Airlines Deals

That the group of five start-ups, Air Deccan, Kingfisher, SpiceJet, GoAir and Paramount, have together cornered 38.5% of the domestic air travel market in June is no surprise, as the underlying trend has been visible since last year. And it is the low-cost airlines (LCCs) that are leading the way, even as passenger carriage for full service carriers is still high. For the industry in a demand-led expansionary mode, price competition is the key strategy. But with an estimated two-thirds of its operating expenses (fuel, landing & navigation charges, lease and maintenance) external to the business, the pressure from these fronts must be checked proactively, else the low-cost model may start crumbling.
As DGCA (directorate general of civil aviation) data shows, LCCs now account for over 30% of the market. But, the aggressive pricing strategy, which is making serious inroads into the latent market, is becoming a pitfall. With more low-cost airlines waiting in the wings, and arduously competing full service players, existing LCCs are fast accumulating losses. The current phase is one of financing expansion and waiting to break even. Yet, funding is not proving to be easy, given players’ high cash burn.

Ads By Google

Thailand’s Exporters
Department of Export Promotion match you to the right exporters.
www.thaitrade.com
Expand your market now
Download the handbook and learn how your company can use e-markets
www.emarketservices.com/handbook
Thrakika Ekkokistiria S.A
Cotton Ginning Mills The Cotton in Europe
www.thrakika.gr
Complete Export Mgnt Serv
Containers to Charters Let Our Experience Move You
www.globalproj.com

It is here, that government has to more proactively ease the industry’s operating cost environment, which growth in traffic won’t be able to cushion for too long. Rising prices of the single largest operating cost component (over 30%)—fuel—exert serious load on margins, as full pass through (surcharge) is strategically implausible. Worse, high sales taxes (39% in some states) and levies on aviation turbine fuel (ATF) create a 50%-plus differential for domestic carriers above international levels. Planes waste precious fuel, while queuing for up to 30 minutes for landing or take-off, and high landing and navigation charges etc. inflate costs.

ATF, therefore, should be brought under the declared goods list, capping sales tax at 4%. Fuel hedging through forward contracts for domestic airlines should be allowed; government has allowed hedging of 10% fuel demand for international operations. (Southwest, even the otherwise efficient LCC in the US, could maintain profits mainly thanks to fuel hedging). Air traffic control modernisation will improve fuel efficiency. The route categorisation policy, which forces airlines to fly unviable routes, needs prompt correction. And, with the market already facing growth pangs due to low airport capacity, the Mumbai and Delhi airport stories warped by arbitrariness must not be repeated for other airports.