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Industry hits airpocket

Currently, there are 11 airlines with a total of 333 aircraft between them — and more are on the way, reports Samiran Saha.
Hindustan Times | By Samiran Saha
UPDATED ON JUL 05, 2008 10:57 PM IST

Not too long ago India had one airline, fewer airports, few aircraft and lesser number of air travellers.

When, in 2003, Deccan Aviation began operations as India’s first low-cos carrier, it ushered in a whole new class of air travellers. A crop of new airlines followed, wooing more people to the air route.

Currently, there are 11 airlines with a total of 333 aircraft between them — and more are on the way. Manufacturer Boeing, in its revised India Market Outlook report of 2007, projected a need for 911 new commercial planes worth more than $86 billion over the next 20 years.

But it hasn’t taken long since those heady days of looking up for the shakedown to begin.

Meanwhile, many other tectonic movements changed the look of the industry. In April 2007, Jet Airways took over Air Sahara for Rs 1,450 crore. Then, Kingfisher acquired an initial 26 per cent stake in Air Deccan for Rs 550 crore and raised it subsequently.

In the mother of all mergers, the government-owned Air-India and Indian Airlines joined to form the National Aviation Corporation.

All these players were re-arranging their cards when the going was good. But that was just the first wave. The new wave of consolidation, that’s expected to set in now, would happen on a different ground, one on which everyone is feeling all shaken up.

What went so drastically wrong, all of a sudden?

The one factor that inadvertently pulled down the sector was the steep hike in crude oil prices globally.

An immediate fallout was an increase in the domestic crude oil prices — by an unsettling 118 per cent in three years. Add to that the fact that cost of aircraft turbine fuel (ATF) in India was always among the highest in the world because of the high taxes charged, and you have the recipe for the current free-fall.

State sales taxes on ATF range from 4 to 39 per cent, an average of 25 per cent countrywide. The total government levies work out to 35 per cent over and above the price of ATF. So, the price of ATF in India is 60-70 per cent higher than the global average, states consulting firm Frost & Sullivan in a recent report.

In such a state, airlines are delaying their domestic and overseas expansion plans. Indian carriers had finalised orders to increase their collective capacity (domestic sector) by 78,000 seats over the next five years. Till recently, they were hankering for on-time deliveries. But not now.

The beleaguered industry is adopting desperate means to cut losses that aggregated Rs 4,500 crore in 2007-08 and could top Rs 10,000 crore in the current financial year.

Passenger loads have fallen to 55-60 per cent per flight from last year’s high of 70-75 per cent.

“Fuel (costs) is a major barrier, coupled with very poor infrastructure. The combination is hammering down the sector’s growth,” says Kapil Kaul, chief executive officer of the Centre for Asia Pacific Aviation.

Also hit are aviation academies, that had mushroomed across the country to meet the growing needs. They cannot exude confidence nowadays about placing their students in the market.

While corporate obituaries are being written, the jury is still out. And not everybody is so sullen.

Sapna Gupta of the Air Hostess Academy, for one, chooses to look at the silver lining. She says, “There is a boom waiting with the Commonwealth Games round the corner, that will bring aviation and hospitality business back in demand.”

A recent report by KPMG stated that Indian airlines can achieve break-even despite the rising costs as long as they focus on improving efficiencies, processes and switch to leaner business models. Even the disbelievers would want that to happen.

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