Poor environment for low-cost airlines
HORMUZ P MAMA (The writer, a journalist, was earlier editor of International Aerospace)  

[ THURSDAY, JUNE 01, 2006 12:06:37 AM]  ECONOMIC TIMES
 
While full-service carriers attract passengers with the overall quality of their service, low-cost airlines offer a bare-bones service and compete primarily on cost.

They fly more sectors in a day than full-service airlines and usually operate from smaller, secondary airports that have lower charges, but may be very far from city centres.

Thus, passengers spend more time and money to get into town. Among typical European examples are London’s Luton, Rome’s Ciampino, or Stockholm’s Skavsta.

These services are generally aimed at eliminating the problems of connecting flights. They do not have code-sharing agreements with other low-cost airlines to minimise costs. They also generally avoid head-on competition with each other, and prey on full-service airlines.

Their staff are generally less well-paid and more intensively used than those of full-service airlines. Admittedly there are numerous exceptions to these broad generalities. EasyJet operates mainly from major airports, JetBlue offers live TV programmes free and some other airlines even offer free meals.

India is not yet ready for low-cost carriers. In the present environment, almost 70% of their operating costs are the same as that of full-service carriers. These include aircraft purchase and lease-rental charges, maintenance, repair and overhaul and fuel costs, airport and navigation charges etc. Thus low-cost airlines can juggle with only just over 30% of their overall costs to gain an advantage over full-service carriers.

Worse still, many of these major costs are way above global levels. The fuel cost in Delhi is over Rs 35,000 per kilolitre, and is much higher at other Indian metropolitan airports. This high fuel cost is mainly due to exorbitant state and central government taxes and duties.

These include a 10% customs duty on imported ATF, an 8.16% central Excise on the cumulative duty rate, as well as state sales taxes of 4-34%, according to data provided by Jet Airways.

Nikhil Garg of Edelweiss Capital points out that when low-cost airlines had started over two years back, no one had expected a 40-50% higher fuel cost . For Air Deccan, high fuel cost accounts for about 40% of its overall expenses. By contrast, for Ryan Air, it is only about 20%.

Thus, Air Deccan could require 3-4 years to break even, while some of the other airlines could even go under. All domestic airlines urge that the cost of ATF be lowered to that for international airlines in India, and that the tax level be reduced to about 5%.

Poor airport infrastructure and high charges hurt low-cost airlines more than others as they have to achieve more rapid turnarounds and higher fleet utilisation. These charges amount to a higher percentage of their overall cost structure. Also India has few secondary airports that could help to reduce costs.

Mr Garg recommends lower charges at non-metro airports and at off-peak hours, to help low-cost airlines to survive. Full-service airlines could have the peak-hour slots at higher rates. That would reduce the competition between them. He wants subsidies or incentives on the lean routes, or the grant of a monopoly status for a few years.

A good solution would be for government to invite bids from low-cost airlines to operate on certain marginal routes, with the airline offering to operate at the lowest subsidy being given exclusive rights for a few years.

These airlines generally have fewer staff, with lower salaries and heavier workloads. In the present environment of acute staff shortages at every level, the personnel can pick and choose, and command fancy salaries.

At peak hours, for flights between Mumbai and Delhi, about 80% of our passengers select the unrestricted full fare”, says Peter Luthi, COO of Jet Airways, adding that the remaining 20% would pay the check fares on offer. At off-peak hours, however, the situation could be reversed.
Globally, while low-cost carriers avoid competing among themselves, and hit at full-service carriers —at least till recently — in India, they are already bleeding each other. It could affect their survival. Moreover, their fares are falling faster than their costs.

That does not help them to recover their costs — which keep rising. Thus, these airlines may be able to break even at only about 85% load factors year-round system-wide — a figure difficult to achieve at best of times.

Air Deccan CEO G R Gopinath, has said that he would like his airline to match rail fares. That is inherently unattainable, because of the economies of scale that the railways enjoy. Also, the railways are fighting back for their high-yield traffic with a counter-fare war.

Clearly, low-cost airlines are doing badly, and the situation will get worse as capacities build up. Air Deccan’s loss of Rs 115.02 crore in its first 2.5 years, and its negative net worth of Rs 796.7 million is mind-boggling. It may find it difficult to attract investors for its IPO at the expected rate of Rs 320 to 340 per share.

Asked about Air Deccan, Mr Garg says that new airlines would take a couple of years to break even. Services between metro and non-metro cities, of the type that Air Deccan has pioneered, generally take more time.

However, he adds that Air Deccan’s load factors are low, at around 70% for the last six months, while break-even could be at about 90% systemwide.

Also, it is not very efficiently run, and does not have a good business model, he points out. However, it may not merit investment until it sustains load factors of above 85%.

A lot has gone wrong with India’s low-cost airlines. These airlines, in their efforts to expand and achieve economies of scale, have been reckless, and have gone deep into the red. Except for Air Deccan, most other airlines concentrate on the saturated metro routes.

This writer feels that the industry will face complete saturation well before that. Low-cost airlines can help India’s economic development.

The present economic boom was just the right time to launch the low-cost revolution. However, so much has gone wrong that India may have to await second-generation low-cost airlines to deliver the goods.

(The writer, a journalist, was earlier editor of International Aerospace)