July 10, 2020
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Takeoffs That Never Were

Private airlines run aground-which may be of their own making

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Takeoffs That Never Were

THE chickens have finally come home to roost. With their books inked in red, the high-fliers of the early '90s—Modiluft, East West Airlines (EWA) and Sahara Indian Airlines—have begun their descent. Last year, Damania Airways grounded itself and is now flown by a new owner after being rechristened Skyline NEPC, while Lufthansa broke its much flaunted tie-up with Modiluft rather acrimoniously on charges of non-payment of dues. At the same time, EWA had its planes grounded for non-payment of statutory dues to the Airports Authority of India and actually flew its airplanes for two days without insurance cover.

But if the fact that these private airlines are floundering is not bad enough, the bigger problem is that none of them are willing to take the blame for their red ink, preferring instead to grumble and complain, rather than find a way out of the mess they are mired in. For, they have three convenient alibis, which enables them to pin all blame for their failures on the Government.

Alibi number one: the industry is unable to cut costs since the Government controls 40 per cent of their input costs (which has increased after the petroproduct price hikes) via aviation turbine fuel (ATF) and rental and landing charges. In addition, another 40 per cent of the costs can only be controlled in the long term. Effectively, airlines in India can only work at reducing costs on the remaining 20 per cent which is controllable in the short term.

In contrast, in the US, the Government controls only 21 per cent of an airline's costs, while another 48 per cent is controllable in the long run. The American airline industry, therefore, is able to work at reducing 29 per cent of its costs in the short term. 

"Fair enough," admits Civil Aviation Secretary Yogesh Chandra, "the long-term marginal cost curve for these airlines is fixed." But he hastens to add that Indian Airlines (IA) too suffers from the same cost constraints, yet it has been able to show an operating surplus for the last couple of years.

Adds Steffen Lauster, principal, Booz Allen and Hamilton, the US-based management consultancy firm which has studied the Indian aviation business: "The high level of non-controllable costs gives airlines a lower margin of error, but with further deregulation expected, controllable costs will increase. Therefore, airlines need to position themselves further than their competitors on those fronts where costs can be controlled. How many of these airlines have done that?"

 Industry sources feel that barring Jet Airways, which showed a meagre profit of Rs 9 crore on a turnover of Rs 400 crore in 1994-95, no other airline has managed to cut costs. Says aviation consultant H.K. Malik: "There has been an average 28 per cent increase in costs every year." Adding that lease charges will go up in the future by 10-15 per cent with tighter guarantees required due to non-payment of dues by most Indian airlines. "Clearly, there is no cost consciousness," he says. Alibi rebutted.

Let's consider alibi number two: airlines are forced to fly on mandatory unremu-are forced to fly on mandatory unremunerative routes. For instance, 10 per cent of seat capacity deployed on trunk routes has to be on category II routes to Jammu and Kashmir, the North-east and the Andaman and Nicobar Islands. In addition, 50 per cent of the capacity deployed on trunkroutes has to be on other routes in the country referred to as category III routes, most of which are loss-making. Private airlines are protesting that since they are commercial operations, they should either not have to fly these routes or be permitted to cross-subsidise these loss-making flights by being permitted to fly on lucrative foreign sectors.

SAYSP.C. Sen, managing director, IA: "If you say that there should be a level playing field with Indian Airlines, then private airlines should also fly category II and III routes." Besides, domestic airlines also gloss over the fact that they have selected the wrong aircraft in the Boeing 737 which today forms the backbone of the private airline industry. Says Malik:"B-737s give the maximum fuel economy only if they fly between 740 km and 1,200 km, but barring the trunk routes, at least half the routes in India are less than 740 km. This increases both the fuel cost of these airlines and their losses on category II and category III routes."

 He has a point. For instance, NEPC Airlines consists primarily of F-27s and flies these smaller aircraft on shorter, supposedly unremunerative routes, cutting costs and maybe even garnering profits, while the B-737s of Skyline NEPC are flown on the trunk routes. And despite existing only on B-737s, Jet Airways too has managed to minimise losses on the unremunerative sectors. Clearly, where there is a will, there is a way.

 Alibi number three: if the fact that costs are primarily controlled by the Government wasn't bad enough, private airlines complain, they don't even have the freedom to set their own ticket prices. While technically they have the freedom of pricing, their prices can't exceed those of IA because the airline dominates most of the routes, and they can't reduce prices because costs are primarily controlled by the Government. So, they complain that boxed in from all sides, it is only natural for their books to be inked in red.

But Chandra contends that the pricing structure is as deregulated as can be. Says he: "Unfortunately for the private operators, most of the routes are controlled by IA, which ends up dictating prices by virtue of being the market leader." Adding, that in any case, from what he can see, these price controls don't affect demand, and therefore, private operators should feel free to price themselves slightly higher. Jet Airways, for one, does price itself slightly higher, and doesn't seem to be doing too badly. For that matter, Sen points to an airline in Madhya Pradesh which is charging three times what IA charges on that route and manages to get away with it. 

"In any case, air fares have increased by an average of 138 per cent ever since the open sky policy was announced in 1991," says Malik, preferring to dismiss the pricing of tickets as a minor problem. Instead, both Sen and Malik and others in the industry point to numerous other factors which have caused problems for private airlines.

Firstly, there has been no effort to develop the market in India. Private airlines estimated that the business traveller would provide 80-85 per cent of their business. They made no effort to develop the Indian leisure market. Says Malik: "This market is price-conscious but throughout the world has proved to be the biggest engine of growth for the aviation industry."

 Secondly, poor management has compelled these airlines to fly B-737s on short-haul sectors with low demand, decreasing their load factor and increasing costs. Hence, airlines are unable to achieve an average 73 per cent capacity utilisation, something which would have enabled them to at least break even.

Besides, most of the airlines are under capitalised, which has forced them to go in for short-term operational leases for their aircraft and pay for it through debt. That they have been unable to meet their obligations despite increasing their debt-equity ratio has deterred financial institutions, both domestic and foreign, from giving loans. This liquidity crunch, therefore, leaves no scope for purchase of aircraft, or even replacement of the uneconomical B-737s.

The only conclusion that appears to make sense, therefore, is that the private airlines could do far better than take the easy way out: point at the usual suspect, the Government. The real culprits may be in their own plush offices.

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