In spite of high operating costs, airlines can make profits by pricing to stimulate demand

International Air Transport Association (Iata) director general and CEO Tony Tyler has urged the Indian government to eliminate the tax burden on jetfuel and remove restrictions on foreign capital coming from international carriers into domestic airlines to ensure a healthy aviation sector in the country. Tyler, who joined the global airline body representing 240 carriers across the world in July this year after profitably running Hong Kong?s Cathay Pacific, spoke to FE?s Nirbhay Kumar on the state of the Indian aviation sector and the role of government in making it financially healthy. Edited excerpts:

Most of the problems faced by Indian carriers are same as those hitting foreign airlines. Then why it is that airlines internationally would make a profit of $3.5 billion in financial year 2012 and Indian carriers who contribute just 3% to the world air traffic would post a loss of $2.5-3 billion during the same period?

Even in bad days, foreign airlines have not more than 30-32% of their total cost as fuel cost, but in India it is 40-45%. High fuel prices are the main problem here. It handicaps the whole industry. It pushes the cost up and so fare has to be increased to break even. But if fares are raised you will have lesser traffic and less revenue.

It is penalising the industry. Infrastructure problem is there. Airport charges are high. This aside, Indian airlines don?t have commercial freedom to set fares. There is a lot of micro management by the government on pricing. The government should focus on security and safety and create better policy environment. There is no doubt, the government can provide better operating environment. Air India is highly subsidised by the government because of very high cost structure. Private carriers have to compete with subsidised carriers.

The proposed Civil Aviation Authority (CAA) seeks to regulate airfares. Although you are against it, it has been in there many sectors, for example in drug industry where price of certain drugs are set by the regulator but it has not pushed the drug makers into loss.

Aviation is an international business, its requirements are different. Regulating a competitive market is not good. Other countries have done away with this. If you regulate the capacity, then regulate the prices. If you have liberalised the capacity, then do not do so.

The government is considering a proposal to allow foreign airlines to buy up to 26% equity stake in Indian carriers. How do you see this helping the sector when just one out of seven scheduled Indian carriers is making profit?

Investing in loss making business is obviously not a winning strategy. Investors single-mindedly look at where the best return is. But certainly Indian laws are very restrictive on foreign investments in airlines. If the government liberalises the FDI policy, you will see the foreign money coming into the aviation market, because it is a rapidly growing market. Therefore, aviation friendly policies are required particularly for lifting the dead weight of taxation.

Have you got any sense from the foreign carriers about putting money in Indian carriers?

In today?s difficult environment, generally speaking, many airlines are trying to keep their balance sheet strong rather than investing in other airlines. If foreign investment in airlines is allowed, then the investments from different kind of sources will arrive. India is a big market and getting there by air is the best way. We need good domestic air transport infrastructure to facilitate foreign investment.

One of the leading Indian carriers Kingfisher Airlines has decided to exit the low-fare market in spite of higher growth in this space. Do you see the future of Indian market in low-cost or both in full service and low-cost?

There is huge potential for low-fare segment and it has very strong and very good prospects. There is also some space for premium fare and cargo. India is a very big market and has many segments. So there is enough space for all the categories.

Do you think there is demand supply mismatch in the Indian aviation sector?

We have seen aggressive expansion by all the carriers across the world especially by the West Asian carriers in the Indian market. It creates very competitive environment. If the cost of operating is very high, then airlines could still make profit by pricing to stimulate the demand. Demand is flexible depending upon the market. There is trick to be able to operate at low cost.

The Comptroller and Auditor General (CAG) has criticised the government for liberal bilateral and has linked it with the poor condition of Air India. How do you see it?

You can?t protect your way to success in the world of business. If there seems to be too much competition, then the answer is to find the way to be competitive yourself. You can?t be protecting your national carrier always. The economics of cost would be huge. India needs to be a part of the globalised world. The answer is to give Air India support for restructuring and reduce tax burden which penalises the Indian carriers very heavily. If you look around the world, where are strong carriers? They come from the most liberalised economies.