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Tuesday, Jun 10, 2003

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Indian Airlines: To get it off ground

Danish A. Hashim

Finding it difficult to take off... Indian Airlines is caught in an increasingly competitive milieu with limited scope for growth in the domestic civil aviation market.

THE state-owned Indian Airlines is on the verge of completing 50 years of its journey. However, it is finding it difficult to retain its market share in a now competitive (though restricted) atmosphere. In the `open sky policy' era, since 1991, and consequent competition from two private airlines, Jet Airway and Sahara, its market share has been slowly but surely dwindling, bringing it down to the second slot in a decade.

Indian Airlines performance began deteriorating from 1989-90, even before competition took off. Between 1989-90 and 2001-02, Indian Airlines incurred losses for as many as 10 financial years. The cumulative net losses amount to Rs 1,455 crore against a cumulative profit of just Rs 113 crore for this period. In this situation, many analysts feel that since Indian Airlines has already cost the nation dearly for its survival, it is time the government handed over its management to the private sector by reducing its shareholding to below 50 per cent.

However, the Government is not yet convinced and has taken Indian Airlines off the list of companies going for disinvestments in the near future. It now plans to make Indian Airlines financially sound before offering it for sale, so as to fetch a better price. The Government apparently thinks that inducting 43 costly Airbuses, A-319s and A-321s, can do this. But reviving Indian Airlines will need much more than this, as a number of other related factors deserve careful consideration.

First, Indian Airlines needs to bring its expenses down by rationalising the size, quality and mix of its fleet. With 52 aircraft, it has been able to manage a market share of less than 40 per cent, whereas Jet Airways with only 40 aircraft could capture a 49 per cent share in 2002. This was despite Indian Airlines having more variety and costlier aircraft than Jet Airways. The IA fleet comprises 30 A-320s (inducted since 1989-90), 11 A-300s, and 11 B-737-200s, whereas Jet Airways has 32 B-737s and 8 ATR-72s. In fact, between 1989-90 and 2000-01, Indian Airlines' output, measured in revenue tonne km, declined at the average annual rate of 0.2 per cent.

In 1989-2000, when Indian Airlines faced a demand recession, its interest expense and depreciation charge on account of the induction of A-320 aircraft were rising. Consequently, for a unit of output (defined in available tonne km), the average interest payment stood at Rs 1.8 against a meagre operating profit of Rs 0.75. The average depreciation jumped to Rs 2.2, which had earlier never crossed Rs 0.47. Surely, a less expensive fleet of aircraft, instead of A-320s, would have been the better option.

The lessons, however, from this apparently grave mistake, seem to have been ignored by Indian Airlines, as it now plans to induct 43 Airbuses, costing Rs 10,089 crore.

If such a large investment is made, then Indian Airlines will be required to approximately double its revenue output immediately. At the risk of sounding pessimistic, this is a tall order for an airline with a non-too-bright record, caught in an increasingly competitive milieu and with limited scope for growth in domestic civil aviation market.

It will also be required to make a healthy operating profit to allow for the payment of heavy interest. This is again doubtful, unless other factors contributing to higher operating expenses are corrected adequately to offset the effect of higher depreciation. In this situation, when even operating profit is difficult to come by, going for a variety in the fleet, of relatively cheaper aircraft, and increasing the size of fleet gradually would have been the better approach. Leasing a few new aircraft would also have been a good idea.

Second, the huge staff strength of Indian Airlines requires serious attention. The employee-aircraft ratio of the airline is about 361:1, against the industry average of 200-250:1. For Jet Airways it is 173:1 and for American Airlines 128:1.

Also, between 1989-90 and 2000-01, the wages per unit of available tonne km increased alarmingly from Rs 1.34 to Rs 8.7, raising the share of wages in operating expenses from 15 per cent to 26 per cent. Obviously, there is a large scope to improve on this account.

Third, Indian Airlines is plagued by the problem of higher expenses due to maintenance and overhauling, the direct result of an aged fleet. For 2000-01, it spent 26.9 cents per unit of available revenue tonne km, whereas Jet Airways, SIA and Lufthansa spent 7.8 cents, 2.4 cents and 5.1 cents respectively. This indicates the crying need for employing newer aircraft, which will help in not just cutting down the operating expenses, but also in building a much needed positive image of the airline on safety ground.

Yet another serious problem that Indian Airlines faces is the relatively higher expenditure on fuel and oil. In 2000-01 it spent under this head 17.4 cents per unit of available revenue tonne km while for SIA, American and Lufthansa airlines it was only 5.6 cents, 5.8 cents, and 6.4 cents respectively.

However, Indian Airlines has little control on this, as this high expenditure is the result of high sales tax, duties, etc., on Aviation Turbine Fuel (ATF). Some States have rationalised the sales tax on ATF (for instance, Andhra Pradesh at 4 per cent), but others (like Kerala at 39.10 per cent) are yet to take such initiative.

For 20001-01, Indian Airlines contributed to the State exchequer Rs 158.76 crore as sales tax and to the Central exchequer Rs 140.98 crore by way of Customs, excise duties, etc.

A lower sales tax and aviation duty will allow Indian Airlines make profit for its own expansion, while enlarging the market through cut in fares. Rationalisation of sales tax is necessary not only to help Indian Airlines survive, but also to keep the domestic civil aviation industry healthy.

Fifth, Indian Airlines also suffers by serving certain low-density routes (private airlines are also required to share this burden) such as to the North-East, Jammu and Kashmir, and Andaman Nicobar Islands.

These routes caused an average loss of Rs 54.4 crore per year to the Indian Airlines during 1989-94. Poor capacity utilisation on such routes is one of the main problems, which can, however, be handled by deploying smaller aircraft.

Still if Indian Airlines incurs losses on such routes and is required to operate by the government in pursuit of any public purpose, it needs to be fully compensated for the losses incurred/profit forgone, as suggested by the Kelkar Committee (1996).

(The author is Sir Ratan Tata Postdoctoral Fellow, Institute of Economic Growth, Delhi University Campus, Delhi.)

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