Aviation in America may be entering another consolidation phase, after Delta announced a merger with Northwest Airlines, having acquired the latter for $3.1 billion. Delta plus will now be a $35-billion business with some 800 aircraft flying over 360 destinations in 67 countries, and will overtake what was the world?s largest airline American Airlines, which was in the news last week for thousands of stranded passengers at airports awaiting a safety check on dozens of its planes. The bug that has bitten both Delta and Northwest is the same: soaring prices of aviation turbine fuel (ATF). American reports indicate that average prices over the past two months were more than 50% higher than the same period the previous year?enough to put the fear of flying into the most seasoned of aviators. Fuel being a significant cost, flea-sized carriers in the US such as Ata Airlines, Aloha and Skybus have suspended operations, and the shakeout is expected to be followed by an M&A session of an intensity that will severely warp all existing notions of aviation industry cycles. It was only in September 2005 that Delta and Northwestern filed for bankruptcy protection, a crisis from which they emerged in 2007. Alas, ATF prices put the squeeze on their margins shortly afterwards.
Airlines in India cannot pretend to be insulated from any of this. The industry recorded aggregate losses of nearly Rs 2,000 crore in 2006-07. Domestic ATF prices have risen an estimated 40% since then, and at least one airline chairman reportedly expects industry losses in 2007-08 to exceed Rs 2,800 crore. This, in spite of a round of consolidation in India that was supposed to help shore up P&L accounts. For the Jet-JetLite and Kingfisher-Deccan combines, full-fare and no-frill services were expected to be pressed into concerted action in a manner that could maximise upmarket revenue without losing price-sensitive volumes generated by the low-fare revolution at the market?s lower end. The calculations, however, have been thrown into disarray by ATF prices. The rise was entirely unscheduled, and the challenge now is to ensure that the industry retains its trajectory. For this, airport infrastructure expansion efforts should be redoubled, so that ground capacity is not a constraint on the size of operations. Economies of scale are far below their limits in India. Mass-market aviation is not a dream that must die early.