PAY MORE, FLY LESS

Costlier aviation fuel has driven up more than just the fares for flying. Passengers are being made to shell out for services, such as refreshments, which were hitherto free. Vibha Sharma reports on how airlines are coping with the crisis and what lies in store for fliers

THE smooth flight of the aviation industry in India seems to have hit a turbulent patch and with that the customer-is-king attitude, too, seems to have been grounded. With rising fuel and infrastructure costs, the era of cheap airfares seems to be over, at least for the time being. On July 31, several airlines hiked domestic airfares for the fifth time this year to meet the increasing cost of aviation turbine fuel (ATF). With the last increase the airfares have almost doubled during 2008. The cheapest Delhi-Mumbai ticket, which was earlier available for between Rs 2,800 and 3,000, now costs about Rs 5,000.

This has clipped the wings of the aviation industry, which had expanded dramatically in recent years with the entry of several new players and low-cost carriers. Until last year many of these airlines, especially the low-cost carriers, were going overboard to woo more and more passengers by offering attractive bargains. So much so that the competitive rates made rail and road passengers switch to flying.

But the scenario is changing fast as the growth bubble has punctured and 2008 is becoming a difficult year for the sector. It is almost back to the days when flying was the prerogative of the rich and those flying at the expense of their employers.

"The transfer of cost burden to passengers in the form of higher fares and surcharges are having a dampening effect on demand. Bot for airlines, this slowdown coupled with soaring fuel prices is worrying. For airports, moderation in growth rates will provide a welcome relief from the strain on overburdened facilities," says Kapil Kaul, India Head of the Centre for Asia Pacific Aviation (CAPA).

Interestingly, global aircraft manufacturers remain bullish about India’s aviation story. The reason, according to Boeing Dinesh Keskar, is that the Indian market for new airplanes has been valued at $105 billion over the next 20 years.

"Wilbur Ross’s investment of $ 80 million in SpiceJet is a reaffirmation of the fact that India continues to be a good investment," he explains. After all, logically which financial major will invest in a loss-making proposition?

But for now, the problem is there. And it is big enough to evoke the concern of Prime Minister Manmohan Singh and Civil Aviation Minister Praful Patel, who are trying to save India’s ‘sunshine’ industry from crash-landing.

Cutting corners

The odds are loaded against the low-cost airlines operating in the domestic sector. ATF prices have gone up from Rs 21,000 per kl in 2004 to about Rs 70,000 kl now. ATF accounts for 40 per cent of the operating costs of Indian carriers against 20 per cent for international carriers as in India ATF is costs much more than in the international market.

Indian air carriers pay 60 per cent more for ATF as compared to the international benchmark countries. The 50 per cent increase in ATF prices over the past few months has put an additional burden of $1 billion on Indian carriers this year.

Since ATF accounts for a major part of operational costs, and the more an aircraft weighs, the more jet fuel it consumes, airlines are trying every possible way to reduce in-flight weight and save on fuel.

International airlines are reducing the weight of in-flight magazines and cutlery and jettisoning entertainment services. In India, too, efforts are on to cut down extra flab. Spicejet Chief Financial Officer Partha Sarathi Basu says the airline has curtailed the weight of aircraft by not carrying ovens and coat hangers.

"We have the lowest fuel consumption per hour in the industry. Our aircraft are fitted with winglets to make it fuel-efficient. We have also curtailed the weight of the aircraft by not carrying ovens and coat hangers, etc," he says.

President and Chief Executive Officer IndiGo Airlines, Bruce Ashby, adds the airlines is careful in developing aircraft specification to avoid carrying extra weight.

"We use sophisticated flight planning software that considers all trade-offs of climb, descent, cruise speed and fuel boarded. We monitor the actual performance of flight as per the flight plan and give and receive feedback from the pilots when there are deviations. We also are careful in developing our aircraft specification to avoid carrying any extra weight," he adds.

Airlines have also implemented 10 to 20 per cent reduction in the number of flights on domestic routes and have put expansion plans on hold. Currently, the path is that of consolidation rather than of taking deliveries of new aircraft. Kingfisher had almost 20 deliveries scheduled per year till 2012 but that schedule is likely to be revised. Airlines are revising schedules to rebalance the supply of seats and demand for those seats at prevailing fare levels in the lean travel season.

SpiceJet Chief Commercial Officer Sam Sridharan says his airlines is focusing on consolidating network and connectivity between 15 cities it caters to rather than expanding into newer cities in the next 12 months.

Dealing with fuel price while ensuring the profitability issue is the prime issue. Sridharan says: "Cost-cutting is part of our culture and we will continue to find ways of reducing cost. We have aircraft with winglets that reduce fuel consumption and give a saving of 4 to 5 per cent. We also have an aggressive fuel management programme that is regularly monitored. This helps us to save 3 to 4 per cent on total costs annually. We also attempt to optimise speed and height at which the aircraft fly so that they burn optimum fuel," he adds.

Jet is embarking on a cost-saving programme that will help save around $50 million by March 31, 2009, and $80 million by the end of the following year.

Ways to reduce fuel consumption, including good operational and maintenance practices, are being explored. Airlines are towing airplanes to runways to cut pre-flight fuel consumption, reducing passenger service and entertainment items, monitoring weather and air traffic at airports to adjust speed of planes to prevent circling overhead.

Currently Air India and Indian are in the worst financial health. National Company of India Ltd (NACIL) — the company formed after the merger of AI and Indian Airlines — is in such deep trouble that its losses have tripled during 2007-08 from Rs 688 crore last year.

Recently, the Civil Aviation Ministry asked AI to rationalise capacity and cut down loss-making unprofitable routes with immediate effect and save at least Rs 1,000 crore in 2008-09.

Several services which are free of cost may have to be paid for. Apart from food and beverages served on board, passengers are also likely to be charged for the check-in baggage, blankets and other facilities.

Travel tail spin

Hike in domestic airfares is influencing leisure travellers. Once again there is a shift towards train travel, private vehicles and buses for short distances.

Director, Group Business Development, STIC Travel Group, Richa Goyal Sikri, says the number of passengers travelling for leisure has gone down, but business travel appears stable.

"Due to rising fuel costs, domestic carriers have cut back on capacity by 20 per cent and stopped short distance flights as passengers now prefer travelling by trains, coaches or cars. With the low-cost carrier concept, air travel became affordable, and tour packages clubbing three to four or more destinations were introduced in the market. But due to rising ATF costs, inflation and reduction in flight options, air travel is being reconsidered by leisure and SME travellers. Earlier, a package for Rajasthan covered multiple destinations by air. Now it has become a combination of air, land and train travel. Similarly, where earlier several tourists opted for a Mumbai-to-Goa flight, now they prefer other options.

Internationally, too, the scenario is not completely stable. In the past two years international leisure travel had witnessed an unprecedented increase. But now more and more people are preferring destinations closer home. Travel and tour agents have also suffered losses due to the price hike and the zero per cent commission problem, explains Sikri.

Travel search engine Zoomtra.com Director Vikas Jawa says there has been a definite impact on the margins of the travel agents.

"Fuel costs and taxes have caused a huge setback to the airlines, which are trying to maintain steady overall cost to ensure that air travel remains within the reach of a large number of people. Travel agents can still benefit from the increasing volumes. But this has also forced agents to look beyond the plain ‘vanilla air ticket industry’ and concentrate on more lucrative travel products like leisure holidays and hotels," he adds.

Faultlines

The international aviation sector is expected to double its accumulated losses this fiscal to $2 billion. IATA forecasts the industry loss at $2.3 billion with average oil price of $106.5 per barrel and $6.1 billion with average oil price of $135 per barrel.

IATA says industry’s total fuel bill for 2008 will be $176 billion with oil at $106.5 per barrel. In contrast, the total fuel bill for 2002 was $40 billion. Keskar adds that everytime the price of fuel goes up by one dollar, the industry costs increase by $1.6 billion.

In India the cost of ATF has doubled in the past one year. Losses for the industry in 2008-09 are estimated at Rs 8,000 crore, double of what it suffered during 2007-08. Experts say operators too are responsible for this financial mess. The tendency of the airlines to operate more than the required number of flights in a particular sector often forces it to sell tickets at discounted rates while incurring losses.

Kaul says the airlines are losing more money because of their inefficiencies in terms of supply chain, capacity management, distribution system and infrastructure constraints.

Take the issue of food. Keskar says there is no need to serve food on short-haul domestic flights. "Most people can live without food for an hour-and-a-half flight. In the US even for a four-hour flight they don’t offer anything".

Help at hand

The ATF price for domestic airlines includes customs duty of 10 per cent and excise duty of 8 per cent, while different states levy sales tax ranging between 4 to 30 per cent. Andhra Pradesh and Kerala are among the states that have reduced sales tax on ATF to 4 per cent.

While the ministry is asking all states to peg taxes on ATF at four per cent, its attempt to include ATF in declared-goods list has failed. And apparently, the Finance Ministry has also rejected its proposal to levy a specific excise duty on ATF.

At present the ATF attracts excise duty of eight per cent and the ad valorem duty. Which means the actual levy goes up every time the price of the commodity is hiked. However, analysts say specific duty can soften net fuel price only when base price is too high. In case of low base price, which would happen when crude price falls, it may not have the desired affect. Recently the Prime Minister also approved setting up of a committee to examine issues relating to the financial crisis being faced by airlines. The committee will assess financial difficulties faced by operators and examine international scenario and practices followed by other countries and airlines. It will make short-term and long-term recommendations for sustained growth and health of the industry. The ministry is planning to pursue tax issue with the committee.

"Industry’s problem is if it increases fares, it may not be able to carry that many passengers. If the industry falls sick, then the government has to step in. We are making all efforts to reduce the sales tax, but we have to take everybody (states) along," Patel says.

Hanging on hope

In spite of the present scenario the civil aviation major, Boeing, is upbeat about India. The company predicts that Indian market for new airplanes will be valued at $105 billion over the next two decades.

In its 2008 current market outlook, Boeing says India will require 1,001 new commercial airlines, both passenger and freighter, worth more than $105 billion at current list prices, between 2008 and 2027.

Boeing’s forecast takes into account the industry’s near-term challenges, including slowing worldwide economy, surging fuel prices, slowing traffic growth and concerted action by airlines to balance costs and revenues.

The 2008 CMO for India includes 59 regional, 728 single-aisle, 203 twin-aisle and eleven 747 and larger airplanes. The primary increase from Boeing’s previous forecast has been in the single-aisle category.

Keskar says commercial airplanes in 100 to 400-seat category will account for majority of growth over the next 20 years, and airlines will accommodate that growth by adding frequencies and point-to-point nonstop flights.

Rising ATF costs and stricter emission regulations envisaged in future are also making the industry work on cheaper and greener alternatives to fossil fuel.

World’s leading airlines and manufacturers of commercial airliners are testing ATF derived from bio-fuel sources. Virgin Atlanta recently tested biomass-derived fuel on an engine during a demonstration flight. Japan Airlines Corporation, too, is planning to test a flight next year.

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