The Hindu Business Line : Consolidation takes wings

The stake acquisition by the United Breweries group in the low-cost carrier Deccan Aviation is further confirmation that the Indian aviation industry is taxiing for consolidation. The development comes in the wake of Jet-Sahara coming together under a common ownership structure, and the Government announcing that it is on course to merging the two public sector airlines along with their low-cost carrier affiliates. The few standalone entities too would, sooner or later, be confronted with the question of viability of their business model.

Internationally, the performance of aviation industry has been characterised by boom and bust cycles with a period of robust growth in operations and profits giving way to losses and an inevitable search towards consolidation. This is in the very nature of the cost structure of airline operations where fixed costs such as aircraft lease rentals, depreciation and staff costs could be as high as 50 per cent of sales. Even a marginal decline in traffic volume or a nominal addition to capacity arising from the entry of new players can undermine the viability of incumbent operators. The current wave of consolidation sweeping the Indian skies may appear to be in accord with the global trend, but is actually different in one respect. The consolidation is happening even before the industry has achieved a state of stable and orderly growth. The sector was opened to private competition, just a few years back. The period since then has witnessed one of the most exceptional record of buoyancy in national prosperity. In the event, the new entrants can perhaps be pardoned for viewing the future with an optimism that in hindsight may not only be regarded as excessive but did not prepare them to withstand the pressures of the market place.

The Government may be tempted to come up with stiffer entry barriers in the mistaken belief that its present policy that has seen a few obstacles fall by the wayside is detrimental to the growth of civil aviation. That would be a folly. Any inference as to the condition of the industry drawn from the current anaemic state of airlines may be flawed. The air passenger traffic has just recorded 30 per cent-plus growth. This comes on top of another year of robust performance placing India among the fastest growing aviation markets. As disposable incomes rise and new classes of air travellers emerge, the future of the aviation industry can only be brighter. All that the Government needs to do is to focus on strengthening the airport infrastructure where it still has a decisive role to play. It can leave the rest to the market forces.