Nevrekar
3rd Mar 2008, 08:04
Airlines crash land in red zone
With fuel price shooting up and self-destructing fare undercutting, domestic airlines have no hope to make profit in the near future, explain B S Arun and Dilip Maitra.
The pre-budget appeal of the domestic airlines to the finance minister to reduce taxes on aviation turbine fuel (ATF) was their last hope to make money. The Union Budget for 2008-09 has not touched upon the subject and left airlines to their own destiny.
And airlines seem to be flying to the doom. All airlines, including the largest Jet Airways and the Government-owned Air India, are bleeding heavily. Against the estimated total loss of around Rs 2,500 crore in 2006-07, the airline industry is expected to pile up a loss of Rs 2,800 crore to Rs 3,000 crore from their domestic operations in 2007-08.
Even the winter season, when airlines make a lot of money from the holiday travelers, was bad. Instead of posting profits, the third quarter of 2007-08 financial year saw most airlines record heavy losses.
Premier private carrier Jet Airways suffered losses of more than Rs 90 crore as against a profit of about Rs 40 crore in the corresponding quarter of the last fiscal. This was after five consecutive profit-making quarters.
Low cost airline Deccan Aviation reported losses of Rs 190.9 crore for the quarter ending December 31 2007, against a profit of Rs 9.64 crore it made during the same time in the previous year when it sold and leased back some aircrafts. Kingfisher Airlines, which is merging with Deccan Aviation as the liquor baron Vijay Mallya is the majority owner of both, did not disclose its large losses. State-run carrier, Air India’s (the merged entity) losses is likely to mount to Rs 1,000 crore in the current financial year against Rs 448 crore it lost in 2006-07.
Civil aviation secretary Ashok Chawla recently stated that combined loss of Air India - Indian Airlines was Rs 700 crore in the last financial year and this time this figure could be higher. “The total loss of domestic Indian carriers’ this fiscal is feared to be much higher than last financial year,” said V Thulasidas, Chairman of Air India and also the head of Federation of Indian Carriers.
Among the other low cost carriers (LCC), SpiceJet reported a moderate operational profit of Rs 4 lakh against an income of Rs 438 crore for the quarter. The two-year old airline hopes to turn profitable next fiscal. Funnily enough, the losses are mounting despite a huge 30 per cent growth in passenger traffic and in the revenue of airlines, which have introduced many new flights to new destinations.
Main culprit
What went wrong? The main culprit is the price of ATF, which accounts for a crucial 40 per cent of the total cost. ATF prices are high because international oil prices have zoomed and, more importantly, taxes levied on ATF by the centre and the states are exorbitant.
“In some states, sales tax or VAT on ATF is as high as 30 or 35 per cent. I said at the meeting with civil aviation ministry officials that airlines would be forced to go in for a differential fuel surcharge.
Some may even have to close down if there is no matching hike in air fares,” Mr Thulasidas told a news agency recently. Explaining the impact of taxes he said ATF in India was almost double the global rates and accounted for 40 to 45 per cent of total airlines expenditure compared to 18 to 20 per cent abroad.
In fact compared to a country like Singapore, ATF prices in some states in India is almost 70 per cent higher.
Other reasons
Another reason for losses is high salaries for pilots and crew members. Starting salaries of pilots (and engineers) are said to have gone up by as much as 75 per cent in the last one year owing to the launch of more airlines and shortage of skilled workforce. Salaries constitute about 20 per cent of an airline’s cost. Yet another reason cited for losses is the overcapacity in the sky.
According to Jet Executive Director Saroj Dutta, it is not ATF prices but excess capacity in the airline industry, which is putting pressure on the airlines. His view was echoed by Dinesh Keskar, Senior Vice President, Boeing Commercial Airplanes. He said, “The large number of wide-body aircraft would not be sustainable by the Indian aviation industry for serving the domestic market. With the large capacity (through more airplanes) coming in, airlines are finding it difficult to reach a break even load factor. Bigger the aircraft, the fuel burnt would be more leading to higher operating cost.”
However, S Venkat, AI Executive Director says, “Unless and until fuel prices stabilise at $58 to $60 a barrel, we cannot think of profitability coming in.” According to Deccan CEO Ramki Sundaram, “The losses were on account of capital related costs, which included interest, lease rentals and depreciation, and the one-off expenses pertaining to rebranding.” The airline said the increase in sales was largely because of the result of improved yield, which reflect the airlines’ repositioning as a high value carrier.
Industry experts note that at the end of the financial year, Jet Airways may break-even—thanks to the sale and lease back of aircraft over the past year. However, unlike others, SpiceJet Executive Chairman Siddhanta Sharma is confident of profits. He remarked, “We expect a small profit in the next fiscal (2008-09).”
Too crowded
It is also true that the heard mentality of the Indian business has made many to join the high flying club without much planning. As everyone thought that by driving volume one can make money, airlines kept on adding new planes.
LCCs particularly, to squeeze maximum benefit out of the existing fleet added many flights to smaller towns where passengers are very sensitive to fare. As each one is offering seats at lower prices to fill the plane, an airline seat is an instantly perishable product, losses only mounted.
Said a senior official of a large airline, who did not want to be named, “Domestic aviation business is now a ‘Collective Chaos’. Many entered the business with a few aircraft, they offer ridiculously low price and create problem for everyone. The industry itself is to be blamed for its plight, to a large extent.”
The latest round of market-share-grabbing bout has just started as some airlines are offering return flights for just Rs 500 (plus surcharge and taxes) to woo passengers in the lean season. Since the Railway Minister Lalu Yadav has further widened the gap between air and rail fare by lowering train fares in his latest budget, airlines now will have lower fares further and thus, add more to the loss. The consumers, of course, are not complaining as they could never dream that flying could be so cheap.
With fuel price shooting up and self-destructing fare undercutting, domestic airlines have no hope to make profit in the near future, explain B S Arun and Dilip Maitra.
The pre-budget appeal of the domestic airlines to the finance minister to reduce taxes on aviation turbine fuel (ATF) was their last hope to make money. The Union Budget for 2008-09 has not touched upon the subject and left airlines to their own destiny.
And airlines seem to be flying to the doom. All airlines, including the largest Jet Airways and the Government-owned Air India, are bleeding heavily. Against the estimated total loss of around Rs 2,500 crore in 2006-07, the airline industry is expected to pile up a loss of Rs 2,800 crore to Rs 3,000 crore from their domestic operations in 2007-08.
Even the winter season, when airlines make a lot of money from the holiday travelers, was bad. Instead of posting profits, the third quarter of 2007-08 financial year saw most airlines record heavy losses.
Premier private carrier Jet Airways suffered losses of more than Rs 90 crore as against a profit of about Rs 40 crore in the corresponding quarter of the last fiscal. This was after five consecutive profit-making quarters.
Low cost airline Deccan Aviation reported losses of Rs 190.9 crore for the quarter ending December 31 2007, against a profit of Rs 9.64 crore it made during the same time in the previous year when it sold and leased back some aircrafts. Kingfisher Airlines, which is merging with Deccan Aviation as the liquor baron Vijay Mallya is the majority owner of both, did not disclose its large losses. State-run carrier, Air India’s (the merged entity) losses is likely to mount to Rs 1,000 crore in the current financial year against Rs 448 crore it lost in 2006-07.
Civil aviation secretary Ashok Chawla recently stated that combined loss of Air India - Indian Airlines was Rs 700 crore in the last financial year and this time this figure could be higher. “The total loss of domestic Indian carriers’ this fiscal is feared to be much higher than last financial year,” said V Thulasidas, Chairman of Air India and also the head of Federation of Indian Carriers.
Among the other low cost carriers (LCC), SpiceJet reported a moderate operational profit of Rs 4 lakh against an income of Rs 438 crore for the quarter. The two-year old airline hopes to turn profitable next fiscal. Funnily enough, the losses are mounting despite a huge 30 per cent growth in passenger traffic and in the revenue of airlines, which have introduced many new flights to new destinations.
Main culprit
What went wrong? The main culprit is the price of ATF, which accounts for a crucial 40 per cent of the total cost. ATF prices are high because international oil prices have zoomed and, more importantly, taxes levied on ATF by the centre and the states are exorbitant.
“In some states, sales tax or VAT on ATF is as high as 30 or 35 per cent. I said at the meeting with civil aviation ministry officials that airlines would be forced to go in for a differential fuel surcharge.
Some may even have to close down if there is no matching hike in air fares,” Mr Thulasidas told a news agency recently. Explaining the impact of taxes he said ATF in India was almost double the global rates and accounted for 40 to 45 per cent of total airlines expenditure compared to 18 to 20 per cent abroad.
In fact compared to a country like Singapore, ATF prices in some states in India is almost 70 per cent higher.
Other reasons
Another reason for losses is high salaries for pilots and crew members. Starting salaries of pilots (and engineers) are said to have gone up by as much as 75 per cent in the last one year owing to the launch of more airlines and shortage of skilled workforce. Salaries constitute about 20 per cent of an airline’s cost. Yet another reason cited for losses is the overcapacity in the sky.
According to Jet Executive Director Saroj Dutta, it is not ATF prices but excess capacity in the airline industry, which is putting pressure on the airlines. His view was echoed by Dinesh Keskar, Senior Vice President, Boeing Commercial Airplanes. He said, “The large number of wide-body aircraft would not be sustainable by the Indian aviation industry for serving the domestic market. With the large capacity (through more airplanes) coming in, airlines are finding it difficult to reach a break even load factor. Bigger the aircraft, the fuel burnt would be more leading to higher operating cost.”
However, S Venkat, AI Executive Director says, “Unless and until fuel prices stabilise at $58 to $60 a barrel, we cannot think of profitability coming in.” According to Deccan CEO Ramki Sundaram, “The losses were on account of capital related costs, which included interest, lease rentals and depreciation, and the one-off expenses pertaining to rebranding.” The airline said the increase in sales was largely because of the result of improved yield, which reflect the airlines’ repositioning as a high value carrier.
Industry experts note that at the end of the financial year, Jet Airways may break-even—thanks to the sale and lease back of aircraft over the past year. However, unlike others, SpiceJet Executive Chairman Siddhanta Sharma is confident of profits. He remarked, “We expect a small profit in the next fiscal (2008-09).”
Too crowded
It is also true that the heard mentality of the Indian business has made many to join the high flying club without much planning. As everyone thought that by driving volume one can make money, airlines kept on adding new planes.
LCCs particularly, to squeeze maximum benefit out of the existing fleet added many flights to smaller towns where passengers are very sensitive to fare. As each one is offering seats at lower prices to fill the plane, an airline seat is an instantly perishable product, losses only mounted.
Said a senior official of a large airline, who did not want to be named, “Domestic aviation business is now a ‘Collective Chaos’. Many entered the business with a few aircraft, they offer ridiculously low price and create problem for everyone. The industry itself is to be blamed for its plight, to a large extent.”
The latest round of market-share-grabbing bout has just started as some airlines are offering return flights for just Rs 500 (plus surcharge and taxes) to woo passengers in the lean season. Since the Railway Minister Lalu Yadav has further widened the gap between air and rail fare by lowering train fares in his latest budget, airlines now will have lower fares further and thus, add more to the loss. The consumers, of course, are not complaining as they could never dream that flying could be so cheap.