Code red

With domestic airlines expected to rack up combined losses in excess of ₹13,000 crore this year, it’s crisis time in India’s civil aviation sector. Responding to panic calls, the Centre is reportedly working on a relief package to help airlines cut costs. Details of the package are not known yet and no deadline has been specified for its roll-out. Carriers would be hoping for some long-pending demands to be addressed, including lower taxes on aviation turbine fuel (ATF) and rationalisation of airport charges. On average, fuel accounts for 34 per cent of the operating costs of airlines in India, well above the global average of 24 per cent. While the oil price rally and the rupee’s rout have primarily led to fuel costs escalating this year, high taxes levied by the Centre and many States have made a bad situation worse. While there is a case to cut taxes on ATF, the Centre may be in a bind. The prices of petrol, diesel and other fuels have also shot up. Cutting tax on ATF alone will make for bad optics, more so in an election year. The Centre’s tight financial position gives it little room to cut taxes on other fuels. What the government can do, with relatively less trouble, is to create competition for fuel supply at airports with common-use open-access infrastructure and remove or reduce fuel throughput fees at airports. It could also look at ways to reduce airport charges such as parking and landing fees, and allow airlines easier access to foreign funds.

That said, there is only so much that the government can and should do. Much of the pain the sector is now experiencing is of its own making. Huge ongoing capacity additions have worsened the already intense competition among airlines and prevented them from increasing ticket fares sufficiently to offset rising costs. This is ironic given that passenger traffic growth in the country remains in double-digits. Airlines seem to be in a race to the bottom, trying to woo passengers with cheap fares, even at the cost of their profits. Calibrated capacity expansion that allows rational pricing is imperative, if airlines have to grow in a sustainable manner. They should also make every effort to cut non-fuel costs, improve operating efficiencies, hive off non-core businesses, cut debt and raise funds through equity dilution, if need be.

Finally, it is not advisable for the government to interfere with the ‘creative destruction’ cycle in the market, or interfere with market forces. Globally, aviation is prone to regular shake-outs and consolidation, and India should be no exception. In India too, many airlines have come and gone. The sector, after the initial upheaval, has adjusted and grown. If a few players do go belly up, largely due to their own imprudent decisions in the past, so be it. More importantly, the Centre should stop artificially propping up Air India — this is the mother of all market distortions in Indian aviation.