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Operational Cost - Wildly Fluctuating

Issue: 04-2009By Air Marshal (Retd) B.K. Pandey, BangaloreIllustration(s): By 248_b.jpg

Pre-1990s, airlines in India were governmentowned and the airline industry was not a profitable business even though the international price of crude was in the region of $15 (Rs 750) a barrel. But it did not matter as the two airlines in the public sector, Air India and Indian Airlines, were run as departments of the central government serving a purpose that was socialistic in nature and more a matter of national prestige than a profitable commercial venture.

Deregulation of the civil aviation sector that began in the early 1990s saw the entry of a number of airlines in the private sector, such as Jet Airways, Air Sahara, ModiLuft, Damania, NEPC and so on—all full service carriers. With the exception of Jet Airways and Air Sahara, all the other airlines soon closed down as they were unable to survive in the hostile and high cost operating environment. Their business models were illconceived, the demand for air travel in a sluggish economy was low, there was insufficient financial resilience with some of the new start ups, and the whole system was afflicted with excessive government control with inherent lack of efficiency. Fuel cost constituted only a small percentage of operating cost and was really not the barrier to profitability.


The second wave of emergence of private airlines on the Indian aviation scene began in the wake of a resurgent economy in the period 2003-04 with business models tailored to different segments of the customer base. The quality of service offered extended from no-frills low cost carriers at one end of the spectrum to luxurious but affordable full business class travel at the other. Being a capital intensive industry, it was only reasonable to expect that the new airlines established in the period 2003-04 would break even by 2006-07. Tragically, this was not to be. From around $24 (Rs 1,200) per barrel in 2003, the international price of crude rose to a peak of $147 (Rs 7,350) a barrel in 2008 with corresponding impact on Aviation Turbine Fuel (ATF).

Cost of ATF as a percentage of operating cost of airlines rose from 15 per cent in 2003 to 65 per cent when fuel prices peaked in 2008. The average figure for the year 2008 was around 47 per cent. While the stateowned Air India, not surprisingly, continued to bleed and yet survive possibly with government support, the private carriers were in dire straits confronted with perhaps the toughest challenge, that of skyrocketing oil prices. As it is, the price of ATF in India is considerably higher than elsewhere in the world and as such India-based airlines would find it difficult to be competitive internationally.