Indian airlines suffer huge losses
But the last few months have seen the industry being buffeted by unexpected turbulence. The industry, which reported a loss of nearly a billion dollars for the financial year ending March 31, 2008, is likely to see a doubling of losses in the current fiscal. Millions of passengers, mostly from the middle-class, who had discovered the joys of flying, have abandoned their services as air fares have soared.
Load factors on many sectors have fallen to record lows, though costs continue to remain high. While global oil prices have tumbled, the cost of aviation turbine fuel (ATF) in the country continues to remain high. Worse, several state governments impose hefty taxes on the sale of ATF, with some charging as much as over 30 per cent.
ATF accounts for nearly 50 per cent of operational costs for an airline. Similarly, hefty taxes by the federal and state governments also frustrate efforts by airlines – especially low-cost ones – to slash ticket prices. Fuel prices and taxes have shown no signs of declining over the years, despite low-cost airlines slashing fares to attract passengers.
Many of the low-cost carriers continued to reduce fares, hoping to make up for the losses through higher volumes. But most have had to give up this business model. Today, the price difference between a full-fledged carrier and a low-cost one is marginal, and the industry has sadly reverted back to the regressive era of high fares, which only corporates and the affluent can afford.
International fares continue to be low – as foreign airlines buy ATF abroad, where prices are competitive – on several sectors including Mumbai-Dubai and Delhi/Chennai-Singapore. It is cheaper to fly to a foreign destination, instead of taking a flight from Mumbai to Kolkata or Delhi to Chennai.
A variety of opaque surcharges – relating to air congestion, airport development and other matters – have made air tickets dearer, resulting in potential passengers boycotting airlines and returning to trains.
The slump in the industry has coincided with the privatisation of airports infrastructure in India. Private operators now manage several airports, including Mumbai and Delhi, the two busiest in the country. As the cost of redeveloping these airports is huge, the new airports operators pass on the charges to airlines, demanding huge sums for their services. This is again reducing margins, hurting the industry.
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TWO major developments last week brought to light the existential crisis confronting the industry. Leading private carrier Jet Airways sent shock waves across the country – especially in political circles – by announcing the sacking of nearly 2,000 employees.
While businesses in the West routinely sack thousands of employees when a sector does not fare well, in India mass retrenchments are unheard of – and even banned by law. Not surprisingly, political parties ranging from mainstream ones like the Congress, to regional and opportunistic ones like the Shiv Sena, the Maharashtra Navnirman Sena (MNS) and the Samajwadi Party rushed in with their condemnations.
The Shiv Sena and the MNS – founded by the estranged nephew of Bal Thackeray, the Sena chief – have been battling to control trade unions in the civil aviation and hospitality sectors in Mumbai. Employees of many private airlines and hotels have for years been snubbing trade unions, wanting to set up presence in the industry.
But the sacking of relatively well-paid airline employees – which dominated primetime television news and the front pages of leading newspapers – and the widespread condemnation it generated is in stark contrast to the deafening silence of the political establishment (and the media) to the routine exploitation of millions of workers in the unorganised sector.
With elections due to be held next month in several key states – including Delhi, Rajasthan, Madhya Pradesh and Chhatisgarh – and general elections round the corner, political parties are reluctant to be seen as anti-labour. And with television cameras focussed on attractive air-hostesses and cabin crew members demonstrating for their jobs, most politicians hungry for any election-eve publicity have been rushing in with bizarre statements.
Jet Airways has been growing at a phenomenal pace all these years and has been on a hiring spree – even poaching from other airlines. It has a total strength of 13,000 employees. But the sudden turbulence in the industry, caused by soaring costs, has forced it to take drastic remedies, including sacking employees on probation and relative newcomers.
According to Wolfgang Prock-Schauer, the expatriate chief executive of the airline – which is owned by Naresh Goyal, a billionaire NRI – the airline was forced to take the step to prevent it from collapsing.
Jet Airways, which emerged as the largest domestic airline, embarked on a massive global expansion, after acquiring the rights to fly abroad. But the airline has had to cut down its overseas expansion and downsize its aggressive expansion plans in view of the crisis in the industry.
According to Prock-Schauer, the civil aviation industry in India is witness to a double-digit decline in revenues, forcing the premier carrier to reduce the numbers of flights in its winter schedule by 15 per cent. The airline has also put on hold its fleet expansion plans, frozen its planned introduction of flights to new international destinations and even grounded aircraft.
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THE airline almost burnt its fingers when it acquired low-cost (but loss-making) Air Sahara for $500 million about two years ago and re-branded it as JetLite. The airline, which has placed orders for billions of dollars of new aircraft, has also borrowed heavily and is likely to be impacted by the global financial crisis.
Last week, Jet Airways was forced to reconcile with its closest competitor, Kingfisher Airlines – owned by liquor baron Vijay Mallya. The two leading private carriers entered into a strategic alliance covering code-sharing, joint fuel management and sharing of common infrastructure and services including ground services, ticketing and crew training.
Critics blasted the strategic alliance as cartelisation by the two big carriers – who together account for 60 per cent of the market – though Goyal and Mallya dismissed such fears. Kingfisher too had acquired pioneering low-cost carrier Air Deccan. The acquisition of the two low-cost carriers by the two full service operators had virtually brought an end to the era of cheap prices for the middle-class.
It is now feared that the two giants might combine their resources by curbing flights on popular sectors, to ensure higher yields. Other low-cost carriers like Spice Jet (in which American investor W.L. Ross recently acquired a stake) Indigo and Go Air might also find the going tough.
India’s domestic civil aviation sector had witnessed sluggish growth for decades, as it was dominated by a state-owned monopoly. But things began to change after the opening up of the domestic skies for private operators and the entry of low-cost carriers.
However, the churning that is going on in the industry, with big players gobbling up smaller ones – and also the merger of two state-owned carriers – could slow down the growth rate of the industry. Passenger traffic growth, which peaked at 33 per cent last year, is down to just seven per cent in the current year.
Political leaders, however, are not concerned over the fact that millions of ordinary Indians are being deprived of the opportunity of flying to their destinations on holidays because of the steep tax rates on fuel for “a rich man’s mode of transport.”
Competition and the opening up of the economy has brought about huge changes in sectors like telecommunications and civil aviation – benefiting millions of poor and middle-class consumers. But these gains could well be wiped out, at least in the airline industry, if the government continues to dither on pushing ahead with further reforms in the sector.