TERM PAPER

Of
MANEGERIAL
ECONOMICS
TOPIC:- WHY IT IS THAT LOW COST AIRLINES THAT
WERE MUSHROOMING IN INDIA FEW YEARS BACK ARE NOW
FACING PRESSURES OF INCREASING COST. FIND OUT THE
REASON FOR THIS AND ALSO SUGGEST WHAT STEPS COULD
BE DONE BY THESE COMPANIES AND ALSO THE
GOVERNMENT TO SOLVE THIS CRISIS.

SUBMITTED TO- SUBMITTED BY-

Mr. VARUN NAYYAR ARUN CHAUDHARY

SEC-315

ROLL NO. – B44

ACKNOWLEDGMENTS

The most precious moments are those when we get an opportunity to

remember and thank everyone who has in some way or the other
motivated and facilitated us to achieve our goals.

First of all I thank to GOD ALMIGHTY for giving me power to pen down the
term paper in its present shape. I thank the entire teaching staff
especially Mr. VARUN NAYYAR for sharing his valuable knowledge with
us & for providing his able guidance and support. I also thank to my
classmate who every time helped me out and encouraged me for
carrying out the task.

I fall short of words to thank my family, who stood beside me while

completion of my task.
Contents:

1) LOW COST CARRIER

• HISTORY
• IN INDIA
2) BENEFITS OF LOW COST AIRLINES
3) REASONS FOR INCREASED COST
4) IT,S IMPACT
5) MEASURES TO BE ADOPTED
• BY GOVERNMENT
• OTHER MEASURES
6) BIBLIOGRAPHY
What is a Low-cost carrier

A low-cost carrier or low-cost airline (also known as a no-frills or

discount carrier or airline) is an airline that offers generally low fares in
exchange for eliminating many traditional passenger services. The concept
originated in the United States before spreading to Europe in the early 1990s
and subsequently to much of the rest of the world. The term originated
within the airline industry referring to airlines with a lower operating cost
structure than their competitors. While the term is often applied to any
carrier with low ticket prices and limited services, regardless of their
operating models, low-cost carriers should not be confused with regional
airlines that operate short flights without service, or with full-service airlines
offering some reduced fares.

Business model
Typical low-cost carrier business model practices include:

• a single passenger class

• a single type of aeroplane (commonly the Airbus A319 or Boeing 737),
reducing training and servicing costs
 • a minimum set of optional equipment on the aeroplane, often
excluding conveniences such as ACARS, further reducing costs of
acquisition and maintenance
• a simple fare scheme, such as charging one-way tickets half that of
round-trips (typically fares increase as the plane fills up, which
rewards early reservations)
• unreserved seating (encouraging passengers to board early and
quickly)
• flying to cheaper, less congested secondary airports[1] and flying early
in the morning or late in the evening to avoid air traffic delays and
take advantage of lower landing fees
• fast turnaround times (allowing maximum use of aircraft)
• simplified routes, emphasizing point-to-point transit instead of
transfers at hubs (again enhancing aircraft use and eliminating
disruption due to delayed passengers or luggage missing connecting
flights)
• encourage the use of direct flights. Luggage is not automatically
transferred from one flight to another, even if both flights are with the
same company.
• generation of ancillary revenue from a variety of activities, such as a la
carte features and commission-based products
• emphasis on direct sales of tickets, especially over the Internet
(avoiding fees and commissions paid to travel agents and computer
reservations systems)
• employees working in multiple roles, for instance flight attendants also
cleaning the aircraft or working as gate agents (limiting personnel
costs)
• a disinclination to handle Special Service passengers, for instance by
placing a higher age limit on unaccompanied minors than full service
carriers
• Aggressive fuel hedging programs

Not every low-cost carrier implements all of the above points. For example,
some try to differentiate themselves with allocated seating, while others
operate more than one aircraft type, still others will have relatively high
operating costs but lower fares.

The price policy of the low cost carriers is usually very dynamic, with
discounts and tickets in promotion. Even if the advertised price may be very
low, sometimes it does not include charges & taxes.
History

Boeing 737-700 of UK low cost carrier easyJet

The first successful low-cost carrier was Pacific Southwest Airlines in the
United States, which pioneered the concept in 1949. Often, this credit has
been incorrectly given to Southwest Airlines which began service in 1971
and has been profitable every year since 1973[3]. With the advent of aviation
deregulation the model spread to Europe as well, the most notable successes
being Ireland's Ryanair, which began low-fares operations in 1990, and
easyJet, formed in 1995. Low cost carriers developed in Asia and Oceania
from 2000 led by operators such as Malaysia's AirAsia, India's Air Deccan
and Australia's Virgin Blue. The low-cost carrier model is applicable
worldwide, although deregulated markets are most suited for its rapid
spread. In 2006, new LCCs were announced in Saudi Arabia and Mexico.

For holiday destinations, low cost airlines also compete with seat-only
charter sales. However, the inflexibility of charters (particularly as regards
length of stay) makes them unpopular with many travelers.

This has led to the establishment of low-cost routes by existing and new
operators such as Hungary-based Wizz Air, which took its first flight on May
19, 2004 and Slovakia-based SkyEurope, which took its first flight on
February 13, 2002. From 2004 to 2007 routes have been established into
Austria, Bulgaria, Croatia, Slovenia, Slovakia, Poland, Romania, Hungary,
Czech Republic, Turkey and Israel. By the end of 2007, there were over 45
low-cost carriers operating almost 3,500 routes around Europe.
In India
India's first low-cost airline, Air Deccan started service on August 25, 2003.
The airline's fares for the Delhi-Bangalore route were 30% less than those
offered by its rivals such as Indian Airlines, Air Sahara and Jet Airways on
the same route. The success of Air Deccan has spurred the entry of more
than a dozen low-cost airlines in India. Air Deccan now faces stiff
competition from other low-cost Indian carriers such as Jetlite, SpiceJet,
GoAir and Paramount Airways. IndiGo Airlines recently placed an order for
100 Airbus A320s worth 6 billion USD during the Paris Air Show, the highest
by any India domestic carrier. After a year of operation, in 2006, Kingfisher
Airlines changed its business model from low-cost to value airlines.
 BENEFITS FROM LOW COST AIRLINES

As an increasing number of low-cost airlines target the middle-class traveller,

the pie in the sky gets bigger. With budget carriers in stiff competition with
each other, it is the passenger who is the gainer.

ADITYA Choudhury, a sales representative with a Delhi firm, sat munching a burger and
French fries and sipping from a can of cola. In the past, it would have taken him 35
hours to reach his home town, Guwahati. Used to travelling by train, it was an arduous
journey which he would undertake only once in years. The past seemed so far away, he
thought, as he drifted to sleep. An hour later, he was nudged awake by his wife to put on
the seat belt as the flight was about to land at the Guwahati airport. Aditya disembarked
from the plane with a smile on his face, feeling as fresh as ever.

Mahabir Singh, an office assistant with a government organisation, nurtures a life-time

ambition of flying along with his family. In the last year of his service his wish will be
realised when with his wife and grandchildren he will fly to Bangalore.

The power and the convenience low-cost airlines have managed to give to a middle-class
traveller is tremendous. Opting to fly by these airlines at a cost nominally higher than the
AC II-tier by train, the budget traveller can emerge a winner, with time on his side and a
smile on his face.

Changed outlook
Low-cost airlines in India have changed the way
people travel in the country. The sky is the limit as
the mushrooming budget airlines gives travellers
more options. Some of them even charge a nominal
sum for the renting of ear plugs to enjoy in-flight
entertainment, while others don’t carry foodstuff on
board. No one is complaining because promotional
fairs, some even as low as Re 1 plus taxes, have
revolutionised air travel.

The concept of budget airlines was launched initially

by a former officer of the Indian Army, Capt G.R.
Gopinath, through his airline, Air Deccan. The boom in the Indian aviation industry was
responsible for India emerging as the highest spender at the recent air show in Paris.
Orders from Indian airliners were talked about, indicating a buoyant growth in the sector
after the arrival of low-cost airlines.

The yet-to-hit the skies airline, IndiGo, stunned the industry by placing an order for 100
A-320 aircraft from Airbus, a deal which was estimated at $6 billion. Orders worth $12
billion were placed, according to rough estimates. Experts say the country’s market is
poised to grow 20 per cent annually. Kingfisher Airlines of the UB group placed an order
for five Airbus 380s (world’s largest aircraft) in a deal estimated at $2.5 billion. India’s
largest private carrier, Jet Airways, placed orders for 20 Boeing aircraft worth $ 2.8
billion and 10 Airbus A-330s worth around $1.5 billion. Another latest entrant in the low-
budget arena, Spicejet also ordered 20 aircraft.
 Low budget
The potential of low-cost flying in the aviation sector is reflected by the fact that in the
last six months the country’s private airline firms have placed orders for 250 aircraft.
This is 43 per cent of the total global orders for Airbus and Boeing. The concept of low-
budget flying initially originated in the West and was quickly picked up in the East Asian
countries. Richard Branson of Virgin Airlines was the front-runner in the UK, while Qantas
took the major chunk of the Australian budget skies. In the post-WTC days of aerial
terror, seat occupancies in established carriers crashed, leaving them to operate on
losses. That was the time when the wallet-friendly carriers took off and still operated
with profit margins. The non-frillers were characterised by few on-board services,
elimination of catering and assistance services and little inflight glitz. Basically, a
barebone mode of aerial transport, from Point A to Point B.

Train to plane
Taking the lead in the Indian skies, where air travel traditionally has been expensive, Air
Deccan unleashed cut-throat competition in the aviation scene ith fares mostly
competing with train fares. In response, leading domestic airlines like Indian Airlines, Jet
Air and Sahara Airlines slashed rates and unveiled advanced purchase schemes (Apex) to
take up the new challenge. Competition, as always, brought the best to the customer
and one year down the line there are already two more players in the race, with a few
more lined up to grab a piece of the cake of the air.

According to Air Deccan, 40 per cent of its first-time
they have chosen to fly. Even poorly connected small
Spicejet Director Ajay Singh says that exploiting the
low-budget flying. That was the reason that his
connecting the small towns to the metros.
passengers say low fares are why
towns benefit from the new trend.
train passenger is the key to the
airline was presently looking at

Stealing a march
The low-budget airlines have actually been stealing a march over the regular airlines with
a load factor of over 90 per cent, an achievement in the lean season. Analysts point out
that the fares can be expected to decline further. After the Apex fares last year, regular
airlines this year have again come out with their low-fare schemes to increase its load
factor. Private operators believe that the sales/passenger potential in India is huge with a
population of more than a billion people, a majority of them train travellers. In the fiscal
year that ended in March 2005, some 16 million plane tickets were sold in India. This
number accounts for just about five days of air traffic in the USA. As far as India is
concerned, even these 16 million seats reflected a 27 per cent jump over the year
before. Aviation experts believe that the business would continue to rise at about 25 per
cent every year over the next few years.

Investment opportunities
Low-cost carriers keep costs down by going in for rationalisation and revenue
optimisation. The new business opportunity has also made investors sit up and take
note. Air Deccan obtained venture capital funding of $40 million in late 2004 and plans
an initial public offer of stock to raise at least $250 million. Kingfisher will invest $40
million and SpiceJet will spend $28 million to build their fleet and train personnel. AirAsia
of Malaysia, which claims to be the world’s most low-cost airline, pays its flight
attendants to clean planes instead of employing special crews. This lowers costs and cuts
the time spent on boarding at terminals to 25 minutes—about half as much taken by
major airlines. Its pilots are trained to land at a later point on the runway and at a slower
speed to conserve fuel and reduce wear and tear of tyres. And, half of AirAsia’s tickets
are sold over the Internet, eliminating travel-agent fees.

AIRLINES FACING PROBLEM OF INCREASED COST

REASONS FOR INCREASED COST

INTRODUCTION

India's Airlines Find that Fast Growth Has Its Ups

and Downs
Jet Airways currently has 60 aircraft and is
expected to increase that number to 90 in
two years. Such rapidly growing airlines are
where manufacturers like Boeing and Airbus
are filling their orders these days, tapping
into a civil aviation boom in both India and
China.
Although it is starting from a low base, India's civil aviation passenger
growth stands at 20% -- among the highest in the world -- saturating most
metro airports and a handful of fast-growing smaller cities. Many airlines are
bulking up on capacity as well: Ten Indian carriers recently placed orders for
about 400 aircraft worth $15 billion. But this good news is marred by
looming overcapacity along with the fact that, given new competitive
pressures, most airlines are losing money.

India's civil aviation market has been severely underserved for several
decades. Less than 0.01% of the population used air transportation and,
until last year, this country of over a billion people had only 150 large jets.
Meanwhile, India's strong economy in recent years has lifted people's
disposable incomes, while increasing urbanization. In addition, more diverse
business investments in non-metropolitan regions have brought new
demand for air services.

• Airsickness at Higher Altitudes

Despite this growth, Indian civil aviation's numbers are still small in absolute
terms compared to larger international markets. China's total air passenger
traffic was expected to be 160 million in 2006, and is forecast to grow to 187
million in 2007, according to a report on the China Daily website. The total
fleet size of all commercial aircraft in India is now about 263 compared to
roughly 8,000 in the U.S., according to aviation industry databases. China's
aircraft fleet is expected to grow to about 1,000 in 2007 with the addition of
155 planes currently on order, China Daily reports.

Many of the Indian airlines are facing severely eroded pricing power due to
increased competition and investments in additional capacity, and almost all
the airlines are currently incurring losses. "This is a typical prisoner's
dilemma: Airlines add capacity and have to fill the planes and lower the
fares to do so," says W. Bruce Allen, Wharton professor of business and
public policy, and director of the Wharton Transportation Program.
Even as the airlines are battling over their discounting strategies, the chiefs
of all the large carriers met with India's ministry of civil aviation in mid-
2006to try and find a way out of their depressed profit margins.

• NO REGULATION

Allen cites the case of the U.S. aviation industry to show the downside of
government regulation. "In the U.S., some LCC's have been successful, e.g.,
Southwest, JetBlue, AirTran -- but many would-be LCCs have gone
bankrupt, such as National, Independence and Hooters," he says. "Legacy
carriers have cut costs significantly and appear to be more successful.
Capacity cuts and greatly increasing demand have even made them
profitable, although it probably isn't sustainable because of the prisoner's
dilemma." If the government were to intervene and restrict capacity
additions, he adds, that "would protect the less efficient carriers; it's the
reason we got rid of government intervention."

• When Costs, Too, Start Flying

Apart from the pressures of price wars and fleet acquisition debt, the airlines
are also finding costs rising significantly for fuel, manpower and aircraft
leasing. Staff costs at Jet Airways grew 107% in the April-June quarter of
2006 over those in the corresponding period a year ago.
Almost all the major cost areas are up, but on the revenue side it is a
downward slide, unlike the U.S., Indian companies don't enjoy Chapter 11
protection from creditors as they reorganize themselves: If they don't pay
up, they go under. This will make market consolidation a reality instead of
prolonging things. The last round of consolidation in Indian civil aviation was
about a decade ago, when several new airlines went bankrupt under the
weight of overcapacity.

The growth mood has traveled the entire aviation chain. Two of the country's
largest airports -- Mumbai and New Delhi -- were privatized earlier this year.
Two greenfield airports are being built at hubs in the southern part of the
country. Investments are pouring into almost all aspects of the industry,
including aircraft maintenance, pilot training and air cargo services.

• Hike In Fuel Surcharge

Remedial measures are not taken to provide some interim relief, the impact
of rising ATF prices hit airlines. Already, ATF is around 45% of the total
operating cost and a further rise in prices will make aviation sector unviable.
It will be a big negative for the Indian economy.

The aviation ministry is expected to demand a central sales tax at 4% tax

applicable across all states, in place of its earlier demand of 12% sales tax.
It also proposes relaxation in norms for allowing domestic airlines to fly on
profit international routes.

• Low-cost airlines hit by recession

When the chill wind of recession blows and the fuel price escalates, they
prepare for take-off. Instead of sitting tight, they buy more aircraft, increase
services and cut fares.
The rampant growth in air traffic is not sustainable and the business model
must change. It's not only the incumbent flag-carriers that are threatened
but the new low-cost carriers that thrive because of two market miracles -
the availability of very cheap fuel and galloping growth in passenger
numbers.
But these buttresses are crumbling, playing havoc with a business model
that has changed the face of aviation over the past decade.
Airports are a mess, airline staff are in rebellion and the cost of jet fuel is
soaring. What is less apparent is weakening demand for air travel. IATA, the
airline establishment's lobby organisation, signalled the downturn this week,
pointing to weakening load factors and a marked slowing in growth in
revenue passenger kilometres - key industry volume statistics.
The load factor, the percentage of seats holding bottoms, fell in every region
in February, with the biggest fall in Europe. Passenger kilometres worldwide
grew at a rate of 4 to 5 per cent, which sounds good, except that this
industry has become accustomed to 7 to 8 per cent annual volume
increases.

• GOVERNMENT
A few of the airlines, particularly the legacy carriers, had hoped the ministry
would step in and control fares or put in entry barriers for newer entrants to
prevent a bloodbath in the marketplace. The government has refused to
intervene and has, at least for the present, left the airlines to their own
devices. However, media reports say the government is now asking all new
airline promoters to submit detailed business plans and is checking out their
financial soundness before granting approvals.

AFFECT
 • LOW COST AIRLINES GRAPPLE WITH SOARING
AIRFARE

Some advance planning, coupled with smart

calculations and cheap air tickets - you and
your family could cruise to any destination in
India even with a small budget. Cut to the
present, air travel, it seems, it has taken a
full circle.

The Great Indian Middle Class dream of

getting air-borne looks dashed and probably
good times may not come back ever.

So what went horribly wrong? Is it only soaring oil prices?

Or an innovation which just didn’t work? Whatever. The dynamics of budget
air travel have changed for good, as more airlines find themselves stuck on
the tarmac. In fact, forget about booking profits, now they are just
struggling to stay in the business

• Airways panicked

THE sacking of Jet Airways staff is a case of mismanagement and a blot on

the Indian aviation canvas. Only two years back civil aviation was a buoyant
sector with 40 per cent growth and unprecedented opportunities.

The government decision, permitting 40 per cent equity and 100 per cent
investment in aviation without any prior approval led to the mushrooming of
new airlines and hectic buying of aircraft.

India was one of the largest buyers in the market and tourism seemed to
boom. Jet had been in dire financial straits till it got the rights to fly abroad.

Under bilateral agreements with different countries Indian aviation

companies could fly to foreign destinations and those countries’ airlines were
permitted to fly into India.
These slots had remained unutilised due to Air India’s limitations. As a
Director on the Board of Air India, I had in the past opposed this non-
utilisation as a loss to the country.

With the government decision, fresh opportunities opened up. Jet started
growing ambitiously and Kingfisher followed. Thousands of young people
pitched their dreams on this growing sector with opportunities to see the
world.

Air India’s market share went down and the government continued to
subsidise it purely for the personal benefit of politicians and bureaucrats,
who are the major beneficiaries of its privileges.

• Foreign players attack

There could also be the possibility of some airlines adopting unfair means to
garner passengers. Here the role of the Directorate General of Civil Aviation
(DGCA) and that of the Ministry of Civil Aviation would become crucial. The
fight in the low-budget sector is not expected to remain within the country
but would soon extend to foreign skies. According to industry insiders, two
of the leading names in the low-cost airline business from Southeast Asia —
Singapore-based Valuair and Qantas subsidiary JetStar — have already
firmed up plans to enter the Indian skies.

MEASURES TO BE TAKEN FOR REDUCING

COST

BY GOVERNMENT

• ATF PRICES
We are deeply concerned over rising ATF prices and the subsequent losses
being suffered by domestic airlines. the Prime Minister and the finance
minister and seek some ‘interim relief’ for the sector. We shall look at all
options to keep the industry viable, airlines were suffering huge losses and
can’t pass the entire burden (of ATF price rise) on users as it negatively
affected their number of passengers carried by them. Underlining the fact
that ATF prices in India were priced at nearly 70% higher compared with
international benchmark, the basic price of ATF was very high against other
countries and it needed to be reduced, as a result, loss-making airline
companies might soon prune their operations and rationalise their services
for various sectors, which may affect connectivity for smaller cities and some
non-profit-making routes.

The airlines would fly less to suffer lesser losses. The very concept of making
aviation affordable for the masses and not the classes is becoming
irrelevant. ATF price has increased 5-6 times since 2005, and airlines are not
in a position to pass on the burden to customers, which may lead to a major
drop in passenger load and make operations of many airlines unviable,”.

• GOVERNMENT INTERVENTION
Civil aviation minister Praful Patel is planning to meet Prime minister
Manmohan Singh over the hike in aviation turbine fuel prices. The civil
aviation secretary will also approach the Cabinet secretary to convene a
‘review meeting’ with all concerned ministries to discuss ATF tax and other
issues.

“If remedial measures are not taken to provide some interim relief, the
impact of rising ATF prices will hit airlines. Already, ATF is around 45% of
the total operating cost and a further rise in prices will make aviation sector
unviable. It will be a big negative for the Indian economy.”

The aviation ministry is expected to demand a central sales tax at 4% tax

applicable across all states, in place of its earlier demand of 12% sales tax.
It also proposes relaxation in norms for allowing domestic airlines to fly on
profit international routes.

The airlines would fly less to suffer lesser losses. The very concept of making
aviation affordable for the masses and not the classes is becoming
irrelevant.

• FDI to cap in aviation

The government has to liberalised the Foreign Direct Investment Policy (FDI)
by bringing in new areas like aircraft maintenance, commodity exchanges
and credit information for overseas investment.

The amended FDI policy, which was deferred several times earlier and
approved by the Cabinet Committee on Economic Affairs (CCEA) today, put a
number of areas on automatic route, especially in the Civil Aviation Sector.

The amended policy allows 100 per cent FDI in maintenance, repair and
overhauling (MRO) facilities for aircraft as also aviation training units,
Information and Broadcasting Minister Priya Ranjan Dasmunsi told
newspersons after the CCEA meeting, chaired by Prime Minister Manmohan
Singh here.

• Low-cost airlines are now the new major

players
Flexible design in airports essential for courting them

Leading low-cost airlines with a preference for small, inexpensive airports

are now the largest airlines in INDIA, according to an MIT expert on airport
design and operations, who said that airport planners in major metropolitan
areas need to accept this paradigm shift and build flexibility into airport
design.
MIT Department of Civil and Environmental Engineering said that airport
planners have been slow to grasp the reality that the business model of their
largest customers has changed dramatically. Low-cost airlines require
terminals about half the size of those of the legacy airlines, because they
use space more intensively—shared gate lounges, and none or few retail
shops and restaurants. The reduced commercial activity results in fewer
airport employees going through security checks and helps cuts passenger
turnaround time in half.

Airport planners are still building airports with fancy architecture and lots of
retail space, but the low-cost airlines often won't use them. And the low-cost
airlines are not necessarily small anymore; they are a growing sector that
represents the future. They want smaller, cheaper airports that increase
efficiency, in general, smaller airports have fewer ground and air traffic
control delays than large airports.

OTHER MEASURES WHICH COULD BE

ADOPTED
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

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 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- — Photo by Pradeep Tewari.
landing. Location courtesy: Flying Cats

• 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.
FARE PAIN: Air travel is no longer
The 50 per cent increase in ATF prices
within the reach of many who
over the past few months has put an
had got used to it in recent years
additional burden of $1 billion on
— Photo by Mukesh Aggarwal
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.

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.

• 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.

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.

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.

• 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.

• 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.

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.

BIBLIOGRAPHY:-
• http://www.kansascity.com/business/story
• http://www.indipendent.ie/business/reccesion-
will-prove-test-for-airlines
• http://www.voanews.com/bangla/story/archiev
e/2008-10-3
• http://www.euerekaalert.com/public_release