The Hindu Business Line : Bottomline turbulence

That the civil aviation sector — comprising state-owned, and full-service and low-cost private carriers — may be flying into rough weather came home to industry when Air Deccan reported a whopping Rs 340-crore loss for the 15-month period that ended June 15. Not only was the magnitude of the loss higher than expected, it had also wiped out over half the airline's net worth. And, it is not that only the low-cost carriers are in distress. Mr Naresh Goyal, founder-Chairman of Jet Airways, told his shareholders recently that all airlines could collectively loose as much Rs 2,200 crore this year or over Rs 6 crore a day.

The implications are several. Vigorous — some would even say cut-throat — competition for a market share was always expected to impact the operating margins of the airlines both new and established, but especially the former. Even Jet Airways, which in quick time acquired the largest market share and started international operations, has come under financial stress though not to the same extent, or for entirely the same reasons, as the others. Its aborted merger with Sahara is costing it dear. A sharp increase in the cost of aviation fuel has been the principal, and common, cause followed by the woefully inadequate airport infrastructure. That has had many deleterious consequences, including delays in landing and take-off, resulting in avoidable fuel consumption. Some of these, especially the sticky oil prices and the Governments' reluctance to ease up on levies were unexpected. Others, such as the rising costs of hiring pilots and other airline professionals, should have been anticipated. It would have been naïve on their part to believe they could keep the pay levels of these professionals reined-in as it was when the industry was a duopoly.

Another key reason is the inability of airlines to comprehend, leave alone counter, the adverse effects of the price competition. Before the advent of Air Deccan, with its no-frills model and competitive pricing of tickets, competition among the three domestic airlines — Indian, Jet and, to a lesser extent, Sahara — was essentially non-price in nature. The no-frills carriers have been betting on first cultivating clientele by resorting to aggressive promotional fares. Tickets have been offered at Re 1 even. This strategy has enabled Air Deccan build a decent market share but, as its latest financial statement shows, can be injurious too. The obvious answer — to raise fares and recoup initial losses — has not been possible to implement, mainly because of newer competition; at least five more no-frills carriers are set to fly.

The budget airlines have forever changed the rules of the game forcing established players to discount their fares. Other customer-friendly but also cost-saving measures have followed. Today, all airlines allow their passengers to book tickets online, through telephone and some, like Air Deccan, at certain Internet cafes and petrol stations. The Indian air traveller has never had it so good but it is unwise to ignore the financial predicament of the airlines.