Silver Lining amid Turbulence

While airlines are engaged in a life and death struggle, they can look forward to some relief as there are encouraging signs from the government. The government has acceded to the request by the airlines to import ATF directly for their own use.

The turbulence in the airline industry in India appears to be getting worse by the day. Since the beginning of the so called boom that began in 2005, most of the carriers have remained consistently in the red and with each passing year, the financial mess has become more precarious, seriously threatening their survival. While the national carrier Air India has been surviving as it has perpetually been on life support provided from public funds, Kingfisher Airlines, decidedly the most glamourous and world-class carrier and with seemingly the most powerful financial backing by the global liquor giant UB Group, has somewhat inexplicably run aground. Even IndiGo, which has the largest market share and has been reporting profits consistently for the last three years, has not remained immune to the difficult conditions in the airline industry. It is believed to have posted an operating loss of Rs. 88 crore in the period 2011-12.

Despite efforts behind the scene and a ray of hope generated by the recent policy change in respect of foreign direct investment (FDI) into Indian carriers by airlines registered abroad, the situation does not seem to be getting any better for the beleaguered airline industry. FDI by carriers abroad may not be a reality anytime soon as most foreign airlines are themselves struggling to survive.

Although airfares have been on an upward trajectory for some time now, airlines have not benefited financially as the constantly rising cost of inputs have had a devastating impact on the already wafer-thin margins the airlines are operating with. Besides, contrary to the optimistic projections by professional analysts of healthy growth, passenger traffic is actually on the decline, further aggravating financial distress of the airline industry. The situation is becoming so untenable that it prompted the Chief Executive Officer of one of the leading private carriers to state that the airline industry in India is perhaps the only business in this country that is not founded on sound financial principles. His profound observation is not only factual, but also triggered essentially by an overwhelming sense of frustration.

However, the CEO’s observation is certainly not far from truth. In the airline industry in India today, all stakeholders other than the airline itself, are making money. First of all, the price of aviation turbine fuel (ATF) in India is amongst the highest in the world owing primarily to high rates of both Central and state taxes. As the price of ATF is no longer regulated, it has been rising continuously in tandem with the international price of crude. As ATF accounts for about 50 per cent of the operating cost of an airline, only around 50 per cent of the base airfare is available to the airlines for other items of expenditure. The oil marketing companies do not lose money at the cost of airlines.

Analysis of the fare structure would reveal that a large portion of the airfare paid by the passenger goes towards a variety of levies such as service tax by the Central Government, passenger service fee, user development fee or airport development fee (ADF) by the Airports Authority of India (AAI) and transaction fee by the travel agents.

Clearly, the burden of taxes and levies are life-threatening for the airline industry. Landing, parking and navigation charges at the metro airports such as Delhi and Mumbai are 70 per cent higher than that at Changi International Airport in Singapore which is rated as the best airport in the world. Airport charges here are 50 per cent higher than in Europe. The recently approved 345 per cent hike in airport charges will add an annual burden of Rs. 1,650 crore on the airline industry.