What would one do if the price of an input that accounted for over 40% of a business?s operating cost doubles in three years? That is the question facing India?s airlines at the moment. The country?s airlines are choosing to pass on the rising cost of aviation turbine fuel (ATF) to consumers. As a result, ticket prices have become costlier by as much as Rs 3,000 in the last two years.

The airlines have now been further affected by the recent decision of the bleeding oil marketing companies to increase the price of jet fuel by as much as 18.5%, the steepest in some time. Airfares have gone up for the fourth time in as many months, as this increase will push up the operating cost of the carriers by as much as 7-8%.. The forthcoming summer months are unlikely to help the cause of airline losses. Most of the major airlines will have to offer concessionary fares to attract passengers.

This comes at a time when the country?s aviation boom seems to be heading towards a crash landing. Air passenger traffic growth slowed to 11.12% in the first three months of 2008 from nearly 40% growth in the same period a year ago and in April, the growth fell to just 8%. The country?s carriers are staring at a cumulative annual loss of about $1.5 billion in 2008.

Let?s compare the situation in India with that elsewhere. For Indian carriers, ATF consists of 40% of operational cost, while for overseas carriers its just 20%. And jet fuel is 70% more expensive in India than the international bench-mark. Nine Indian carriers guzzled about 4,500,000 metric tones of ATF in 2007-08 to operate about 5.2 lakh flights.

The ministry of civil aviation can assist the carriers by affecting some policy changes.

The government has been reluctant to allow Indian carriers from lifting ATF abroad, or to allow complete hedging of price variations. A change in this policy position could help reduce the operating costs.

The ministry can also relax the mandatory requirement of flying ?social obligations routes? to get permission to operate profitable routes. These routes, often with less than 50% occupancy, put pressure on the profitability of carriers. And now, with regional carriers also permitted in these routes, pan-India carriers are at a greater disadvantage. If airlines are allowed to deploy aircraft in these routes on the basis of market requirements, most of them can save as much as 20% of their operating cost.

The government has other plans for airline routing. It is planning to allow more domestic carriers to fly overseas?a move fraught with risk for airlines. Most carriers do not have the experience to fly overseas and do not have the requisite financial strength to acquire aircraft or operate such long-haul routes. In addition, it also means guzzling more jet fuel, which would push up further their operating costs. Margins are also small in an overcrowded market.

The Centre has also failed to arrive at a consensus to remove the factors causing the high cost of jet fuel in India?import parity pricing of oil marketing companies, state taxes, customs and excise duties, and the high fee charged by oil companies for filling at airports. A reduction in, or removal of, one of these cost components will lead to huge cost savings. Back-of-the-envelope calculations show that a Rs 1,000 per kilolitre reduction in the price of jet fuel can result in an overall saving Rs 500 crores for the sector.

The government itself is caught in an unenviable situation because of the soaring global prices of oil. It has little choice but to pass some of the burden on to the airlines.

Consumers will inevitably be paying more to travel by air. The airline industry is fighting for its survival. The only way forward is for all the stakeholders?government, consumers and airlines?to share the burden in these turbulent times.

?bipin.chandran@expressindia.com