The flight of expectations

The flight of expectations
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First Published: Mon, Jul 14 2008. 11 54 PM IST
Updated: Mon, Jul 14 2008. 11 54 PM IST
This year’s focus at the Farnborough International Airshow near London, which started on Monday, may be on fuel-efficient planes, but orders will likely be slow in coming. Airlines the world over are reeling, especially with skyrocketing fuel costs. And back at home, the industry is struggling to reinvent itself. Buying new, fuel-efficient planes may not be a high priority need for airlines in India for now.
It’s the budget airlines — which had first tapped some of the latent potential in the domestic market four years ago and led a massive capacity creation in the sector — that are suffering the most. Their fleet of planes is likely among the youngest in the world, and their worries more complex.
Of course, there’s no doubt that the steep 80%-plus rise in domestic aviation turbine fuel (ATF) prices since last summer has been the trigger for their current distress, leading them to cut down on the number of flights, routes and staff. Fuel constitutes as much as 45% of their operating costs, and higher taxes have contributed to making ATF prices 60-70% more than in other countries. With the major chunk of taxation imposed at the state level, this problem will not likely be resolved too soon.
Faced with no alternative, low-cost airlines have raised prices and the fuel surcharges or fees that they add to their basic fares — which has meant a shrinking of traffic growth in June, reported to be for the first time in four years. And June is traditionally an important travelling month.
Airlines are now working to tighten up their acts. For instance, as Mint reported on Monday, they are keen on IT solutions to cut manpower costs and to improve efficiency. Some are looking at hedging risks of ATF price rises by trading in futures, or securing cheaper supply from private sector importers and engaging in fuel swaps across locations to cope with differential taxes in the country.
All that won’t be enough, though. The need is to innovate and to overhaul the so-called low-cost business for its survival. There will be a fresh round of consolidation in the medium term, but players will also have to rethink revenue models. Even for a price-sensitive Indian market, promotion pricing, that basically meant undercutting competition, has taken its toll. It’s time for rationalizing —both costs and expectations about market growth.
Will our budget airlines cope with these pressures? Write to us at views@livemint.com
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First Published: Mon, Jul 14 2008. 11 54 PM IST