BackBudget airlines losing steam
Budget airlines losing steam
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Budget air travel may be disappearing into thin air — at much the same speed with which fuel evaporates when pilots dump the stuff just before they land to ensure a safe touchdown.
Ironically, the one commodity that they so routinely jettison is exactly the one that will displace the safe landings of their investors.
The culprit isn’t mismanagement or lack of demand; it is the steadily rising price of jet fuel. The commodity that has doubled in value in about a year can make up as much as half the cost of running an airline. And with each notch that it marks up the price ladder, it pushes airline margins down.
Budget airlines typically operate on low margins, anywhere in the range of 3-4% to giving them little elbow room unless something gives way. The worry is: There is no let- up in sight.
In India, more than anywhere else, that problem is compounded because of the high general sales tax that states slap on carriers which fuel up in the 28 states and seven Union territories they fly to. Each state sets a tax it sees fit that can vary from 4% to 30%. That money out of the way, import duties on jet fuel step in. The finance ministry’s take-in would no doubt have gone up as Indian carriers mushroomed, as did fuel intake. But it refuses to cut airlines any slack by reducing these duties. Finance minister P. Chidambaram should bear in mind that hop-skip-and- jump neighbour Vietnam has just said it will reduce the import duty on jet fuel to 5% from 15%.
In India, hedging on jet fuel prices has only been allowed since mid-2007 and is routed through state oil firms. Private domestic carriers have hardly used the hedging facility because they say it’s too cumbersome and ineffective compared with global standards. Combine all those factors and escalating wage costs amid pilot and staff shortages, India’s budget carriers may go up in smoke. But with states promoting new airports, vying for industry and tourism and pushing the private model, it’s imperative that there be enough carriers to price competitively so a healthy supply-demand match is created. Any undersupply will derail this tenuous economic link.
To keep order, something’s gotta give.
Are budget airlines in trouble? Write to us at views@livemint.com
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