FE Editorial : Flight to nowhere

Written by The Financial Express | Updated: Dec 26 2012, 09:37am hrs
Airlines world over have traditionally been tough businesses with few carriers able to make money consistently. In India, the first round of privatisation, in the early 1990s, saw no survivorsall three carriers East West, ModiLuft and Damania sank without a trace. Some of the second crop of players, however, have done well in a more liberalised economic environment and while some of them may be heavily indebtedJet Airways, Indigo and SpiceJethave all built up strong franchises. So far there has been one casualtyDeccan Aviationwhich was bought out by Vijay Mallya, in a spectacularly bad decision. Going by the look of things, Kingfisher Airlines could be the next. The decision to buy Deccan apart, Mallyas more than full-service model for KFA was in itself seriously flawed because there was not enough of an addressable market, over a sustained period, that would earn KFA the kind of fares that it needed to be able to cover its ever increasing costs. In other words, the top line for such a product simply didnt exist even as costs continued to rise. To their credit, the value value carriers like Indigo and SpiceJet read the Indian market more correctly by not going over the top with their revenue projections but instead keeping costs in check and focusing on service. KFAs expenses incurred in running a full-service airlineand servicing the huge debt on its bookssimply got out of hand at a time when the rising price of crude oil and high taxes on aviation fuel hit the airlines badly. Prices of ATF have more than doubled since March 2009 to around R70,000/kl and are at near 10-year highs. But despite this, Indigo reported an operating loss of just R87 crore last year on revenues of R5,552 crore while Spice Jet reported losses, post rentals, of R600 crore on revenues of R3,900 crore. KFAs losses, on revenues of R5,493 crore, were much larger at R2,328 crore.

The industry will continue to be in trouble for a while because theres simply not enough pricing power. Jet Airways is expected to report a loss of around R150 crore in 2012-13 not just because costs will double but also because the airline will pay out nearly R1,000 crore as interest; the anticipated revenues of R20,000 crore are not expected to be enough to cover these. Of course all airlines are reworking their route maps; Jet for instance, has opted out of some loss-making long haul routes in India and switched to short haul international routes in the Gulf. In some ways though the industry seems to be hurting itself by raising faresthe number of passengers flown between January and November this year has fallen to 53.4 million from 55 million in 2011 with the drop having been steeper in recent months. Destroying demand can hardly be the right strategy at a time when the economy is sluggish.