Hello, flight control...

With the pioneer among low-cost carriers (LCC) wiping out half its net worth in a short 15 months, it is time to take a long hard look at an aviation sector that seems to have got caught in very rough weather. For, the country's largest (full-service) airline's chairman told his shareholders last week that, while Indian carriers had been expected to lose Rs 2,200 crore during the year, this figure would climb as more low-cost carriers entered the market. Since Naresh Goyal is presumably including in his numbers those of Air-India and the foreign operations of Indian Airlines, this translates to loss levels equalling 10-12 per cent of turnover. Any business with those numbers is going to have a short life.

In the weeks prior to announcing his disastrous results, Deccan Air's Captain GR Gopinath was citing the example of telecom to calm nervous investors""Airtel made huge losses in the initial years, he said, while building up a client base, and this was just part of doing business. Mr Gopinath is absolutely right, and he has been adding one new aircraft every month since he first opened his doors to passengers""and also deviating from the LCC model of sticking to just one kind of aircraft (which may partly explain his current troubles). In any case, there is one aspect he did not speak of""just three or four of the original band of 10-11 players in the telecom business are around today. Will there be similar consolidation in the aviation business?

It certainly seems that there is no hope of the sector making profits if fare discounting does not stop""and for that there has to be consolidation in the market so that the fight for market share is not ruinous""as indeed it has been in the US, where too every airline is now bankrupt. The alternative, as the civil aviation minister has threatened, is regulation""which might be considered the European model. The problem with that is it would preclude the rapid growth of the business that has been in evidence over the past year, recording an astonishing 40 per cent and more and taking aviation beyond the segment of business travellers to include those travelling at their own expense, having upgraded from rail.

Some analysts still believe in the LCC model, as opposed to the full-service model of Jet and Indian Airlines. But at today's prices, each extra mile flown is adding to losses. Just the fuel costs to fly a mid-sized jet from Delhi to Mumbai is around Rs 3.5 lakh""so, a low-cost carrier needs around 90 passengers to cover just this, and fuel costs are just 40 per cent of total costs. So, even a plane with 130-140 passengers on board is losing money when it takes off. So unless there's consolidation (as Jet tried by merging with Sahara before the deal fell apart) and fares go up, it's difficult to see how low-cost carriers can justify their existence at today's below-cost prices. If the losses that Mr Goyal warns of were to materialise, investors will need to take a call on whether they want to fund them. It is equally clear from the aborted Jet-Sahara deal that the chances of investors exiting at a reasonable price aren't great.