Govindraj Ethiraj: India's great low fare spiral

DOUBLE EDGE

A few days ago, a senior airline executive narrated this discussion his colleagues had with the Air Traffic Control officials. The meeting's objective was to explore ways of reducing airport delays at Mumbai and Delhi.

Why, the airline asked, did ATC want such long gaps between take-offs? After all, most modern airports allowed lift-off intervals of under a minute. ATC Mumbai, for instance, insists on intervals spanning several minutes. With just one runway, obviously sequential delays increase.

One answer, apparently, was that it was a safety requirement in case there was an engine failure at take-off. How many engine failures had happened around the world during take-off, forget India, asked the airline chaps. I am not sure what the answer was. Maybe radar separation and wake turbulence (from a departing aircraft) were issues too.

The desperation to squeeze operational efficiency is showing. What looked like a seasonal upheaval earlier is now set to be vicious high-cost, low-fare spiral that could last several years. And unless a few quick mergers, acquisitions or bailouts take place, several airlines will sink to the bottom. This would be a good idea for most businesses except perhaps those involving aircraft and passengers.

Going by current order book projections, by the end of next year a whole new Indian Airlines (Indian) or over 50 aircraft will have joined the fleet of aircraft over Indian skies. What this will do to airport infrastructure is anybody's guess, though a separate debate. But that's only for starters. Almost five aircraft are expected to be added every month till 2011.

This does not include at least four new aspirants, including one wishing to serve the north east. This is technically good news for the exploding airline passenger market, growing at over 25% annually and expected to touch 25 million passengers this year. The question is whether any airline, including the no-frills, can really afford to serve this market.

The full-service airlines need "full-fare" paying passengers. The problem is that the market is growing at less than 10% per year. As more seats keep getting added to the kitty, the players""notably Jet, Sahara and Kingfisher""find themselves unable to extricate themselves from the low-fare game. Earlier only 10% of seats would be offered on lower fares, now it's perhaps twice as much. At the least. Full-service airlines are in an unusual situation. Their loads could not have been better and their yields worse""so they would rather fly at 70% average passenger load with higher fares rather than the other way round.

The no-frills are caught in their own spiral. Because they are low-fare airlines, not low-cost, as is often pointed out. The cost of fuel, spares, airport infrastructure and crew does not change much. A full-service airline man alleges pilot salaries at some "low-cost" airlines are higher than his. Nothing wrong with that, except that margins for the latter will suffer.

What does this add up to? One industry watcher estimates that this will blow a neat $400 million (Rs 1,800 crore) hole in airlines' balance sheets by the end of next year. Most seem prepared for this but how they will survive this is anybody's guess. Older ones like Jet will hang on, newer ones like Kingfisher will have the advantage of group backing. It's the rest that will face the most pain.

Flying international will help some. Jet, Sahara, and Kingfisher are expanding or trying to. Long-haul revenues, both from passengers and cargo, are good. But going West without being able to fly onto the US is a handicap, as Jet discovered. Nor did it expect British Airways to respond so swiftly with additional London flights. The East is more remunerative, but only comparatively. Not surprisingly, Jet hopes that 50% of its revenues (and presumably more profits) in four to five years will come from international flights.

The no-frills are, meanwhile, expanding their network furiously, cutting back with almost equal alacrity when faced with low yields or other hurdles. The gamble is that the network will deliver revenues, particularly new destinations. Such strategies are also highly infrastructure- and external environment-dependent. In India, hidden costs have a nasty habit of punching you in the face.

The worry is not all of that as is the potential threat of tightening margins on safety and the like. The same industry watcher said one airline's spare part inventory on its books bore no correlation to reality. And so on. Even if the aircraft were safe in the air, chances are they would spend more time on the ground, affecting passengers and the bottom line alike.

There might be two ways out of this. First, the civil aviation ministry shuts the door on new airlines, as is being perhaps contemplated. But it's a little late for that now. The only other option seems to be to summon them and make them "talk" to one another. Like the government occasionally does with banks. And see if the full-service airlines can find find low-cost partners. Or vice versa. Or some other equation that ensures continuity, if not growth.

govindraj@business-standard.com