The opponents of free markets must be cheering. “We told you so.” Don’t hand over the skies to private players. Don’t destroy the monopoly that Indian Airlines enjoyed in domestic markets. So what if their fares were high, so what if their service oscillated between the pathetic to the barely tolerable and you were at their mercy, if your flight got cancelled.
Today, the proponents of free markets will have to concede their opponents one point: the government as the owner never went on strike. Their private counterparts have decided to put a black mark on corporate India by deciding to stop flights for a day, and threatening an indefinite strike, if their demands are not met. They deserve no pity.
Private Indian airlines, banding together under the aegis of the Federation of Indian Airlines, today announced their decision to suspend operations on August 18. Industry leaders like Naresh Goyal of Jet Airways and and Vijay Mallya of Kingfisher Airlines joined other airline owners in announcing this at a joint press conference.
The main demand is that aviation turbine fuel should be termed as a ‘declared good’ on which states will be able to levy only a 4% central sales tax instead of the current free hand they have for levying taxes. They also want private airport operators to lower the various airport charges, which they claim has upped their costs.
The key Points raised by the Airlines
- The state sales tax on aviation turbine fuel makes it very expensive for the airlines. Different states levy taxes at different rates on ATF. The airlines want the central government to classify it as a ‘declared good’. That way, states lose control over it and only central sales tax will apply on the good. That’s the equivalent of giving the airlines a blank cheque.
- They want the government to bear upon the airport operators to go easy on the charges and not behave like companies out to make profits from a business.
- Fuel prices in India are quite high, mainly because of the taxes levied on them. This holds true for petrol and diesel as well, and also for LPG and kerosene, if you cut out the taxes they would become a lot cheaper.
- But they also constitute sizeable income streams for state governments. So, they would not want to let go of these revenues unless they are compensated for it. In addition, they would consider the cost of aviation turbine fuel as something that does not really affect the common man. It’s a non issue. The centre will not want to compensate states for the drop in revenues, either.
How much is ATF as a percentage of costs?
- In the June 2009 quarter, fuel was 29% of Jet Airways’ expenditure. And, other operating expenses was 36%, while salaries account for 15%. A look at the EasyJet Plc results for the half year ended March 2009 shows a fuel to expenditure ration of 33%. That’s not very different from what Jet paid.
- This is by no means conclusive but there needs to be a comparison done, to see if fuel costs as a percentage of expenditure are really different for Indian companies compared to international companies. The government should perhaps examine the financials of international airline companies and compare them to Indian companies.
A legacy problem
- The distortion that airlines claim exists in ATF pricing is nothing new. When they entered the business, they should have factored this in to their calculations. If they assumed that these taxes are going away or will be lowered they were being very optimistic.
What could have really happened?
- Indian consumers are value conscious. When airfares had dropped, more people flew simply because the differential between airfares and train fares was narrow enough to encourage a shift. Airlines seem to have extrapolated this as a permanent shift, not realising that the moment pricing changed, this floating population of fliers disappeared. It is not uncommon now, for people to do one leg of a trip by train and the next leg by air.
- Business traffic has dipped as companies are cutting back on costs, telling their employees do not fly unless essential, use the phone or video conference facility.
- Now, airlines are doing everything to cut costs. Employee costs are being slashed but some of their costs seem inflexible. It would appear that airlines are unable to shrink their operations when they see a dip in business. In accounting parlance, their level of fixed costs seems high. Not building in flexibility was alright if passenger traffic and fares both kept increasing, but in a downturn, when both are falling, the effect can be quite devastating.
Reading between the lines
Why does the government need to bail out the sector? And has the government really done nothing?
When the going was good, airlines were hiking prices, almost behaving like an oligopoly. Deccan Aviation’s entry put an end to that. But to be fair, the government never paid heed to calls for pricing controls, saying market forces will decide on pricing. They never interfered. So, why should the government be responsible for a bail-out of these organisations?
The government has also allowed airlines to delay their payments to both oil companies and to the airport operators. That has given them relief on the working capital front.
Is the situation really so bad? Jet Airways says in its June 2009 results presentation that oil prices continue to be under check, reducing the pressure on its operating costs. It also says that the fuel surcharge that was increased in June will help yields to some extent in the current quarter. In fact, it says that the domestic average fuel rate in the quarter was manageable. And indeed, fuel price has dropped from Rs 67 a litre in June 2008 to Rs 35 in June 2009.
Have the private airlines hedged themselves into a corner? World over, airlines are in trouble for having hedged against rising oil prices, only to find them dropping leaving them with losses on their hedges. The government perhaps needs to examine this aspect also, to see how hedging is having an impact on the bottomlines of Indian airlines.
The government is believed to be considering a funds infusion into NACIL, the government airline. If the government tops up its bank account, it may get aggressive in the market, forcing the other airlines to take cover. Their balance sheets are not as sound at the moment. So, are the airlines saying to the government, if you want to bail out your airline, fine, but give us something too?
And yes, one last thing. Private airlines going on strike is an inhuman way of treating people who are flying on August 18. Businesses have always been critical when striking Airport Authority employees have held the country to ransom. Leading industry bodies like CII and FICCI should drill some sense into their airline brothers.
The government on its part should do some fact finding, appoint a committee to probe into their finances and compare it with international airline finances. The airline business, internationally, is known to be a tough business. What made the private airlines think India will be any different?
And yes, as for the strike, the government should declare domestic flight services an essential service for six months under the Essential Services Maintenance Act. Anyone goes on strike, you know what to do.
Read what the government had to say about it here. Key message: Indian Airlines will increase its flights on that day, the only gainer in this situation, it would seem.
The airlines called off their strike as suddenly as they had announced it. Read about it here.