Monday, March 18, 2013

INDIAN AVIATION SECTOR: FARE HIKES

The Last Time Domestic Airlines were allowed to decide fare levels, They went into a Hand-Wringing war to death. This time, The Government has intervened. But the Players Aren’t Amused. Steven Philip Warner Answers Why.

Not to forget, the pleading lot this time too, is the same, which went about illogically doling tickets at throw-away prices some years back (which resulted in the state of the domestic sector that is today), forming cartels, requesting relief from the government on all possible fronts and begging for deadline extensions on the billions of rupees due on jet fuel payments. [As on December 3, 2010, Jet & Kingfisher still owed Rs.10.50 billion in fuel bills.] So why is their lot requesting the government to stay home this time? The answer lies in understanding that these preachers of “Free-market Economics” desire to make every inch count. For them, this is the chance to garner windfall profits, and in unbelievable quick time.

Count the maths. Given the improved conditions of demand in recent months, which have proved a setback for LCCs to an extent, even if we assume that a 200% increase in fares across the board, leads to a 50% fall in topline (considering 0% change in op. expenditures & ATF bills for the players), at the H1, FY2010-11 levels of topline, depreciation and interest on loans, Jet would have reported a net profit of a massive Rs.31.73 billion in the remaining two quarters of FY2010-11 – wiping out the nightmares of Rs.11.20 billion in losses garnered since FY2007-08 and lighten its existing debt burden by 91.33% over the next six quarters! Kingfisher, on the other hand, would have reported profits of Rs.52.13 billion during H2, FY2010-11 – enough herb to soothe the Rs.42.04 billion burn accumulated in five years, and wipe clean its total debt by Q2, FY2011-12. Given that the airline has never made profits since it began operations in FY2005-06, it clearly viewed the fare hike as an apt redemption from the societal pressure of not having broken-even yet. It wasn’t to be.

For now though, the government has put its foot down, to restrain the worst of corporate behaviours. It has already set up a tariff analysis unit to monitor route-wise fares of airlines, and the fares across various routes have already fallen by upto 70% since the DGCA made its intentions clear. As for the domestic aviators, they would do themselves good, even if they try and imitate the act of American LCC SouthWest Airlines (SWA) – the only airline that has never made losses in the past three decades! Even in 2009, while “all” airlines in US reported negative bottomlines, it made $99 million in profits. SWA has made money by no wizadry. It plays with volumes (not price-hikes), offers just what a stripped down LCC aircraft can, and operates its fleet of 550 aircrafts only on profitable routes. Today, Indian carriers which deploy about 70% of their fleet in the budget model (as of October 2010), are close to getting it right. And some like CAPA has even forecasted profits to the tunes of $300 million this year. Says Greater Manchester-based David Bentley, Joint MD, Big Pond Aviation, to B&E, “There is a demand for competitively priced tickets in US. The same is the case in India. India is not physically as big as the US but there is the opportunity to follow the same path...”


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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