Will no-frills airlines survive?

Once again there is an increased interest among new airlines to fly schedule services in the Indian skies. This time, however, the focus is on no-frills airlines, so as to keep costs low.

Deccan Air has already started such services on number of routes. At least 10 other no-frills airlines are expected to start operations soon.

The equity base requirement to start no-frills airlines being just Rs 30 crore, a majority of the new airlines are by first-generation entrepreneurs.

Will these airlines survive? And will their entry benefit the industry? It may be recalled that a similar influx of airlines was witnessed after the removal of the entry restriction in 1991, when some dozen airlines entered the industry. Of them, only two airlines -- Jet Airways and Sahara Airlines  -- survive till date.

Although these airlines have survived, not all is rosy in the industry. Between 1989 and 2002, Indian Airlines suffered losses for as many as 11 years, which accumulated to Rs 17.32 billion against a meagre profit Rs 1.13 billion.

Jet and Sahara also suffered losses of Rs 244.45 core and Rs 37.75 crore in 2002-03. These two private airlines were in the red even during 2001-02.

Despite all the three airlines running into losses, they are not hesitating to cut the apex fares. With the entry of no-frills carrier on trunk routes, the price war is likely to intensify, and the survival of an airline would depend upon its ability to prolong the losses. So airlines with not-so-deep pockets would be among the first to crash.

The entry of new airlines could be converted into an opportunity, if an attempt is made to increase the demand for air services by reducing the regular fare for which there is a wide scope.

International Civil Aviation Organisation data shows that domestic airlines in India, on an average, incurred a 71 per cent higher unit cost (per unit of available tonne km) than some selected airlines of the world during 2000-01.

Even the unit cost of Pakistan International Airlines and Sri Lankan Airlines is more than half of that of the airlines in India!

No-frills carriers, by doing away with ticket-booking and cutting on passenger services, would be able to reduce the average fare by about 20 per cent. To lower the unit cost further, the government's role is decisive.

First, the government will have to ensure the availability of air turbine fuel at international rates. There is a gaping difference in ATF prices in the domestic and international market. For instance, in February 2003, the average ATF price for domestic airlines was almost double (Rs 22,380 per kilo-litre) that prevailing in Singapore (Rs 11,400 per kilo-litre). As a result, domestic airlines incur a 14 to 15 per cent higher unit cost.

There are two main reasons for higher ATF price in India:

• On an average, there is a 25 per cent sales tax by states on ATF, in addition to an 8 per cent central excise (16 per cent, till recently).

If the sales tax and duty were just 8 per cent, instead of 40 per cent, then the unit cost of JA and IA would have been lower by around 8 per cent in 2000-01. However, this would have still left the fuel cost per unit of output 40 per cent higher than the international average.

• The state-owned oil companies supplying the fuel to airlines are overcharging. Hence, the airlines should be allowed to buy the ATF from the choice of their source.

Second, various airport charges like the landing charges, terminal navigation landing charges (TNLC), parking charges and so on at domestic airports are roughly 78 per cent higher than the international average.

At the international level of airport charges, JA would have saved around 8 per cent unit cost in 2000-01. There is a need to reduce the landing charges and abolish TNLC. Developing secondary airports in major cities could also be cost-effective.

Third, the policy requiring domestic scheduled airlines to serve a certain portion of their trunk route services on low-density routes (category II and III) deserves serious consideration.

It would be best if the airlines serving route I are not required (forced) to serve a proportion of their services on other routes. Instead, the government could impose some cess on revenue earned on trunk routes and use the money to cross-subsidise the other routes.

Attempts should also be made to make the category II and III routes profitable by offering various incentives to the no-frills airlines -- like the waiver of sales tax on ATF and airport charges, duty- and hassle-free import of small aircraft, limiting the competition on such routes and so on.

In short, the government needs to play a much larger role than just allowing the unrestricted entry of airlines and increasing the foreign direct investment limit. Merely reducing the entry barrier for airlines to compete for the limited traffic will only destabilise the domestic civil aviation industry.

The writer is a consultant at the Indian Council for Research on International Economic Relations, New Delhi.

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