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ShareCarriers being battered by oversupply, falling demand, rising fares and operating costs
BANGALORE: Much before the raging aviation turbine fuel (ATF) prices hit the profitability of Indian airlines, overcapacity in the industry was already eroding margins.
In January-March this year, one-fifth of the seats flew empty.
This put immense pressure on the pricing power of airlines because they were scrambling to get as many passengers as possible onboard. This, coupled with selling tickets below cost, has pulled carriers relentlessly into a financial quagmire.
Price warrior Deccan had reported a staggering net loss of Rs 213 crore in the fourth quarter ended March 31, 2007, or Rs 2.36 crores per day, when oil prices were below $70 per barrel and demand was growing at 20-30%.
But operators chose to ignore the writing in the sky. Despite 20% excess capacity in January-March, airlines added 18% more in the same quarter even as passenger growth slowed to 11% from 20-30% levels.
Ankur Bhatia, managing director of Amadeus, the global airline ticketing platform vendor, says oversupply is a prime reason for the deteriorating financial health of the carriers, and oil has only "catalysed the effect."
So what do airlines do to stanch the haemorrhage? Add levies into tickets on the pretext of rising input cost. ATF prices have risen 100% over the last 18 months. For Jet alone, that's an additional monthly cost burden of Rs 90 crore. No doubt jet fuel prices have hurt, but it is not the only reason airlines are sloshing in red ink.
M Thiagarajan, managing director of Paramount Airways, the south-based carrier, said any attempt to adjust fares now is only pulling down passenger demand.
According to Jet Airways estimates, consistent increases in fuel surcharge have led to traffic growth tapering from the peak of 40% in FY2007, leading to airlines selling at cheaper basic fares.
In a presentation on its website, Jet says the industry is losing Rs 1,720 per passenger today.
Now, the airlines are seeking relief on the exorbitant aviation turbine fuel levies, which will reduce their losses to some extent, but representations by the industry lobby to the government agencies have only fallen on deaf ears.
In trying to get the attention of the government, the airlines are only going around in circles with each concerned ministry passing on the buck to the other.
SpiceJet Ltd executive chairman Siddhant Sharma is appalled at the government's apathy.
"What is happening is that when we approach the finance ministry, they agree that excise duty and custom duty comes under them but then send us off to the petroleum ministry, which, in turn, says that they are dependent on the finance ministry for subsidy budget and if they give us relief (on excise and custom duty) they will fall short on subsidy. So we are back to finance ministry."
Sharma says the finance ministry is also apprehensive of asking the state governments to slash sales taxes on ATF prices, which go as high as 39%.
"They fear the states will demand recoupment," says Sharma.
States, on their part, are brashly shoving aside the concerns of the airline industry, saying they would rather be worried about the 98% of the road and rail travellers than the 2% air travellers.
Such responses have surprised industry players because their representations on the flawed ATF pricing mechanism, which makes domestic jet fuel 60-70% costlier than prices in Singapore and Dubai, are being led by none other than the civil aviation minister Praful Patel himself.
Today, International carriers are paying Rs 50,000 perkilolitre of ATF whereas Indian airline operators are paying between Rs 66,000 and Rs 73,000 per kilolitre in metros.
A recent Frost & Sullivan report said airlines had lost around Rs 2,100 crore last year due to irrational ATF pricing, and they could lose around Rs 8,000 crore this year.
"This will have far-reaching consequences. Low-cost carriers may even have to close down many routes and streamline frequencies. Even full-service carriers will have to rationalise operations," the Frost & Sullivan report warned.
Analysts said capacity growth had slowed down to 18% year on year during the fourth quarter of FY08 compared with 22% in third quarter in the same fiscal.
"Airlines are to be blamed for the problems they have brought upon themselves due to overcapacity. As they chased market share, they created a huge demand- supply imbalance. Even if the oil prices had not shot up the way they have, overcapacity would have killed some carriers anyway," said one analyst, who could not be named due to compliance reasons.
Airlines have woken up to the truth. Jamshed Dadabhoy of Citigroup, in a recent report said a silver line was emerging as the supply side is beginning to rationalise.
SpiceJet's Sharma says the industry will be cutting 15% capacity in the next two months.
But whatever the airlines do, they can't seem to get out of the vicious circle: if the fares continue to rise, selling tickets becomes a problem.
So, as the average load factor keeps tumbling, the load factor needed to break even keeps rising.
The domestic air traffic growth has been continuously slipping since November 2007.
It literally plunged from 27.1% in November 2007 to 6.2% in May this year.
Experts have said that rising operating costs, falling demand and overcapacity will expand the airline industry losses to Rs 8,600 crore in the current fiscal.
Will ATF prices set to rise again, there is no escaping the tailspin for now.
