Use derivatives to deal with turbulence in the air

India’s aviation industry has just a 2% share in the $470-billion global industry, but accounts for a third of its total losses. Blame the fuel cost volatility and high capital expenditure.
If the market turbulence lasts longer, domestic carriers may not be able to sustain their business unless major structural changes are carried out. Interest and fuel costs need to stabilize. This will allow carriers to adjust fares and thereby keep demand stable for a long period.
In a falling economy, the aviation industry would normally be one of the early birds to hit the air pocket. The reason is intense competition from other transportation modes and the growing ICT infrastructure that can somewhat obviate travel.
Currently, the airline industry in India is going through an intensely competitive phase thanks to new entrants and expansion of operations by existing players. Rising fuel expenses, which account for 35-50 % of operating costs, are adding to its woes. Low-cost airlines that have a higher elasticity of demand can be particuraly hit.
Fuel cost increases are passed on to passengers as rising fares or fuel surcharges. This would force the borderline consumers of full service airlines to shift to low-cost carriers. But this woud hardly make up for the erosion in the capacity utilisation of the low-cost airlines due to their marginal travellers shifting to other modes of transportation.
The operators would naturally take cost-cutting measures such as route rationalisation and HR cost cut. But, all this would not offset the high and volatile fuel prices. In such an eventuality, industry growth would begin to ebb out as is happening right now.
25/09/08 V Shunmugam/Economic Times

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Categories: Indian Aviation- In General Sep 2008