Price Rationalisation Must

Those airlines that fail to manage their finances well and balance their books in this highly complex and challenging environment, fail to survive

Issue: 3 / 2017By Air Marshal B.K. Pandey (Retd)

In February this year, the national carrier Air India and the budget carrier SpiceJet almost simultaneously made announcements regarding attractive offers for potential air travellers. The offers by the two airlines included extremely low fares and attractive package deals. Air India came up with an offer dubbed as 'Buy One Fly Two’ which had provision for a free ticket with every booking in first class or business class. However, this offer was limited to non-metro routes and to the domestic sector.

SpiceJet came up with a scheme that was named 'Lucky 7 Sale' under which the budget carrier was offering all inclusive one-way fares as low as Rs. 777 for travel to select destinations on its domestic network routes including Jammu-Srinagar and Agartala-Guwahati. In the second week of March this year SpiceJet came up with an offer dubbed as ‘Spice Value Pack’ that was supposedly designed to add ‘Extra Joy to Air Travel’.

Such campaigns by airlines offering rock-bottom prices for air tickets, though music to the ears of the air traveller, would understandably raise doubts about the viability and sustainability of their business models. However, the aim of the exercise was obviously to attract greater number of passengers so as to enhance seat occupancy also referred to as ‘passenger load factor’, in an operating environment where the competition was getting more and more intense by the day.

Historical Perspective in Brief

IN THE NEXT ROUND OF THE REVISION OF THE NATIONAL CIVIL AVIATION POLICY, THE GOVERNMENT OUGHT TO TAKE A HOLISTIC VIEW AND CREATE A BALANCED AND HEALTHY ENVIRONMENT KEEPING IN MIND THE INTERESTS OF BOTH THE TRAVELLING PUBLIC AND THE INDIAN AIRLINE INDUSTRY

The origin of the Indian airline industry can be traced back to 1932 when J.R.D. Tata established Tata Airline, the very first such entity for the nation. Subsequently, Tata Airlines was renamed as Air India in 1946. A year later at the time of independence, there were nine air transport companies in India engaged in the handling of both cargo and passenger traffic. However, in 1953, the Government of India nationalised the privately-owned assets of the Indian airline industry and created two airlines in the public sector. These were Indian Airline Corporation to cater to the domestic market and Air India International to operate in the international sector. These two carriers were later renamed as Indian Airlines and Air India respectively. However, in the wake of economic liberalisation initiated by the P.V. Narasimha Rao government in the early 1990s, the Indian airline industry was decontrolled paving the way for re-entry of the private sector as well as foreign investment thus ending the monopoly of the two state-owned carriers Indian Airlines and Air India. Over the years thereafter, entry of low-cost carriers such as Air Deccan, SpiceJet, GoAir, IndiGo Airlines and several others opened up the facility of air travel through significantly low and affordable airfares, to a large middle income segment of the population and thus changed the landscape of the Indian airline industry. The Indian airline industry witnessed a steep rise in the number of first time fliers both in the urban and rural segments of the population. Today, after nearly three decades since the airline industry was decontrolled, the Indian civil aviation industry ranks as the ninth in the world and given the impressive rate of growth, it is estimated by professional agencies that in all likelihood, will reach the third slot by 2020 and possibly become the largest by 2030 if the current momentum in growth is sustained.

Survival in a Competitive Environment

While the emergence of a large number of private players on the aviation scene in the country brought about a profound change in the quality of air travel and the services offered to air travellers, it also ushered in an environment of competition in the industry. This was a new phenomenon and was indeed a qualitative change from the business environment prevailing in the past wherein the two national carriers Air India and Indian Airlines had enjoyed total monopoly. In those days, the air passengers had no option but to bear the brunt of high airfares. Air travel was a luxury and was perforce restricted to the affluent segments of the society and the senior functionaries of the government. However, in a liberalised but a fiercely competitive environment, airlines had no option but to lower the price of tickets to maintain respectable levels of passenger load factor as also to garner decent market share. While the perpetually increasing competition did adversely affect the financial performance of the two national carriers, it did not threaten their existence as the government was on call with a life support system by way of infusion of funds as and when required. This was not the case with the airlines in the private sector that not only battled a hostile regulatory environment, but struggled to remain financially viable. It required skills of a high order in the management of the airline and its finances, especially to cope with fare wars that have been breaking out frequently especially in the festival and holiday seasons.

The airfare charged by airlines consists of a number of components as under:

  • Base fare
  • Taxes
  • Airport development fee
  • Insurance
  • Fuel surcharge
  • Service fee
  • Food
  • Seat selection
  • Baggage

The airline benefits primarily from the base fare and marginally from some of the other charges such as food, baggage and seat selection. The remaining consist of taxes, insurance and the sums levied by the government or facilitation charges. The only figures the airlines can reduce are those that go into their coffers. They have no freedom to tamper with the remaining figures. Operating in an environment of cut-throat competition, the airlines resort to large reduction in base fare which in turn seriously impinges on their financial status especially if the goodies and concession on fares are offered frequently or for prolonged periods. Several of the newly established airlines in the private sector have bled to death and have had to be shut down operations or were bought off by the bigger players. One such airline was Air Deccan set up by Captain G.R. Gopinath that was acquired by the glamorous Kingfisher Airlines which too later proved unviable and had to shut down. More recently, Bengaluru-based Air Pegasus could not survive in the highly competitive environment and had to shut down operations after 15 months of operations. This was followed by Vijayawadabased Air Costa that, as per statements by the management of the airline, has had to shut down its operations albeit temporarily. Earlier on, one of the most successful budget carriers SpiceJet too had reached the brink of failure. Fortunately, its original founder Ajay Singh who had parted ways with the company, returned to take over and revive the ailing carrier.

Capping of Airfares

IN A LIBERALISED BUT FIERCELY COMPETITIVE ENVIRONMENT, AIRLINES HAD NO OPTION BUT TO LOWER THE PRICE OF TICKETS TO ENHANCE PASSENGER LOAD FACTOR AS ALSO TO GARNER MARKET SHARE

Soon after the financial crisis that hit SpiceJet in 2014, the Ministry of Civil Aviation proposed a series of financial incentives for the ailing airline industry. This included a proposal to define the maximum and the minimum fare an airline can charge for travel in economy class. The computation of the price of ticket would be based on break-even price per km plus an appropriate profit margin for the carrier. The aim was to ensure that while airlines do not accumulate heavy losses and remain viable, the fares at the same time remain affordable. Also, the carriers are not able to exploit passengers in situations demanding urgency of travel. However, many of the stakeholders in the Indian airline industry remained sceptical about the proposal and believed that “the Ministry of Civil Aviation or the Directorate General of Civil Aviation has no business to regulate fares and that such measures are unlikely to help the industry.” After considerable debate on the subject, in the second week of June last year, the Minister of Civil Aviation, P. Ashok Gajapathi Raju finally declared that the government had dropped plans to regulate air fares. However, in the National Civil Aviation Policy issued in June last year, the government had a provision to cap fares for short duration flights, but only on regional routes as part of the Regional Connectivity Scheme. The maximum fare a regional carrier can charge is fixed at Rs. 1,500 for up to 30 minutes of flying time and at Rs. 2,500 for a one-hour flight. The new policy aims at bringing down tax-based cost for airlines through reduction in VAT on aviation turbine fuel to one per cent and a viability gap funding will be provided by the government to compensate regional airlines for losses suffered and thus help retain airfares at affordable levels.

In the meantime, a public interest litigation was filed in the High Court at Delhi urging the court to direct the authorities to frame guidelines so as to put a cap on airfares and prevent the private airlines from charging arbitrarily, irrationally and exorbitantly for air flights. On July 20 last year, the Delhi High Court had disposed of the PIL with direction to the Ministry of Civil Aviation to consider the issues raised before it and pass an appropriate order in accordance with the law within eight weeks. End September last year, the Delhi High Court sought a response from the government on the PIL seeking capping of airfares across the country so that flyers are not fleeced by airlines. The Delhi High Court issued a notice to the Ministry of Civil Aviation after it was informed that the government had failed to comply with its earlier direction asking them to decide the issue.

The Final Word

Fare wars benefit passengers more than they benefit airlines as one can avail of air travel at low and affordable cost. Sometimes, in the fiercely competitive environment, the airfares plummet to levels that make air travel less expensive than travel by rail. For the airlines, while they can record high passenger load factor in the travelling season, the lean season makes a deep dent in their finances as operating costs remains consistently high. Those airlines that fail to manage their finances well and balance their books in this highly complex and challenging environment, fail to survive. In the next round of the revision of the National Civil Aviation Policy, the government ought to take a holistic view and create a balanced and healthy environment keeping in mind the interests of both the travelling public and the Indian airline industry.