Excess baggage

September will go down as the worst month in the labour history of India’s airlines.  It saw pilots of two leading carriers — Jet Airways and Air India — strike work for a week within 15 days of each other, inflicting revenue losses of Rs100 crore on each and leaving thousands of passengers stranded. 

The labour discord was an inevitable fallout of the airlines’ financial troubles which have piled up in the last two years not only due to factors like soaring fuel prices and a fall in demand due to an economic downturn, but also a business model that led to unsustainable costs.

There were plenty of excesses during the boom years — from selling tickets below cost to aggressively adding capacity, hiring pilots at exorbitant salaries to chasing market share at the cost of profitability, the list runs long. 

All this became a millstone round their necks when the economy went into a tailspin. According to the Centre for Asia Pacific Aviation, domestic airlines have accumulated losses of Rs15,000-16,000 crore in the last 3-4 years.

Interestingly, statistics released by the International Air Transport Association (IATA) show that the losses of local carriers for 2008-09 was Rs10,000 crore ($2 billion), nearly 20 per cent of the global airline industry loss estimated at $11 billion, although their share in the global aviation market was just 2 per cent.  

State-run Air India’s (AI) losses alone have shot up to Rs7,200 crore in the last fiscal from Rs 500-600 crore in 2005-06.

Jitendra Bhargava, executive director of AI, says the reason why AI is worse off than private carriers is because being a government-owned firm does not give it the flexibility to alter its business model swiftly.  This, he says, has saddled the airline with high operating costs even when other airlines have pruned theirs by revamping their business.

He says AI pilots are paid the highest salary in the industry despite their productivity being the lowest. An executive AI pilot draws a pay packet of Rs 6.5 lakh per month compared to a Jet pilot’s Rs 4-4.25 lakh per month. “Our pilots are flying fewer hours lately because we have cut flight frequency on several routes.” 

Bhargava said the biggest contributor to AI’s high cost is the number of employees on its roster. An industry source revealed the airline has on average 100-120 employees per aircraft, against a global benchmark of 30-35 employees.

Another AI executive said interference of politicians is also a big factor. He said most pilots want to be based in New Delhi. So every time a pilot is rostered to fly from some other destination, he wastes commercial seats just to fly to that place and return to his base in Delhi.

“Pilots have strong political clout. If we try to transfer them out of Delhi, they get five members of parliament to write to the (civil aviation) ministry. How can an airline wipe out losses if its hands are tied this way?” asked the AI official.

Meanwhile, private mainline carriers like Jet Airways and Kingfisher Airlines are struggling to keep their operations going by slashing excess capacity and rehauling cost structures. 
Jet has already snipped 30 per cent capacity in the last 12 months while Kingfisher has cut back 21.5 per cent.

The airline industry had been grappling with excess capacity even during the boom time — 2006 and 2007 — when passenger traffic was growing at the rate of 30-40 per cent year-on-year.

Sachin Gupta, an aviation analyst with HSBC, says the domestic air passenger growth had touched a peak in 2006. However, since this coincided with cheap fares offered by airlines such as Air Deccan (now Kingfisher Red), the airlines were mired in losses even then.

The situation deteriorated after the economic meltdown in late 2008. All through this, fares only tumbled further because of the perennial excess supply.

Ankur Bhatia, managing director of Amadeus India, says carriers have aggravated their problems by consistently selling tickets below cost.

He points out that even though India’s GDP has been growing, the fares have only fallen. “Most airlines are scared to raise fares because they feel if they do so passengers will stop flying them. Nobody is ready to take that risk.” 

But a senior executive with a global airline industry body said the main problem is that the operating cost in India is among the highest in the world.

“Every uplift of jet fuel in India is 100 per cent higher than in Malaysia. On an average, it is 40 per cent costlier than the global benchmark price and since fuel is 35-40 per cent of an airline’s operational cost, it has a huge impact,” he said.

Indian carriers’ human resource cost, especially pilot salaries, and airport charges — landing, parking and navigational fees — are also 10% above the global benchmark.

However, the biggest financial drain for the airlines is the capital cost. “Cost of capital is very high because of their track record. They (the airlines) are borrowing at very steep interest rates,” said the industry expert.

Currently, Jet has a total debt of Rs16,600 crore on its books. Kingfisher and AI have also borrowed heavily to expand and sustain operations. So, tomorrow even if the market conditions were to improve, the staggering interest cost may still keep the three legacy carriers in the red.