The airline industry, be it in the US, India or other parts of the globe, faces the same challenges — high taxes, fuel costs, weak demand and competition from low-cost airlines. In consequence, they all have very fragile financial health.
In a recent paper titled “On the Persistent Financial Losses of US Airlines: A Preliminary Exploration” (NBER Working Paper No. 16744), Mr Severin Borenstein, a former member of USDOT's Future of Aviation Advisory Committee, says US airlines have lost nearly $60 billion (2009) in domestic markets since deregulation, most of it in the last decade. He goes on to ask if deregulation is a good thing or a bad thing. The answer is; probably good for the customer, bad for the industry.
Mr Borenstein's main conclusion is that in the US at least, “...high taxes have been at most a minor factor and fuel cost shocks played a role only in the last few years.
Major drivers seem to be the severe demand downturn after 9/11 and the large cost differential between legacy airlines and low-cost carriers, which has persisted even as their price differentials have greatly declined.”
In India, the number of taxes and surcharges levied on air travellers has been increasing while the base fare has been moving in the opposite direction. The taxes levied in India include airport tax and passenger service fee. So, even though Kingfisher Red offers a seat for Rs 100 on its flight from Bangalore to Chennai , the actual fare is higher as not only is there a fuel surcharge of Rs 1,300 but a passenger also has to pay a departure tax in Bangalore.
Similarly, Jet Airways offers a one-way fare of Rs 350 between Chennai and Kochi, although a passenger eventually pays more after adding the fuel surcharge, which varies between Rs 1,250 and Rs 1,900.
The Delhi-based low-cost airline, IndiGo offers a one-way fare of Rs 350 between Bangalore and Hyderabad. But here, again, a traveller pays much more after a fuel surcharge of Rs 1,600 and other surcharges, including that of the airport, are added to the cost of the ticket.
Industry leaders in the US argue that the tax and fee burden on airline tickets is excessive today as it includes a 7.5 per cent tax and a fee of $6.20 for every segment flown. In addition, many airports levy a passenger facilities charge of up to $4.50 for every passenger boarding a flight.
Indian taxes
In many ways this is similar to the levy that is borne by passengers flying out from the six Indian metros and also some smaller airports, which are run by the Airports Authority of India (AAI). These include Jaipur, Ahmedabad and Thiruvananthapuram.
In addition, with the cost of aviation turbine fuel (ATF) shooting up, airlines have been passing on some of this increase to the passengers.
In Delhi alone, the per-kilolitre cost of ATF crept up from Rs 25,859.04 in January 2005 to touch Rs 34,099.80 in January the following year. It touched Rs 45,495.82 in January 2008 before sliding to Rs 31,496.31 in January 2009. Currently ATF prices stand at Rs 53,063 a kilolitre.
But despite these challenges, the number of investors willing to put more money into either setting up new airlines or expanding existing ones keeps going up. In India, a least three airlines — SpiceJet, IndiGo and Jet Airways — have ordered more aircraft.
The answer to this dichotomy could lie in the fact that per-capita the number of flights taken in India is a dismal 0.1 for 1,000 persons as compared to five flights for 1,000 people in the US.