Shed Off Indifference

Issue: 12-2011By Air Marshal (Retd) B.K. Pandey

The private carriers have little hope for survival unless the government sheds its indifference towards their plight and undertakes a comprehensive review of its policies

Early last month, apart from withdrawing from the low-cost segment, one aspect in which Kingfisher Airlines, India’s best and the most favoured carrier, raced ahead of Air India was in respect of hitting the headlines for all the wrong reasons. Scores of flights cancelled, hundreds of passengers left in the lurch, pilots migrating in hordes to other airlines, staggering losses, huge burden of dues to Airports Authority of India (AAI), oil companies and other service providers, default on terms of payment for leased aircraft, delay in payment of interest on loans and salaries to employees, etc. But the financial turmoil and distress were not restricted to Kingfisher Airlines alone. India’s largest airline in the private sector, Jet Airways, reported a net loss of Rs. 713.6 crore for the second quarter of 2011-12 against Rs. 12.4 crore in the corresponding period the previous year. SpiceJet that had posted a profit of Rs. 10.11 crore in the second quarter of the last financial year suffered a loss of Rs. 240.06 crore in the corresponding period this year. Data on financial performance of IndiGo and GoAir cannot be commented upon as it is not available in public domain. However, it would be reasonable to expect that these budget carriers too would also be plagued by the ills that afflict India’s airline industry as a whole.

Despite the constantly respectable load factors, profitability for the airlines has remained a distant and fading dream. The aviation sector has been hit particularly hard especially in the current year by the high and rising price of aviation turbine fuel (ATF) which constitutes 45 per cent of operating cost of an airline. In the last one year, the price of ATF has risen by 45 per cent but fares have remained low and stagnant in the face of fierce competition. The price of ATF in India is clearly the highest in the world largely on account of exorbitant taxation. Apart from Central tax, state tax is also high with some of the states levying as much as 30 per cent. Besides, oil companies are inclined to link the price of ATF directly to the international price of crude. There is no focus at all on the inefficiency of the systems of transportation of crude, production and distribution, the burden of which that could well be substantial, is passed on to the hapless customer. Apart from ATF, in the absence of maintenance repair and overhaul (MRO) facilities within the country, airlines are dependent on such facilities abroad obviously at much higher cost. Even the meagre facilities available within the country are taxed heavily driving the airlines to look for alternatives elsewhere. Surprisingly, airport charges in India are also amongst the highest in the world for facilities that are yet to match international standards. The government continues to dither on the issue of foreign direct investment (FDI) by foreign airlines in domestic carriers. The sharp depreciation in the value of the Indian rupee in the last few weeks has only served to further compound the financial woes of the airlines.

An examination of the fare structure will reveal that of the total fare paid by the air passenger, only a miniscule percentage goes to the airlines. The rest is hived off by the oil companies, AAI and service providers. The net effect is that all agencies involved in the airline industry other than the airlines themselves, make money. And tragically, the airlines continue to languish under the burden of mounting losses. The Airports Economic Regulatory Authority of India (AERA) established in 2008 to regulate tariffs for aeronautical services provided at airports and monitor other charges, has not been able to provide necessary relief to the beleaguered airlines.