Poor sense in business forecasting

A recent example of poor business forecasting is that of the airline industry. Ratan Tata’s executives must be happy that his passion for flying was grounded by government obduracy. The Tatas would, like the others, have lost a lot. Airlines and airports are notoriously cyclical industries everywhere. Yet, many businessmen emulated Tata but took off — Naresh Goyal, Vijay Mallya, Jeh Wadia, and many others. Like lemmings marching behind each other to drown in the ocean, they started new airlines. They could not have had realistic forecasts of demand and price. They bought the propaganda about India’s Growth, imminent double digit growth, India as a Great Power and the unstoppable India. They also saw an opportunity as government owned airlines went steadily downhill, helped by venal politicians and some bureaucrats. None anticipated the extent of competition but only foresaw easy pickings. Jet and Kingfisher even acquired Deccan and Sahara on top of their already large commitments on aeroplane fleets.
“Low cost” airlines followed, selling below cost, without compensating cost savings. At these low prices many travellers switched to air travel. A huge market resulted as airfares fell close to the level of rail fares. Unbridled price wars began. All airlines lost money. Each expected others to fold up, leaving the market to the rest who could then charge remunerative prices.
These operators never grasped the essentials of a “budget” airline. It is tight cost control. Ryanair or Air Asia are profitable because they work with low fuel costs, low operating costs, low airport charges (by using the less popular air terminals and airports), restrict baggage, food and other services, and utilize aircraft to the maximum. Outstanding managerial skills gave low costs, low prices and large demand from undemanding customers who only wanted on-time safe travel.
Indian airline operators displayed no managerial skills, nor did operating conditions make it possible to keep costs low. Indian aviation fuel taxes are more than their cost. Fuel prices in most cases are 100 per cent higher. Sales taxes on fuel amount to 27 to 30 per cent. Aviation turbine fuel in India is subject to eight times higher taxes at 66 per cent versus eight per cent for international airlines. Fuel costs are fixed: at 35 to 40 per cent of total costs they are the largest component of airline expenses. Other taxes — service tax, excise and customs duties, user development charges in new airports, add to costs. Our airport charges are said to be 62 per cent higher than comparable tariffs abroad.
When prices of aviation fuel rose with crude prices, so did passenger fares, leading to a precipitous decline in airline traffic. The low-cost airlines realized their un-viability and disappeared. Air fares have risen. Traffic has dropped and overheads are unbearable. Many airlines will close down.
03/11/08 S.L. Rao (Former director- general, National Council for Applied Economic Research)/The Telegraph

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Categories: Indian Aviation- In General Nov 2008