Flawed fare strategy

Air India bailout can spell more trouble for the aviation industry

Private airlines, led by the financially ailing Kingfisher Airlines, have reportedly sought the government’s permission for direct import of aviation turbine fuel to run their planes on domestic routes. Their argument in support of their plea is that inordinately high taxes levied by various state governments have made aviation turbine fuel 50 per cent more expensive in India than abroad. Since fuel typically accounts for up to 40 per cent of an airline’s costs, the private airlines have said that cheaper fuel imports will help them pare their operational costs. But the private airlines’ losses are huge and it is doubtful if this alone will help them come out of the red. Kingfisher Airlines incurred a loss of Rs 1,075 crore in 2010-11. For the quarter ended September 2011, Jet Airways reported a loss of Rs 713 crore and SpiceJet’s loss was estimated at Rs 240 crore. If they need to cover their losses, they must look at other options including a review of their fare structure.

However, reviewing fares is a complicated problem, not the least because the airlines have to contend with the national carrier, Air India, which in spite of its accumulated losses of over Rs 20,000 crore continues to pose tough competition in terms of fares. A fresh debt recast plan for Air India is now being examined by the government. This includes converting short-term working capital loan of Rs 11,000 crore into long-term debt and turning debt of Rs 7,000 crore into preference shares with eight per cent dividend. In addition, the national carrier is expecting infusion of equity worth Rs 6,750 crore and guaranteed aircraft loans worth Rs 30,000 crore. Little does the government realise that more cash to the ailing state-owned airline on easy terms may prompt it to unleash a fiercer fare war.

Indeed, Air India for many years has been a price warrior, even though it has incurred losses in return. While the focus on fares has continued, it has not paid adequate attention to other more important areas of operational efficiency. Instead of trying out with what meals ought to be served on flights, it could worry more about punctuality and cleanliness. In spite of this neglect, however, Air India remains the fourth-largest player in the market, accounting for a 16 per cent market share. Rivals, big and small, cannot, therefore, overlook what it does. So, they have no option but to benchmark their fares against Air India’s. At a time when jet fuel prices have risen sharply, the low-fare strategy has thus hurt the sector. If the government had held the Air India management accountable and asked it not to use the bailout money for pursuing a low-fare strategy, perhaps the civil aviation sector would not have been in such dire straits. The government would do well to keep this in mind while reviewing Air India’s petition for a debt recast. This will also help create a level playing field for all airline companies including the national carrier.