The Hindu Business Line : Crisis in the air

The airline industry has a genuine grievance that governments have done little to restore its morale. Small and medium-size carriers have not had the access to debt markets that the larger peers enjoy. And there is fear that in the coming months the industry will see other bankruptcies.

Vijayalakshmi Viswanathan

The aviation industry is in the news for the wrong reasons. After riding the crest of success and profits, thanks to the economic boom and buoyancy, the sector is facing adverse conditions and is in urgent need of focussed and innovative measures to bring it out of the doldrums.

As the world witnessed the swiftest and broadest economic collapse since the 1970s, the airline industry suffered major setbacks. The threat of various types of ‘flu’ and soaring jet-fuel prices put paid to any hopes of early recovery.

The scenario appears gloomy, with the IATA Director-General and CEO, Mr Giovanni Bisignani, anticipating a two per cent shrinkage in world GDP and forecasting a total revenue loss of $11 billion for the airlines on the back of weak passenger traffic and cargo demand. The position is akin to the status that prevailed after the 9/11 disaster, when revenues dropped from $329 billion in 2000 to $307 billion in 2001.

It took three years to reverse the trend. Further, with a 15 per cent slump in revenue, eight per cent drop in passenger and a near four per cent decline in RPK (revenue per passenger km); the picture is grim and disturbing. The freight tonne km fell 1.2 per cent, registering the weakest performance in seven years. The loss, initially reported as $10.4 billion for 2008, has since been revised to $16.8 billion to reflect “accounting changes and restatements.”

PROBLEMS ARE GLOBAL

The loss-making phenomenon is world-wide. American and Canadian airline companies incurred a combined loss of $5.1 billion, followed by airlines in the Asia Pacific region, at $3.9 billion. West Asia, Africa and Latin America accounted for $1.9 billion in losses. The only silver lining was that European airlines reported a profit of $0.4 billion.

Some recovery was expected with American airline companies resorting to a number of add-on income devices, such as hold luggage, priority seating, etc., that could bring in more revenues, thus reducing the losses substantially in 2009 to $1 billion.

European airlines are, however, likely to go into red this year. There is no good news for other airlines, with an anticipated loss of $5.9 billion. All these figures form the basis for the initial projection, made in July, of a loss of $9 billion, since revised to $11 billion. As Mr Bisignani puts it, “the bottomline of this crisis — with combined 2008-09 losses at $27.8 billion — is larger than the impact of 9/11”.

The industry has a genuine grievance that governments have done very little to restore the morale of the airlines. Mr Bisignani notes that: “Smaller and medium-size carriers have not had the access to debt markets that the larger peers enjoy, putting them in a more fragile condition”. There is an apprehension that, in the coming months, the airline industry will see other bankruptcies.

Yet another grouse of the industry is that it is treated as a goose laying golden eggs. It is one of the heavily taxed segments. The tax bill for the period 2008-12 is projected as $6.9 billion.

The governments’ penchant for identifying avenues that boost revenues has an adverse impact on air travel. For instance, the UK’s move to levy distance-based passenger duty from November is likely to hit the passenger. European Union’s concerns for environment and emissions may lead to imposition of massive fuel tax. The industry’s tales of woe do not end here. It is in the grip of monopoly suppliers for procurement and rarely do they have any bargaining power.

With huge investments in airport improvements and developments, substantial outgo on user charges is another area of concern. World Airlines Report has assessed that Air Navigation Service Provider charges rose from $54.2 billion in 2007 to $55.7 billion in 2008. Delhi and Mumbai airports now levy a development fee of 10 per cent. The impact of various such user charges at Heathrow Airport, London, will be 89 per cent hike, for the five-year period 2008-12.

REDRESSAL MEASURES

The Indian scenario is no different. Air India, our flag-ship carrier, had been a victim of circumstances and is badly in need of support. The ill-conceived merger with Indian Airlines, opening up of the international skies to private carriers, and lack of a proper manpower planning strategy, coupled with a powerful union with hefty demands, over-aged fleet, operating uneconomical routes, and bureaucratic meddling have contributed to Air India’s sorry state of affairs.

The morale of the organisation is at its lowest ebb, replacing Maharaja’s pride and dignity. When Air India reported a loss of $23 million in 1987-88, the then Rajiv Gandhi government stepped in with revamping measures such as improving the image of the airlines with new planes, aesthetic décor, new logo, re-design of uniform, better in-flight service and rationalisation of routes and introduction of non-stop flights. The steps proved beneficial with the national carrier posting a profit of $23million in 1989-90. Similar strategy with a commitment for results from top to bottom is not only vital but also necessary for the health of the industry.

Airlines, which depend on passenger traffic, are in dire need of a strategy built on the twin planks of cost-cutting and diversification, to meet the challenges faced by them.

(The author is former Financial Commissioner, Indian Railways.)