Troubled skies

Is this the thin end of the wedge? The death knell for India's public sector airlines that have flown through choppy skies for over a decade? A change from the way the aviation industry is ordered in this country?

It was a move that came right from the top. Last month Prime Minister Atal Bihari Vajpayee took the aviation industry by surprise when he declared an open-skies policy for all foreign airlines in the Asean region.

That was followed a few weeks later by an announcement that private Indian airlines like Jet and Sahara could fly as many flights as they wanted to Sri Lanka.

To top it all, the government put its usually restrictive policies on the backburner and allowed foreign airlines the freedom to operate as many flights as they want during the peak season between November and January.

The effects of Vajpayee's pronouncement were first felt this week when India's Ministry of Civil Aviation called together a meeting with top officials from the 10 Asean countries.

The aim: to turn Vajpayee's words into reality. Under the policy that's now being hammered out, Asean carriers will be allowed to operate one flight every day to the country's four metros and 18 tourist destinations.

Asean carriers may be allowed to fly daily to the four metros without signing bilaterals or paying royalty

The big winners will be Thai Airways and Malaysian which are keen to have more flights to India

The Asean carriers and Sri Lankan Airlines score because they can carry Indian passengers to onward destinations like the United States

Air-India and IA expect to lose market share dramatically because they don't have enough planes

That means airlines like Thai or Malaysian Airways will be able to fly as many as 28 flights a week (seven days a week in the four metros).

They won't need bilateral agreements between the two governments to bring these flights into or out of India. Nor will they pay any royalty to national carrier Air-India for flying in.

The government's moves have stirred predictable reactions. Indian Airlines and Air-India have greeted the news with glum silence. Aviation industry experts point out that the moves could be like a ground-to-air missile that will hit the two airlines amidships.

Points out an aviation expert : "The open skies policy should come only after A-I and IA are strengthened or privatised so they have the strength to fight competition."

Unsurprisingly, the tourism trade doesn't feel that way. Says Subash Goyal chairman, Stic Travels: "The only way you can grow tourism is by opening up the skies and allowing more tourists to come in, rather than protecting domestic airlines."

That's a view backed by Ankur Bhatia, managing director, Amadeus, an international reservation system: "A-I gets only $40 to $50 per passenger as royalty. But each tourist coming to India spends over $600. So the question is should we protect A-I's revenue or grow our foreign exchange?"

Will the new policy bring Asia's airlines rushing to India? Certainly, there are three regional airlines that have always shown an interest in India "" Singapore Airlines (SIA), Thai and Malaysian Airways. SIA already operates 29 flights a week so it couldn't ask for more even under the proposed new rules.

Thai and Malaysian could, however, boost their capacities if they are inclined. Today both airlines fly between 13 and 15 flights a week to India. That means they could together add about 26 new flights weekly.

Other airlines could also get into the game. Many Asean carriers from countries like Indonesia, Philippines and Vietnam don't even fly to India.

Together the Asean and Sri Lankan airlines currently have around 40,000 seats a week into India "" that's a 114 per cent rise since 2000.

Says a top source: "While the foreign airlines used virtually 100 per cent of these seats we could utilise only 50 per cent because we do not have new aircraft which we had asked the government to allow us to buy. But the argument that there is a shortage in capacity is bunkum."

The domestic airlines say about 26,000 new seats will be created weekly from the Asean region and Sri Lanka as a result of the open-skies policy. But aviation experts say this is an overestimate and there are unlikely to be more than 8,000 new seats.

There's a good reason why foreign airlines find it easier to attract passengers. Anywhere between 40 per cent to 60 per cent of the passengers on foreign airlines are heading to other destinations like the United States. That means a passenger flies from India to Colombo and flies on to another destination.

"So they are taking away our passengers from the United States and Mid-East markets. We can't do the same thing, because their outbound market is small and they don't use India to go to a third country," says an IA executive.

Executives at the national carriers reckon the financial impact of the latest moves could be staggering for them.

Internal estimates by aviation experts reckon that while the Asean and Sri Lankan carriers might generate additional revenue of over Rs 2,500 crore the potential revenue loss to A-I and IA combined could be over Rs 700 crore.

Of course, the foreign carriers are not complaining. "We would like to take optimum advantage of the proposal. Thai Airways has been wanting to increase its capacity out of India for some time now," says a senior Thai Airways executive.

Similarly, Malaysia Airlines says its business is growing by 20 per cent to 25 per cent annually. It would like to grab the government offer and operate daily flights from Delhi and Mumbai.

A senior Sri Lankan Airlines executive says the airline plans daily flights from all destinations that it flies to currently.

But does this mean there will be an oversupply on the south east Asian route? Amadeus reckons there's a latent demand for 15 per cent to 20 per cent extra capacity. Then there is a natural growth in tourism passengers which is around 5 per cent per annum.

Says an aviation expert: "I think demand and supply will balance out and will not be dependent on the whims of bilateral agreements which are virtually created shortages." But A-I executives say it will lead to a fall in their passenger load factor.

Says an A-I source: "Our PLF in Asean flights will fall from 75 per cent now. And that is because we cannot create more capacity because our fleet acquisition plan is far from being cleared by the government."

Many aviation experts say the government is hurting the two national carriers in the worst way possible. On the one hand, it is sitting on the fleet renewal and expansion plans. And, on the other, the open-skies policy will erode the valuation of A-I.

Says an expert: "Companies which wanted to buy A-I during the previous attempt towards disinvestment were ready to pay a premium for the company provided the government froze the bilaterals for seven years. With open-skies valuation there will be no buyers for A-I even if you privatise."

The national carriers are also losing sleep over the fact that Sri Lanka is being opened to private airline companies.

Executives in the national carriers point out that Sri Lanka is already turning into a hub which Indian passengers use for onward travel to the Mid east, Australia and even the US.

The fact is that Sri Lankan Airlines, (after Emirates bought a stake in it) now flies an amazing 44 flights a week into India "" one of the highest by any foreign airline.

Says a senior Indian aviation executive: "With Emirates buying out an equity stake in Sri Lankan Airlines we fear that it will be used as a hub for getting Indian passengers to the Mid East via Colombo. This will seriously impact our business. They have already dropped prices."

However, India's private airlines don't appear worried by the open skies policies. In fact, they are putting together their own plans for Sri Lanka.

Air Sahara has already announced that it will start two flights daily to Colombo. One will be directly from Mumbai and the other from Delhi-Bangalore via Chennai.

Says U K Bose CEO, Air Sahara: "The yield on a one hour flight from Chennai to Colombo is 30 per cent to 40 per cent higher than a similar flight from Delhi to Lucknow."

No doubt the new government policy could change India's aviation map.But the question is whether it will push India's national carriers to the brink of collapse.

Additional reporting: AMRITA DHAR