Consolidate or exit: Expert to Indian air carriers

ISTANBUL: With jet fuel prices on an upward spiral globally, a top aviation expert and an industry leader on Tuesday said consolidation or restructuring was the way to go for Indian carriers to beat losses and stay afloat.
    
"There are a large number of new entrants and there exists a huge amount of capacity in India. Rising fuel costs will accelerate the restructuring of this capacity.
    
"The new entrants and even large leading carriers will find it difficult to maintain their bottom lines because high costs and high capacity have to be matched. So, it is either consolidate or exit the market," IATA's Chief Economist Brian Pearce told PTI in an interview.
    
He, however, conceded that there was a tremendous potential for air travel in India, which was also witnessing strong economic growth. "With proper infrastructure in place, there is a tremendous capacity for the Indian market to grow. Travel trade will continue to grow in Asia."
    
But under the given circumstances, the airline industry in India has to consolidate or go bust, he said replying to questions on the sidelines of the annual conference of the International Air Transport Association (IATA) here.
    
Agreeing with IATA's estimation, Jet Airways Chairman Naresh Goyal said the Indian airline industry was not only suffering from high jet fuel prices, but also a "crazy" pricing strategy.
    
"We all have been doing crazy and irrational pricing, selling tickets below costs," Goyal said.
    
Jet Airways pioneered consolidation in the Indian aviation space by acquiring full-service carrier Air Sahara, which has now been positioned as a no-frills airline. The merger of state-owned Air India and Indian and that of Kingfisher Airlines and Air Deccan followed.
    
The Jet Airways chief felt that the practice of trying to undercut each other "should stop forthwith if we have to be in business. Today, we are surviving on oxygen. We, the Indian aviation industry, cannot afford to absorb losses anymore."    

He also spoke about the additional fuel bills that were being paid by Indian carriers for air traffic congestion and hovering over airports.
    
Projecting a "dramatic decline" in the US aviation business environment that would affect the growth scene worldwide, Pearce said there was a sharp slowdown in credit in the US and Europe, with banks and other financial institutions not ready to lend any more and imposing difficult conditions, including collateral, to dole out finances.
    
This, he said, was primarily because the lending institutions had suffered major losses in the sub-prime crisis in the US.
    
The IATA Chief Economist said the global umbrella body of the airline industry had to revise its industry financial forecast for 2008 significantly downwards to project a loss of $ 2.3 billion. "For every dollar that the price of fuel increases, our costs go up by $ 1.6 billion," he said.
    
Giovanni Bisignani, IATA Director General and CEO, had yesterday said the industry's total fuel bill in 2008 was expected to be $ 176 billion, based on oil at $ 106.5 per barrel, accounting for 34 per cent of operating costs.
    
This was $ 40 billion more than the 2006 bill of $ 136 billion, which accounted for 29 per cent of operating costs. In 2002, the bill was $ 40 billion.
    
"We also need to take a reality check. Despite the consensus of experts on the oil price, today's oil prices make the $ 2.3 billion loss look optimistic. For every dollar that the oil price increases, we add $ 1.6 billion to costs. If we see $ 135 oil for the rest of the year, losses could be $ 6.1 billion," said Bisignani.
    
Pearce said the situation has changed dramatically in recent weeks. "Oil skyrocketing above $ 130 per barrel has brought us into uncharted territory. Add in the weakening global economy and this is yet another perfect storm."
    
IATA Chief Bisignani yesterday said "oil is changing everything. There are no easy answers. In the last six years, airlines improved fuel efficiency by 19 per cent and reduced non-fuel unit costs by 18 per cent. There is no fat left."    

"To survive this crisis, even more massive changes will be needed quickly. Air transport is a catalyst for $ 3.5 trillion in business and 32 million jobs. This is an extraordinary crisis with the potential to re-shape the industry with impacts throughout the global economy.
    
"Governments, industry partners and labour must deliver change," said Bisignani.
    
State-run oil companies in India last week raised jet fuel prices by 18.5 per cent in view of high crude costs, triggering a spate of fare hikes by airlines.