RUNNING AN AIRLINE – ITS BEYOND ECONOMIC SENSE

about 9 months ago
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Jet Airways is facing massive turbulence; so much so that it is making some FIIs sick and they are parachuting out in a hurry. The company has run into a rough weather and for now, the dark clouds do not offer much of a silver lining.

Things are not looking good for the other two listed aviation companies – SpiceJet and Indigo.

Take the case of Indigo. It posted a very poor show for Q1FY19. On the back of rising fuel cost, its net profit fell by a huge 97% (YoY) to Rs.28 crore on a 13% rise in revenue at Rs.6512 crore. Its aircraft fuel expenses rose 54% during the quarter to Rs 2,715.60 crore, which is 42% of revenue earned. What also did not help was a loss of Rs.246 crore on account of unfavourable foreign exchange movements and certain non-recurring maintenance costs. The inability to hike fares due to mounting competition could not offset the fuel price rise. With fuel prices still on the rise, unless the company hikes fares and cuts costs, the second quarter could see another crash landing. And hiking ticket costs is not going to happen.

The story of Spicejet is also not uplifting. In 3.5 years, it posted its first quarterly loss of Rs.38 crore for Q1FY19 v/s profit of Rs.175 crore in previous Q1. Apart from providing Rs.25 crore for arbitration to be paid to previous group promoter, the company blamed it all on rising fuel price and depreciating rupee.

Well, post the numbers, in current Q2, the rupee has breached the Rs.70-mark; so what kind of numbers are we looking at now?

Many would be shocked to know that the airlines companies are actually making losses as the airfares one pays sometimes leaves one bewildered. The volumes are so high and yet the companies are making losses. Surely, there is something fundamentally wrong in this sector.

For the past so many years, airline companies have been mouthing the same reasons for their dismal performance - In both these listed airline companies, losses are a common factor, and causes are also the same – high fuel cost, lean season, falling yields, depreciating rupee and increase in airport charges. The various Govt tax is also one of the reasons why the sector is mired in red.  Airport maintenance and lease charges are also pretty steep.

Take a look at a typical air fare. Suppose you are flying to Goa on this upcoming holiday, 22nd August with return over the weekend. The total airfare for two comes to Rs.11,262. Of this, base fare is at Rs.5,580; Convenience Fee  when booked on internet is Rs.820 and tax stands at Rs.4862 – this 86% of the base fare! So where does that leave any money for the airlines?

But a quick look into the ‘Fare Sheet’ of any airlines shows the various charges, over and above the base fare -  Passenger Service Fee (PSF), Airline Fuel(YQ), User Development Fee (UDF), Development Fee (DF) and GST (effective from 1st July, 2017). There are also CUTE charges of Rs.50 –  Common Use Terminal Equipment, a software and network airport solution that facilitates the check-in process. Most airlines price this in the ticket. 

Running an airline company in India is not easy, rather mostly unprofitable and that is thanks to the high fuel costs and the various state taxes which makes it all the more unviable. A break-up of the air fare shows that the base fare is Re.1 and then there are top ups like passenger service fare, airport fee, service tax and fuel surcharge. The cheapest ticket of Rs.2035 has a fuel surcharge of Rs.1175 and then the next biggest charge is the airport fee. So we are all paying the price for swanky new airports and more importantly, because the Govt is taking a high percentage when it comes to revenue sharing from these User Development Fees. The good news here – Delhi has slashed its UDF drastically. For the domestic passengers departing from the Indira Gandhi International airport, UDF is Rs.10 v/s Rs 275-550 earlier. International passengers will have to pay Rs 45, down from Rs 635-1,270. Both domestic and international passengers landing in Delhi will not have to pay the UDF anymore. Mumbai too followed suit with domestic passengers not being charged any UDF and international passengers pay 50% less – Rs.227. Other airports across India continue to charge – Chennai said it might stop UDF from 2019.

Apart from all this, the biggest challenge for aviation companies is aviation fuel charge which typically eats away 40% of the revenue. The fuel cost is probably the highest in India when compared with Dubai and Singapore. We import the bulk of our oil and hence any rupee depreciation affects us badly. Moreover, oil is also taxed.

Thus for the aviation sector, taxes are high but given the fiscal challenges of India, tax cut in this is unlikely to happen any time soon. Those in the sector say that India’s navigation service quality also needs to be upgraded. Like Delhi can handle 90 landings and takeoffs per hour but does only 50-60 and Mumbai does 30-35 on its single runway but Gatwick, due to its efficiency does more than double. Lack of proper training is blamed for this low productivity.

Yes, today more Indians than ever before are flying and ideally, all airlines should be making profits. But improper fiscal management, mindless fleet expansion, large debts have kept them perennially in the red.  The sector needs to seriously wake up, stop blaming the losses on external macro factors and look inwards before they get grounded.

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