Aviation Industry and global oil crisis

The aviation industry, like others businesses, has been impacted by the global oil crisis and strong inflationary trends. What is ironic, however are the obituaries lamenting the end of the low cost carrier era in Indian aviation. If anything, it is low cost model in any business, not the high end or luxury model which is advantageously positioned and poised to withstand inflationary pressures.

The situation in India has been challenging for airlines in the last few years on account of the most expensive aviation turbine fuel (ATF) rates in the world, which makes up 40-45 percent of ticket costs as compared to 35 per cent which is global standard. This is coupled with poor and expensive infrastructure which leads to high fuel wastage and diminished asset utilization. The present day scenario in the aviation industry is undoubtedly tough for everyone but it’s particularly tougher for full service airlines despite them adopting multiple cost-cutting measures.

In other businesses too, whether it is retail automobiles the telecom industry, it is the low cost product service mix that is rising to the challenge winning customers while the premium brands bear the brunt. The low cost business model is not just about cutting costs by saving some fuel or a few overhead expenses. Fundamentally, the low cost model is all about innovations, efficiency very high asset utilization and stimulating market demand by targeting an inclusive consumer base. The basic philosophy is not very different from that of a self service Udupi restaurant in stark contrast to a full service air conditioned restaurant. While a plush five star hotel can charge much more per customer than a simple Udupi joint it will lose out on turn around and footfalls.

When a business wants to cater to the bottom of the consumer pyramid, the business model would perforce render itself to a self service niche. The low cost model eliminates the need for frills and middleman ensuring not just increased consumer access, higher aircraft utilization, and quick turnaround based on innovations and intensive technology engagement but also a lower cost base of the business resulting in lower fares for the consumer. In the long run while low cost airlines can strengthen their cost efficiency in various ways, full service airlines can’t because their business model does not allow that.

While airlines are grappling with escalating fuel costs and losses they have unfortunately put themselves in a vicious cycle by resorting to fare hikes and cutting capacity which has further brought down occupancy. The move has not helped airlines combat fuel process or contain the red ink on their balance sheets the real impact, however, is visible in the entry level fares of low cost airlines which are now barely distinguishable from that of full service airlines

The parent in the situation is that both low cost carriers and full service airlines are trying to achieve revenues through higher fares and lower loads. Reducing aircraft capacity is the easier choice for airlines as compared to stimulating the market. The flip side of this option is increased costs and reduced passenger carriage. The implication is serious and far reaching for the industry. If the art base does not expand, airlines will ultimately have to resort to devouring each others consumer base, which will impede the growth and sustainability of the entire industry.

While it is true that the government will also have to play an active role in bailing the aviation industry out of the present crisis airlines can’t afford to sit back and wait to be delivered. Inflationary pressures brought on by a global oil crisis or recessions have been recurring since the 1970s. Efficient companies worldwide have consistently overcome the challenges by increasing their productivity being relentlessly innovative and staying ahead of the technology curve. Though for next one or two years might be turbulent for Indian aviation, airlines should not take to easier options of hiking fares and cutting operations as that will prove counter productive. Charging higher fares is double edged sword that will not only make people shy away from air travel, bringing down airlines traffic further and leading to higher losses but will also shrink the consumer base in the long run.

Under the circumstances airlines have no choice but to ride out the storm. They will need to work on their culture and core competencies to proactively costs and drive up efficiency. The way forward for the aviation industry should be to focus on increased occupancy which will help cushion the impact of rising costs by driving up volumes to offset the cost margin that needs to be realized per seat.

ATF prices in India are 60 percent higher than global prices, Indian airports are inefficient, leading to wastage but are expensive and monopolistic and there are as yet no low cost terminals or alternate low cost airports anywhere in the country. Is time policymakers acknowledged the intangible and collateral benefits of a robust civil aviation industry in promoting equitable growth opportunities civil aviation is the bulwark of a progressive economy and should be recognized of its immeasurable contribution in helping build a physically and emotionally integrated society.