30.6.08

Indian Aviation flies into tough times


Carriers being battered by oversupply, falling demand, rising fares and operating costs:
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%.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.Oversupply is a prime reason for the deteriorating financial health of the carriers, and oil has only “catalysed the effect.”
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.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 (levies go as high as 39%), which will reduce their losses to some extent, but representations by the industry lobby to the government agencies have only fallen on deaf ears.The flawed ATF pricing mechanism makes domestic jet fuel 60-70% costlier than prices in Singapore and Dubai.Today, International carriers are paying Rs 50,000 per kilolitre 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.
Low-cost carriers may have to close down many routes and streamline frequencies. Even full-service carriers will have to rationalise operations.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.
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.

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