Last year seemed to be the year which belonged to the Airlines Industry in India. With the growing income of the middle class and comparatively lower air fares promoted more and more Indians to fly. But come the last quarter of 2007 and 2008 the situations have dramatically changed. The airline companies which posted a moderate profit in 2007 have all been now bleeding . Nearly all the companies have reported losses. According to the industry figures India’s airlines lost Rs. 4000 crore last year (Rs. 40 billion ), the situation is in fact so grim that the industry experts believe that the airlines can loose cumulatively Rs. 8,000 crore in the current year.
Now the most important question what are the factors and situations which have lead the Industry to this state. Aviation Turbine Fuel (ATF) , the refined form of Kerosene that powers the turbines on jet aircrafts , has brought this high flying industry to its knees. The prices of ATF’s have increased nearly 77% , and this figure is after taking into account the very recent 5% duty cuts on ATF.
All the measures of Airline Industry like online reservation , route rationalization , providing midnight routes , innovative accounting practices like ‘sale leaseback’( read about it in my next blog ) that could enable the company to become profitable and report higher margins have resulted in void because of rising ATF prices.
As a thumb rule for every hour the plane is in air it consumes 3,000 litres of fuel which at the current price of 70/ litre works out to be 2.10 lakh add to this other operating costs and then we can clearly analyze that for every flight the earning to expenditure ratio is very low. To add to the woes of the industry the increasing inflation has resulted in lesser discretionary travel spends ,where as the capacity of the industry grew by over 26% the passenger growth is only to the tune of 11% so as a result most of the flights are flying emptier. All these factors have lead to bleeding of most of the national carriers.
So the question arises that whether the industry heading for repeat of happenings of 1996 when eight airlines , including the then largest private sector carrier East West , Damania and ModiLuft crashed in a manner that these companies lost in oblivion .
The answer to this seems to be currently no because airline industry is more important to the government today than it was way back in 1996 and government could not allow this happen once again , so what can be the possible solution ?
The central government can take steps to ensure reduction of the fuel surcharge ( although it comes into state jurisdiction ). State governments are minting money on ATF’s sale. The government can also ensure that ATF comes into the status of “declared goods” on which the maximum sales tax applicable is 4 %. This would not only help the industry to reduce their losses but also lead to reduction of air fares and thus would lead to more and more Indian’s taking the aerial route.
Now the most important question what are the factors and situations which have lead the Industry to this state. Aviation Turbine Fuel (ATF) , the refined form of Kerosene that powers the turbines on jet aircrafts , has brought this high flying industry to its knees. The prices of ATF’s have increased nearly 77% , and this figure is after taking into account the very recent 5% duty cuts on ATF.
All the measures of Airline Industry like online reservation , route rationalization , providing midnight routes , innovative accounting practices like ‘sale leaseback’( read about it in my next blog ) that could enable the company to become profitable and report higher margins have resulted in void because of rising ATF prices.
As a thumb rule for every hour the plane is in air it consumes 3,000 litres of fuel which at the current price of 70/ litre works out to be 2.10 lakh add to this other operating costs and then we can clearly analyze that for every flight the earning to expenditure ratio is very low. To add to the woes of the industry the increasing inflation has resulted in lesser discretionary travel spends ,where as the capacity of the industry grew by over 26% the passenger growth is only to the tune of 11% so as a result most of the flights are flying emptier. All these factors have lead to bleeding of most of the national carriers.
So the question arises that whether the industry heading for repeat of happenings of 1996 when eight airlines , including the then largest private sector carrier East West , Damania and ModiLuft crashed in a manner that these companies lost in oblivion .
The answer to this seems to be currently no because airline industry is more important to the government today than it was way back in 1996 and government could not allow this happen once again , so what can be the possible solution ?
The central government can take steps to ensure reduction of the fuel surcharge ( although it comes into state jurisdiction ). State governments are minting money on ATF’s sale. The government can also ensure that ATF comes into the status of “declared goods” on which the maximum sales tax applicable is 4 %. This would not only help the industry to reduce their losses but also lead to reduction of air fares and thus would lead to more and more Indian’s taking the aerial route.
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