The aviation industry in India is facing a very difficult time at the moment. Air India has received government support whereas Kingfisher is struggling to even pay their day to day bills. All other airlines face some difficulty in an extremely uncertain environment due to higher oil prices, euro zone crisis and a near stall in global economic recovery.
Are the uncertain environments the only problem for the Indian aviation industry at the moment? On a closer inspection, it looks like there are few other factors that could influence the profits of the airlines. Here are a few
Fuel taxes:
If an airline purchases fuel in India, then it has to pay central and state fuel taxes. The central excise duty on aviation turbine fuel is 16% according to the Central excise website. This is significantly more than any of the developed nations. Hence, if an airline is operating an international route, they are at a competitive disadvantage with all foreign carriers on its operating cost to begin with. Hence, the Indian Government has failed to ensure a level playing field for Indian carriers.
On top of this, all domestic flights within India have to pay state fuel duties. Some states charge upto 30% tax on the fuel purchased in their state. The success of the Indian aviation is largely based on luring first class train passengers to take the air for a small premium. For this model to sustain, the higher fuel duties are not helping. It could be one of the reasons for airlines to be squeezed for profits.
When the cost of fuel is more, it implies that the airlines have to maintain a higher load factor to break even. If the load is weaker, it implies that the airline is bleeding money quickly.
Infrastructure:
India has seen a phenomenal growth in the last decade. However, the same level of growth has not happened in the airline infrastructure such as airports and runways. A new airport was constructed in Hyderabad and a new terminal in New Delhi, but this level of growth in Infrastructure is not enough to sustain the level of growth the airlines enjoyed.
The country's busiest airport in Mumbai is running on near full capacity. Also all other airports in the Metros are over utilised. It means that the aircrafts have to make a longer wait for take off and landing. This increases the fuel consumption, which adds heavily to the operating cost, and had to wait for the gates and other facilities provided by the airport. For example, the international terminal in Chennai airport (4th largest city in India) has only 6 gates. Hence, the turnaround time is naturally longer. As a result of this, the aircraft utilisation is lesser.
The Government of India should have planned airport expansions that keeps up with the pace of growth and should have thought about creating secondary airports for the low cost aviation market to flourish. In most of the airports, even the public transportation is not good enough.
Airport charges:
As a result of the squeeze on the airport infrastructure, the prices of using the facilities has gone up. Due to higher demand for the airport services such as usage of runways for take off and landing has increased over the years. These charges may not be completely transferred to the customers as the higher charges may put of millions of price savvy customers from not taking the air for travel.
Hence, the airport charges, along with higher fuel cost has put an upward pressure on the operating cost. To offset these costs, the airlines sometimes have to keep the fares artificially low to fill up the seats. With these low fares, they make losses, but without the low fares, they would have made even more losses. Again, the policies of Government of India is not helping the airline industry to thrive.
Preferential treatment:
Air India would have gone bust if not for Government's bail out every now and then. Air India should have been allowed to fail. If a state organisation is not making profits - especially due to structural deficiencies - then the organisation should be allowed to fail instead of using tax money to prop it up artificially. While Kingfisher is currently having the same problem, it does not get any help from the Government. This preferential treatment from the Government is not creating a level playing field for all the carriers. In a free market environment, all airlines must be treated the same way.
Mandatory routes:
All Indian carries must operate to the remote North Eastern states to ensure connectivity. Even though the demand is less from this part of the country, all carriers are forced to run a certain percentage of their flights to remote places in India. This is a 'Red tape' imposed on airlines that are already struggling to make any money. While the intention of the Government is correct in a way, its policies should ensure that these airlines don’t lose a lot of money by taking these unfavoured routes in its schedule.
Foreign ownership:
Foreign organisations can invest 49% in Indian airlines. However, foreign airlines are not allowed to invest in Indian airlines. Most of the Indian carries are relatively new to the business and need the in-depth knowledge of the established carries of the west. Indian carries need the IT systems that western carriers use to minimise costs. Also, foreign carriers can infuse money to expand the operations to realise the economies of scale. However, in the current climate, nobody is sure on how keen the foreign carriers would be to invest in India.
Still, the restriction on foreign ownership is blocking the Indian airlines form the technology and business experiences of the established airlines of the west.
Kingfisher airlines’ misery is partly due to the policies of the Government of India. However, when other airlines are keeping their head above water, Kingfisher's track record since the year it was founded is poor. By not making a profit for six consecutive years - which coincided with the biggest boom years in Indian aviation history - Kingfisher has let itself down.
India has a huge potential for aviation business. Statistically, on average even if Indians travel 15% of how much Americans travel, it would create a market that would be half as big as America. For that to happen, the Government of India should get its policies correct and should invest heavily on the infrastructure development. Until then, the sustainability of all Indian airlines is in danger.
