Reality check for aviation

Jet Airways is looking to cut its fleet size following reduced demand while Air India is set to slash fares by as much as 70% on many sectors to deal with the same malaise. Having grown at a rate not justified by the demand-cost structure of the industry, airlines have to make the painful adjustment. The rapid growth in passenger traffic over three years to 2007-08 (15.1%, 31.4% and 21.2%) was largely driven by cheap fares.
That despite this strong growth in volumes the airline industry is sitting on losses running into thousands of crores is proof that such fares were not sustainable. The key take-away is that there is a large demand at prices that are marginally more than higher class train travel. But those prices are not profitable under the current operating cost structure for aviation in India. Since costs are sticky in the short run, fares will have to go up.
Indeed, most airlines have raised fares despite dropping volumes. But Air India’s decision to cut fares could create problems for the industry. In a free market situation one cannot argue with the business strategy of a player, but Air India’s case is different. It is a state-owned enterprise whose losses have to be eventually met from public funds as the airline would surely not be allowed to go under. Since the action of such a large player has an impact on the market, it is important that Air India does not abuse its public sector strengths.
On the cost side, airlines have begun to make adjustments through capacity cuts and fewer flights — domestic aircraft movements have dropped sharply of late, by over 10% in February 2009. Airport charges would continue to be high due to huge investment in modernisation or setting up new airports. But operating costs should fall as airports become more efficient.
22/04/09 Economic Times

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Categories: Indian Aviation- In General Apr 2009