Open up aviation

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Times of India
By

Sushi Shyamal
Partner, EY India

What are Indian carriers doing wrong that successful foreign airlines aren't ?

The performance of Indian airlines can't be compared with those of foreign airlines as they operate under different regulatory and cost structures. Aviation Turbine Fuel (ATF), the biggest cost component for an airline, is available to foreign airlines at a much lower price than Indian airlines. Globally, ATF forms one-third of an airline's operating costs; in India, it's around 45% of the operating cost. Landing and navigation charges are also more in India and may increase further.

However, the aviation sector in India is still very young. Many players have hardly completed a decade and are still learning to deal with business cycles. Large foreign players have been in existence for decades and their business practices have evolved with experience. However, Indian players will have to come up with innovative ideas to tackle the inherently difficult market where demand is high and there's a highly price-sensitive population.

Pricing is not the solution to problems faced by the industry. Business mechanics need to evolve and issues such as code sharing, hub and spoke model, single aircraft type fleet, efficient route rationalization and operational discipline need to be implemented by various airlines.

Earlier, too, airlines such as Damania , East-West and Modiluft closed after running for a few years. Are the same factors at work now?

The airline industry in India was nascent in the mid- '90s. The scale of operations today is completely different. The total number of passengers carried in 1997-98 was 11.5 million, with Indian Airlines and Air India holding more than 50% market share. In 2010-11, airlines have served more than four times that number of passengers. With LCCs entering the market, no individual player dominates the market. Currently, LCCs have 45% market share. But, yes, there was competition even in the '90s which impacted profitability.

In today's market scenario, consolidation is pretty evident and we may see more mergers and acquisition (M&A). It's time to open up this sector and allow foreign airlines to take strategic stake. Previous M&As were for market share acquisition, and in one case an entry strategy. However, those events took place when the markets were good and economic sentiment positive.

Why can't airlines hedge fuel like those aboard?

Fuel hedging needs careful planning. Airlines would like to hedge only when they anticipate rising prices. Hedging carries its own risks. If an airline enters fixed hedge today and fuel prices retrace later, it'll be saddled with a fixed high fuel price.

Southwest Airlines posted its first loss in 2009 due to payments on fuel hedges. Even Air Asia hedged only about 17% of its fuel requirement for the first half of 2011.

Hedging can protect an airline only for a quarter or two. In the long run, rising fuel prices can only be countered by focusing on profitable routes and increasing yields.