14-Nov-2011

Airline Woes

The ATF prices are very high in India because states levy sales tax or VAT on ATF between 23 to 35 per cent. Being a state subject for tax, the Centre cannot control ATF prices or make them uniform. Airlines complain that ATF prices in India are almost double than that of global rates and account for 40 to 45 per cent of operational expenses 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, they say. Another factor that drives costs up is high salaries for pilots and crew members. Though, after the recession in 2009, salaries did not move up rapidly, wage cost for airlines is still very high.
How about salaries?  Do these airlines pay as much as airlines in other countries?  I think not.  And what about all those sweet loans from obliging PSU banks?  SBI for instance has the highest exposure to Kingfisher - about Rs 1,400 crores (SBI asks Kingfisher to raise fresh equity before debt recast).

Or maybe the problem is elsewhere?
Yet another reason cited for the losses is the overcapacity in the sky. In the last one year or so, airlines leased more aircraft, added many more seats, opened new routes and increased frequency in the metro routes. The net result was that with more seats on offer and dynamic online pricing system, yield per seat nosedived. Points out SpiceJet spokesperson: “The pricing environment continued to be weak, resulting in a decline in the average passenger yields in the September quarter by 5 per cent to Rs 3,317.” He says that with increased capacities getting inducted, load factor during the quarter was also down to 67 per cent from 74 per cent during the same period last year. With the creation of large capacity, airlines are finding it difficult to reach a breakeven load factor which itself has moved up because of higher fuel cost.

Too crowded
It is also true that the herd mentality of Indian business has made many to join the fashionable high flying club without much planning. As everyone thought that by driving volume one can make money, they kept on adding new planes. Though all airlines are flying more flights with the low cost carriers (LCCs) configuration to cut costs, it did not help much as the fixed costs for fuel, interest payments, depreciation and maintenance and so on, constitute 90 per cent of the total cost.
More from Business Line: The rise and fall of a castle in the air.  Glamour.  Huh.

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