Archive for the ‘Indian Aviation’ Category

Since the Indian Government opened up the skies to private airlines in 1994, the aviation sector had been steadily showing growth. Up until early 2007, Indian aviation was considered the cherry on the top of our Economic Growth pastry. That was when the scenario began to change and many airlines had to come in for “emergency landing”.
Recent rise in ATF and cutthroat competition has pushed various airlines to the darkest corners of a lonely alley. The industry reported a total loss of Rs 40 billion in 2007-08, a figure expected to double this fiscal. Analysts attribute the situation to faulty business models that relied on pricing tickets below cost price to grab market share despite which airlines were unable to achieve break even. The plight of airlines is evident from the following incident. During a recent flight carrying less than 50 passengers from Hyderabad to Delhi on a 180-seater aircraft, the pilot announced, half jokingly, “Sit as comfortably as possible and stretch across as many seats as you like!”
Today’s airlines may call themselves low-cost carriers, but the truth is that they are just low-fare airlines. If this situation were to prevail for a few more years, we might see most private operators packing their bags and running home.
High fares have once again made air-travel a luxury meant only for the rich. Reduction of costs has led to safety worries among travellers. There has been a big dip in the quality of services as well. Though not too many airlines have given out pink slips as of now but there have been pay-cuts and a large amount of job-insecurity among employees. The largest benefiters of the recent aviation boom were other industries such as airports and crew training schools. These industries are facing severe problems today.

Scenario of some major airlines

Air India– Due to high oil prices and low yields, India’s only government owned airline is unable to turn around money fast enough to keep pace with its capital needs. Some of the steps taken by them are:
i. Reduce fleet – They have decided not to renew 13 leases on orders for new planes, which will expire in December this year.
ii. Cut flights which were huge losses for the company
iii. Cut costs on publications
iv. Cut costs on manpower travel

Jet Airways
– Its yields are better than others because of its business class revenue. However, seat occupancy has fallen and fuel costs have nearly doubled. Jet is losing more than $1 million a day. Jet Airways’ owner and Chairman Naresh Goyal has warned that if the trend of high ATF prices continued for another year, his airline may have to face closure. Some of the steps taken by them are:
i. Cancelled or down-sized many national and international flights
ii. Strict control on costs such as fuel consumption, payroll and capital expenditure
iii. Re-negotiating all contracts for goods and services

SpiceJet– SpiceJet has been unable to recover even the fixed costs on a large number of its flights, leave alone the variables. Every day, it flies only once, sometimes twice, between Delhi and Mumbai, India’s busiest route, and that too with less than 100 passengers on board a 180-seater aircraft. The more they fly, the more they lose. The losses have forced SpiceJet to hand out two board seats and quasi-equity instruments to investor Wilbur Ross, for a lifeline of $80 million. At the current rate of losses, that is about 160 days of blood. Some of the steps taken by them are:
i. Fleets down from 17 to 15 aircraft
ii. Flights down from 117 to 97 a day
iii. Surrendered landing slots in Hyderabad, Bangalore, Ahmedabad and Jaipur
iv. Closed Port Blair and Cochin stations

GoAir– This airline owned by the Wadia-group has been facing the maximum number of problems. Some of the steps taken by them are:
i. Cancelled the largest number of flights. From 561 flights every week, it is down to 200, and plans to cut 75 more
ii. Grounded one plane and looking at ways to reduce capacity
iii. Only airline that is laying off staff

Badly formulated business plans

Four years back many entrepreneurs entered the aviation market eyeing huge profits and a booming sector. Owning an airline became a symbol of prosperity. Even today, at least five corporate houses are sitting with licences for regional airlines but no business plans. Many of them achieved early success by pulling away train travellers with rock bottom fares as low as Rs. 1. Nine airlines were launched in 12 months that placed orders for over 200 planes. Pilots and CEOs were hired at exorbitant salaries. Without expanding the network enough, India’s low-cost carriers charged low fares to fill up planes, which pushed up the break-even levels of seat occupancy. The infrastructure crunch meant maintenance of 5-7 bases around the country with pilots, engineers, etc. at each, adding considerably to the already high overheads. The ultimate blow came in the form of rising oil prices, a 5-17 per cent monthly rise in aviation turbine fuel (ATF) prices.
Aviation is also susceptible to regulation. It cannot function effectively if the other parts of the chain are held back, because of either regulations or lack of funds. The uncertainty in government policies has been a major cause for concern in the recent past.
One reason why uptake is not higher in India is that the air travel experience here is still so complicated. The difficulty in getting to airports and the chaos of subsequent processes scares passengers away. Hopping on a train may be slower but it is far easier.

Some solutions to the present scenario

i. Expand consumer-base – Even today, the bulk of Indian travellers use trains and a very few fly
ii. Save costs – Withdraw publications, charge luggage, reduce on-flight services such as movies, charge food items
iii. Fuel cost management – Even though hedging rules were notified in July 2007, no airline in India has used the option.
iv. Mergers and sale of stake – Rumours suggest that GoAir promoters, the Wadia family may be in an advanced stage of talks to sell a substantial stake in the airline. Reports also suggest that UB Group chief, Vijay Mallya, may be in talks with SpiceJet’s main promoter, Bhupendra Kansagra, to pick up the Kansagra family stake of 12.9 %.
v. Stop paying commission to agents on ticket sales – Currently, agents are paid 5 per cent commission on the value of the ticket sold and they sell about 90 per cent of all airline tickets.
vi. Variable fares for luggage

Looking at the present state of the Indian aviation sector, the government of India seems very unlikely to come to the rescue of private airliners. These carriers will have to do a complete rework on their business models. Implementation of no single policy can solve the imminent problems. Not only their own, but the plight of Indian air-travellers also lies very much in the hands of these airlines. Moreover, if something is not done soon, we may see the sector returning to the by-gone era of Government monopoly and air-travel for only the rich. We will have to wait and see whether history repeats itself.