The troubled
aviation sector can learn survival skills from the embattled telecom sector
Mohan Sule
After
telecom and mining, another showcase of the reforms era is in the news for the
wrong reasons. Unlike the telecom and mining sectors, the aviation sector has
hit an air pocket not because of any scandal but due to operational
deficiencies. Yet, just like the telecom and mining sectors, the problems of
the sector can be traced to policymaking and the players’ ambition to gain
market share. The open-sky policy introduced in the early 90s allows anyone
with a borrowed aircraft or two to start an aviation company and fly on any
domestic route with a serviceable airstrip by paying the fees for landing
rights. It was the promoters’ headache to work out the math of balancing the
cost of aviation turbine fuel, servicing the lease, maintaining the fleet and
staff wages with passenger fares. In contrast to telecom and mining, which are
considered basic businesses with little value addition to differentiate one
player from another, the aviation industry has been associated with glamour and
adventure right from the times of the eccentric aviator Howard Hughes. Even our
own JRD Tata achieved a larger-than-life image not merely by making steel and
producing commercial vehicles but after his triumphant return from a solo
flight from Karachi to Mumbai via Ahmedabad
in a Puss Moth aircraft in 1932 before launching Tata Aviation, which
later became Air India International. Not surprisingly, airlines till the end
of the last century spent huge amount of money to build brands and loyalty.
The
first batch of private sector aviation players was a motley crowd of poultry
farmers, unknown entities alleged to be fronts for underworld elements,
wheelers and dealers sensing another opportunity to earn returns, and
industrialists keen to diversify. In the process, they failed to interpret the
market signs correctly. The market was no doubt expanding. The emerging middle
class wanted an option to the rickety services offered by Indian Railways.
A diet of subsidized fares had hampered the domestic state carrier’s capacity
to expand. There was, however, a limit to the premium first-time fliers were
willing to pay for better services. Competition on the trunk routes resulted in
fare war as in the telecom sector. There was incipient demand for feeder
routes. To break even, it was essential that the aircraft had a minimum number
of passengers per flight. To ensure this, there was no alternative for the new
entrants but to woo the budget-conscious travellers. Among the casualties of
this realisation was Damania Airlines, whose promoters were not adequately
capitalized to sustain a fancy airline. Sahara Airlines decided to sell to Jet
Airways, and Air Deccan to Kingfisher. Low-cost carriers SpiceJet and IndiGo
gained popularity. Despite the consolidation and increase in passengers,
airlines have not been able to stem the flow of red ink due to the surging
prices of ATF, with crude oil crossing the US$100 a barrel in 2008. The brew turned
potent on volatility of the dollar following the sovereign debt crisis in
Europe and the hardening of domestic interest rates.
A striking
feature of the current turbulence in the aviation sector is its similarity with
the problems of the telecom sector. One is the wafer thin revenue per user. In
spite of being among the fastest growing and the largest in the world, both the
industries are not making profit even as they are gaining more users. This
means there is demand for the service provided but the economics of providing
the service is not viable. Telecom companies have halted the race to offer
airtime at throwaway prices. Instead they are concentrating on the creamy layer
to ensure decent usage. Airlines either have to follow the no-frills model or
use the heavy rush on the metro routes to subside flights to tier I and II
cities. Another option is pooling ground services or to carve up the feeder routes
among themselves. Telecom services providers are sharing tower resources and
till recently were inking 3G roaming pacts with those in other circles to
provide users a seamless experience. At the same time, there are two glaring
irritants that are unique to the aviation players. One is the subsidy provided
by the Central government to Air India to keep its fares low. This provides a
benchmark for passengers to compare private airlines. The second, and crucial,
cause of grief is ATF. One way to tide over the problem would be to have a
variable component in the air fare, linked to the fluctuation in the previous
day’s crude price. After 9/11, may top-of-the-line airlines including Swiss Air
and US carriers Delta and United Airlines went bankrupt, sending out a clear
message that the era of discount flying is here. This means airlines like
telecom services have become commodities rather than brands.
Mohan Sule
