general have come down over the last decade. This is,part from increased incomes,a major reason for the double-digit growth. In this context,the central reservation systems based on econometric modelling has introduced an element of irrationality in ticket pricing. The CRS is based on assumptions and unknowns that lead to the underpricing of tickets,below operating costs,when demand goes down. However,when demand goes up,prices go up excessively. For example,after Kingfishers cancellation of flights,ticket prices have gone up 30 to 40 per cent. Post liberalisation,all cost controls by the DGCA on ticket price have been given up,although under Section 135 of Aircraft Rules of 1937,the DGCA is obliged to control predatory pricing at one end and excessive pricing at the other end.
Adding to the problem is the size of the fleet. While some leased aircraft are returned,it is difficult to reduce or increase the size of fleet very much. So it becomes a financially sound practice to keep the fleet operational and fill it up as much as possible by dropping prices. Thereby hangs the tale of double-digit growth and high occupancy in flights,but a drop in profits,if not losses. Perhaps,we need an airline regulator to keep the competition healthy.
The writer is chairman of International Foundation of Aviation,Aerospace and Development,India chapter