What ails our airlines

Written by Sanat Kaul | Sanat Kaul | Updated: Nov 30 2011, 06:12am hrs
There has been much talk in the media about our airlines losing money due to wrong government policies. On the one hand, we are having double digit growth in the sector and on the other, we find that all airlines are losing their profitability. The general mood is to blame the government for its policies. The blame is that, in the domestic sector, high ATF prices and high sales tax (going up to nearly 30% for Mumbai) are the main problems. However, all airlines are being charged in the same manner and there is no discrimination. Hence, there is a level playing field.

The problem needs to be looked into in its entirety. While the contradictory trends of increasing passenger traffic and falling profitability are an industry-wide problem, they do not apply uniformly to all airlines. Two full-service airlines, i.e. Air India and Kingfisher, stand out. Both these airlines are victims of their own mismanagement. Air India has always had the goodwill of the government and also public sympathy at the middle class level. The merger of Air India and Indian Airlines has truly been a disaster, and since then the entity has been living off government dole at the cost of taxpayers. The recommendation of the Committee on Public Undertakings of the Parliament to de-merger into two airlines under a common holding company seems to be the best way out for the time being to bring sanity to the disastrous merger carried out over four years ago.

Kingfisher Airlines is another story. A wrong business model compounded by the purchase of Deccan Airlines and micro-management by the owner has led to its decline. There is nobody to blame but the owner himself. Further, the airline has already been bailed out once by public sector banks by converting its debt into equity at a much higher rate while the share price plunged thereafter. It may be pointed out that private sector banks had refused to bail out this airline and it was government intervention that made the consortia led by State Bank of India to go in for it. They are now 23% owners of Kingfisher Airlines. The only thing possible with Kingfisher is to divest the present owner of its haphazard management (they are returning to the concept of full service with more emphasis on business class).

Now we come to the issue of the profitability of the rest of the airlines. Post-deregulation in 1994, after the abolition of Air Corporation Act, the DGCA gave up its practice of approving ticket prices, which the monopoly domestic airline, Indian Airlines, used to fix. As a result of competition, and later in 2001 the coming of the LCC airlines, price wars started and the prices of airline tickets came down, which led to the great growth in air traffic in India. The LCC model was a great success and it became the dominant player in the market with its share currently around 70%.The full-service airlines, like Air India, Jet and Kingfisher, turned partially to this model. While Air India started Air India Express, Jet bought Sahara Airlines and Kingfisher, Deccan. Both Jet and Kingfisher have appeared to have overpaid in their respective deals, which has impacted their balance sheets.

The LCC airlines continued to do well and ordered a very large number of new aircraft.

As new aircraft arrived, it led to overcapacity, bringing down ticket prices and margins.While the LCCs managed on thin margins, the full-service airlines had more difficulty in this respect. With no price control, we find that market leaders and price-setters changed from Air India and Jet to LCCs. The consumers welcomed the low prices but, during festival rush when prices hit the ceiling, they complained. Further, during tragedies like the Mangalore crash and the Leh cloudburst, the prices to these destinations shot through the roof. Meanwhile, Air India, having lost the market, started undercutting below operating costs, without a care to their mounting losses as they were on government life support through budgetary support. Most airlines started operating below cost.

It has been reported that the Federation of Indian Airlines has recently gone to the government to seek stoppage of the practice of setting predatory as well as excessive ticket prices. They are interested in competition between bands to be fixed by DGCA. DGCA is also empowered and obligated to ensure the ticket prices are neither predatory nor excessive. We need a healthy airline industry and, therefore, there is, I feel, a need to allow the competition to set prices between the two limits mentioned above, which is also the mandate of Competition Law in India, to keep our airline industry from becoming sick. As far as high ATF or sales tax on ATF is concerned, it should be reduced, but should not be used as a reason for decline in profitability as they are common to all.

The author is chairman of the International Foundation for Aviation, Aerospace and Development (India Chapter)