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Leaving profits on a jet plane

Leaving profits on a jet plane
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First Published: Wed, Jun 10 2009. 10 01 PM IST
Updated: Wed, Jun 10 2009. 10 01 PM IST
Fly the good times, one airline tells us. Indeed, the times were good when the airline industry grew at 35%. But now that good times aren’t rolling any more, airlines should start realizing that even the business model for the good times may not have been good enough.
Airlines are now complaining about overcapacity, or empty seats. This week, Jet Airways announced a 10% cut in capacity for June, halting the immediate purchase of new planes. In a Wednesday Mint interview, Jet’s executive director Saroj Datta said he sees “enormous overcapacity” as a “fundamental problem”.
Yet, there was a time when under-capacity seemed to be the problem: In November 2006, airlines were offering an additional 15,000 seats every day. With the entry of low-cost carriers, more routes and aircraft were added—all under the impression that the 35% growth would continue forever.
This isn’t a story limited to airlines. The earlier part of this decade saw unprecedented expansion in, say, real estate: Now, there are unfinished projects all over Gurgaon, Haryana. But the airline sector is worthy of note because expansion occurred without fully considering existing limitations.
That can be seen in how the slowdown has affected Indian carriers particularly. The International Air Transport Association (Iata) noted earlier this week that though India comprises 2% of global air traffic, it accounts for nearly 25% of global airline losses this year. India is, then, a high-cost environment—slowdown or not.
First, infrastructure imperils airline finances. There are few airports in India, and that too with poor facilities that leave aircraft circling for hours. Yet, their monopoly lets them levy high charges: Noting the 207% increase in airport charges in Mumbai and Delhi over the past year, Iata has put them on a “wall of shame”. Personnel costs are high for similar reasons.
Second, government interference decreases profitability. The high sales tax on fuel, along with government guidelines on what routes airlines can fly, leaves balance sheets bleeding. These have been in place for long, and weren’t going to disappear suddenly.
These are issues airlines don’t seem to have appreciated while expanding. If there’s a silver lining in the slowdown cloud, it’s that airlines are now forced to consider these.
Is a bad business model hurting airlines now? Tell us at views@livemint.com
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First Published: Wed, Jun 10 2009. 10 01 PM IST
More Topics: Ourviews | Jet Airways | Real estate | Iata | Views |