Sucheta Dalal :Towards REAL Low Cost Aviation
Sucheta Dalal

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Towards REAL Low Cost Aviation  

October 24, 2008

By Philip S. Thomas

When an otherwise extremely methodical airline like Jet Airways makes a total hash of its human resource management image, it is clear that Indian aviation as a whole is flying out of control. But it did serve to attract the attention of a hidebound government. Up to this point, the government has been almost completely immune, not only to the industry's fervent entreaties (since 2007) but also those of the Minister Of State (holding independent charge) of Civil Aviation.  

The petroleum ministry has now chimed in with sops of extended credit from the oil companies for aviation turbine fuel (ATF), a heavy duty kerosene. The irony is that oil companies are already sitting on a mountain of credit to the tune of Rs 95,000 crore, in the form of oil bonds, for the sale of subsidised petro goods (i.e. ordinary kerosene, diesel, cooking gas and petrol while ATF remains the sole premium priced exception on airline account).
 
So far, there is only the assurance that ATF prices will be reviewed fortnightly in relation to international benchmarks instead of monthly. Airlines must be hoping that ATF prices are still on a downward trend and do not begin an upward move after falling a whopping 50% from unprecedented heights! So far,airlines have only got some symptomatic relief, more as an expedient nod to the global liquidity crunch (provided suitable bank guarantees are produced) and not a cure for the disease (viz the acute need to reduce the industry's intractable cost structure which is the focus of this article).
 
Monkey business?
 
Developments in the aviation industry leave one with the unmistakeable impression that an otherwise 'complex' business is, in its Indian avatar, sheer 'monkey business'. For starters, how could ATF prices for Indian airlines be pegged at 70% above international levels? It appears that though ATF is produced in India, its base price is  benchmarked to international levels and may, therefore, be on the high side to begin with. Oddly enough, a customs duty of 5% is then levied and in addition there is excise duty. It remains to be seen if the tax-happy and tax loss averse Finance Ministry will contribute its mite to reducing these duties. 
 
Meanwhile the petroleum minister is drawing attention to the weakening of the rupee in currency exchanges which presumably raises international prices. It is also not known what the purpose is of the civil aviation ministry's scheme (since downplayed) of allowing airlines to directly import ATF for their own use. It may amount to monkeying unnecessarily with the business. Instead of trying to conform gradually to global standards, India perversely tries to be different, indiscriminately stalling or even reversing the required progress.
 
To top things off, there is sales tax which varies from state to state and is of the order of about 30%. The airlines claim that the industry would break even if these sales taxes were reduced to a standard 4% (applicable to 'declared goods'). However, when Andhra Pradesh reduced its sales tax on ATF to 4% earlier this year it reportedly had to forego only Rs 60 crores of revenues. It is hard to believe that the airlines are right about breaking even on a 4% all-India sales tax level. We need to see hard numbers, that too across the board, for that matter. 
 
All these levies are ad valorem rather than specific rates on  quantities consumed. Hence they have a cascading effect, boosting the exchequer automatically, besides being about 70% above international benchmarks in the end as stated earlier. The IATA chief has recently dubbed this a system of 'crazy taxes'. Parenthetically, the exorbitant differential between ATF used by the airlines and diesel used by trains and buses puts a big squeeze on low cost carriers. The heavy discounting of full service carriers syphons passengers at one end while the low fares of trains and buses drains those at the other end. 
 
This brings us to the 'quantity' aspect of ATF consumption. About 50% of air space is militarily restricted so that airlines have to fly roundabout routes wasting fuel and increasing their costs. In the U.S. only 5-15% of airspace is restricted for military purposes. It is in China that the restriction is as high as 80% and it is targetting reductions in a phased way. It is estimated by the ministry of civil aviation that straightening out routes could save at least 15% of operating cost or about Rs 3,200 crores. Compare this to the estimated losses of the airlines of Rs 8-10 thousand crores in the current year. But the ministry is relying on satellite navigation technology which is many years away instead of pushing for hard institutional choices in the near future.
 
Furthermore, how can landing slots be restricted during peak daylight hours in civil enclaves in prime industrial and tourism destinations (like Pune and Goa respectively) for military flight training purposes/ This  results in congestion (i.e. more fuel wastage) from holding patterns, queuing for take-off etc and reduced aircraft utilisation which add to costs too? There are over 25 civil enclaves and all are subject, more or less, to military flight training restrictions in favour of the squadrons based in each location. This, first, results in congestion at the busier civil enclaves, where there is often a mismatch between adequate runway capacity and stringency in parallel taxiways, parking bays and passenger amenities. Next it cascades into congestion at the hub airports of our metros too, along with the rest of the network because of the unevenness that is built into it.   
 
And how could functional and busy airports (usually civil enclaves) be closed to make way for greenfield airports without providing for convenient ground access? Old Hyderabad Begumpet's runway recently saw the successful operation of the A380 superjumbo in connection with the country's first civil air show. Its ATC has also been lauded for handling record numbers of flight movements in this connection.  But it has been unceremoniously closed to commercial traffic since March when the new airport opened.  
 
How could such greenfield airports like Hyderabad and Bangalore be so costly as to require whopping user development fees (UDF) from passengers? Making users pay instead of taxing the exchequer is good in PPP (public private partnership) project theory. But it makes no sense to take the easy way out by merely cannibalising the traffic from existing facilities (the old civil enclaves) to boost the numbers at the greenfield airports. The idea should be to tap new traffic segments and grow the facility (the provision for sufficient expansion in future being an essential pre-requisite), modularly and in phases. The connecting roads can be built in sync with such growth rather than wastefully very late in the day or, even worse, on an ex-post basis. 
 
Besides, taxpayers may be mostly the ones who use airport and connecting transport infrastructure anyway. So UDF would amount to a kind of duplication of the financial burden. But private developers may not really be taking the long view in both the investment and financial return aspects. The former requires a public service and capital efficiency perspective. The latter emphasises small but continuous yields rather than the 'quick buck'.   
 
How can flights be cut (without replacement by a competing airline) or consolidated/rescheduled by the slot holder, rampantly without demur from the DGCA? Connectivity and airport revenues suffer grievously from such airline arbitrariness and regulatory negligence. 
 
How can Indian airlines (like Jet and Kingfisher) fly headlong into the international arena (where fuel prices are supposed to be cheaper but competition stiffer) and land in a total soup domestically? To add insult to injury they are entering into a pseudo strategic alliance to rationalise routes and jack up fares, with the blessings of the ministry of civil aviation, and no competition commission is there to restrain them in a reasonable time frame i.e. before irreparable damage is done to financially stretched competitors. There is no incentive for the 'controlled growth' which is crucial for a capital intensive industry like aviation. Laissez faire on the part of the authorities due to ignorance or negligence is not a virtue.
 
Serious introspection 

Some serious introspection about the industry is required and corrective measures must be taken by industry AND government in the interests of true low cost aviation. The media (especially the business and financial ones) must also highlight ALL problems of the industry instead of turning a blind eye to some crucial ones.

Let us expand on some other ideas in relation to low cost aviation. It depends heavily on a pricing regime in which advance purchase tickets are always at lower cost than walk-in tickets. It makes no sense to undercut advance purchase fares with lower fares on the day of the flight. This is predatory. Airlines resort to it because seats are a perishable commodity and any revenue contribution is better than flying with an empty seat.  Perhaps it happens because advance fares are not low enough (or cannot be because of high costs) and can be fairly easily undercut close to flight days. 
 
In the classic low cost model, aircraft turnaround is 15-20 minutes (due to no frills, including services such as in-flight food and beverages, checked baggage and baggage transfers). It is done with practised precision and not undertaken lackadaisically. This allows flight frequencies and passenger load factors to be high (due to low fares) and helps to generate revenues from capital intensive assets like aircraft. Traffic is stimulated when fares are kept low but presumably above costs. The regulator must keep a sharp eye out for predatory pricing from any quarter (as well as for 'bracketing' low cost carriers, schedule-wise, for this purpose) and act swiftly to curb it with suitable deterrents and penalties. 
 
For India to emerge as a hub for low cost aviation, air space restrictions have to be reduced to 15-20% (vs 5-15% in the U.S.) and the slot restrictions for military flight training have to be lifted.  Thought has to begin to be given to remote and comprehensive (multi-service) facilities specifically for flight training, eliminating any redundancies in bases in the process. However, operational sorties for recces, transport and even occasional combat exercises can, perhaps, continue to be carried out on a flexi-time basis.
 
Low cost aviation will require the emergence of multi-airport systems in which one (usually close in) airport is positioned as 'primary' and the other (about 30 km away) is 'secondary', at least initially, though transitions can and should occur over 5-10 years as ground transport connectivity improves in a systematic and proper way. Some compartmentalisation of aircraft and airlines may be necessary for this to be effective. Such multi-airport systems must operate in tandem for the long haul to benefit their city and not as cut throat competitors except in relation to other cities. 
 
Greenfield airports in such multi-airport systems must be built over a long time horizon in phases and modularly, in sync with air traffic trends and not on a 'Big Bang' basis for the first few years and then with monopolistic toll systems locking the public in for decades. On the other hand, the 'go/no-go' tendency of Bangalore International Airport's facility design must be avoided as far as possible. Greenfield airport land must be reserved for long time periods, protected against encroachment in the growth phase and the area effectively zoned right from Day One against obstructions and high rises. 
 
There should be low cost terminals in airports where food services are provided at reasonable cost to passengers of low cost carriers, but conveyor belts and aerobridges are dispensed with at least initially. However, these are preliminary ideas. They could be applied in one emerging multi-airport system (e.g. Goa) to provide a demonstration effect to begin with and rolled out to others subsequently.
 
The bottom line is that if low cost aviation is to take root in India on a sustainable basis a serious study must be undertaken of the following: 1) ATF taxation and pricing at the state and central levels 2) the realignment, and closure of air bases (as is periodically done in the U.S.) and relocation of flight training on a multi-service basis to remote sites to relieve civil enclaves from slot restrictions and  3) turning  the PPP model upside down so as to encourage the emergence of multi-airport systems to serve low cost airlines. 

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-- Sucheta Dalal



 



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