arun eco term paper

8/14/2019 Arun Eco Term Paper

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TERM PAPER

Of

MANEGERIAL

ECONOMICS

TOPIC:- WHY IT IS THAT LOW COST AIRLINES THATWERE MUSHROOMING IN INDIA FEW YEARS BACK ARE NOW

FACING PRESSURES OF INCREASING COST. FIND OUT THE

REASON FOR THIS AND ALSO SUGGEST WHAT STEPS COULD

BE DONE BY THESE COMPANIES AND ALSO THE

GOVERNMENT TO SOLVE THIS CRISIS.

SUBMITTED TO- SUBMITTED BY-

Mr. VARUN NAYYAR ARUN CHAUDHARY

SEC-315

ROLL NO. B44


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ACKNOWLEDGMENTS

The most precious moments are those when we get an opportunity toremember and thank everyone who has in some way or the other

motivated and facilitated us to achieve our goals.

First of all I thank to GOD ALMIGHTY for giving me power to pen down the

term paper in its present shape. I thank the entire teaching staff

especially Mr. VARUN NAYYARfor sharing his valuable knowledge with

us & for providing his able guidance and support. I also thank to my

classmate who every time helped me out and encouraged me for

carrying out the task.

I fall short of words to thank my family, who stood beside me while

completion of my task.


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Contents:

1) LOW COST CARRIER

HISTORY

IN INDIA

2) BENEFITS OF LOW COST AIRLINES

3) REASONS FOR INCREASED COST

4) IT,S IMPACT

5) MEASURES TO BE ADOPTED

BY GOVERNMENT

OTHER MEASURES

6) BIBLIOGRAPHY


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What is a Low-cost carrier

A low-cost carrier or low-cost airline (also known as a no-frills ordiscount carrier or airline) is an airline that offers generally low fares inexchange for eliminating many traditional passenger services. The conceptoriginated in the United States before spreading to Europe in the early 1990s

and subsequently to much of the rest of the world. The term originatedwithin the airline industry referring to airlines with a lower operating coststructure than their competitors. While the term is often applied to anycarrier with low ticket prices and limited services, regardless of theiroperating models, low-cost carriers should not be confused with regionalairlines that operate short flights without service, or with full-service airlinesoffering some reduced fares.

Business model

Typical low-cost carrier business model practices include:

a single passenger class a single type ofaeroplane (commonly the Airbus A319 or Boeing 737),

reducing training and servicing costs
http://en.wikipedia.org/wiki/No_frillshttp://en.wikipedia.org/wiki/Discounts_and_allowanceshttp://en.wikipedia.org/wiki/Airlinehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Europehttp://en.wikipedia.org/wiki/Business_modelhttp://en.wikipedia.org/wiki/Fixed-wing_aircrafthttp://en.wikipedia.org/wiki/Airbus_A319http://en.wikipedia.org/wiki/Boeing_737http://en.wikipedia.org/wiki/File:Ryanair_Boeing_737-800_At_Manchester_International_Airport.jpghttp://en.wikipedia.org/wiki/Discounts_and_allowanceshttp://en.wikipedia.org/wiki/Airlinehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Europehttp://en.wikipedia.org/wiki/Business_modelhttp://en.wikipedia.org/wiki/Fixed-wing_aircrafthttp://en.wikipedia.org/wiki/Airbus_A319http://en.wikipedia.org/wiki/Boeing_737http://en.wikipedia.org/wiki/No_frills


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a minimum set of optional equipment on the aeroplane, oftenexcluding conveniences such as ACARS, further reducing costs ofacquisition and maintenance

a simple fare scheme, such as charging one-way tickets half that ofround-trips (typically fares increase as the plane fills up, which

rewards early reservations) unreserved seating (encouraging passengers to board early and

quickly)

flying to cheaper, less congested secondary airports[1] and flying earlyin the morning or late in the evening to avoid air traffic delays andtake advantage of lower landing fees

fast turnaround times (allowing maximum use of aircraft) simplified routes, emphasizing point-to-point transit instead of

transfers at hubs (again enhancing aircraft use and eliminatingdisruption due to delayed passengers or luggage missing connectingflights)

encourage the use of direct flights. Luggage is not automaticallytransferred from one flight to another, even if both flights are with thesame company.

generation ofancillary revenue from a variety of activities, such as a lacarte features and commission-based products

emphasis on direct sales of tickets, especially over the Internet(avoiding fees and commissions paid to travel agents and computerreservations systems)

employees working in multiple roles, for instance flight attendants alsocleaning the aircraft or working as gate agents (limiting personnel

costs) a disinclination to handle Special Service passengers, for instance by

placing a higher age limit on unaccompanied minors than full servicecarriers

Aggressive fuel hedging programs

Not every low-cost carrier implements all of the above points. For example,some try to differentiate themselves with allocated seating, while othersoperate more than one aircraft type, still others will have relatively highoperating costs but lower fares.

The price policy of the low cost carriers is usually very dynamic, withdiscounts and tickets in promotion. Even if the advertised price may be verylow, sometimes it does not include charges & taxes.
http://en.wikipedia.org/wiki/ACARShttp://en.wikipedia.org/wiki/Airporthttp://en.wikipedia.org/wiki/Low-cost_carrier#cite_note-0http://en.wikipedia.org/wiki/Low-cost_carrier#cite_note-0http://en.wikipedia.org/wiki/Ancillary_revenuehttp://en.wikipedia.org/wiki/Travel_agenthttp://en.wikipedia.org/wiki/Computer_reservations_systemhttp://en.wikipedia.org/wiki/Computer_reservations_systemhttp://www.uk-air.net/UMsfaq.htmhttp://en.wikipedia.org/wiki/Fuel_hedginghttp://en.wikipedia.org/w/index.php?title=Allocated_seating&action=edit&redlink=1http://en.wikipedia.org/wiki/ACARShttp://en.wikipedia.org/wiki/Airporthttp://en.wikipedia.org/wiki/Low-cost_carrier#cite_note-0http://en.wikipedia.org/wiki/Ancillary_revenuehttp://en.wikipedia.org/wiki/Travel_agenthttp://en.wikipedia.org/wiki/Computer_reservations_systemhttp://en.wikipedia.org/wiki/Computer_reservations_systemhttp://www.uk-air.net/UMsfaq.htmhttp://en.wikipedia.org/wiki/Fuel_hedginghttp://en.wikipedia.org/w/index.php?title=Allocated_seating&action=edit&redlink=1


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History

Boeing 737-700 of UK low cost carrier easyJet

The first successful low-cost carrier was Pacific Southwest Airlines in theUnited States, which pioneered the concept in 1949. Often, this credit hasbeen incorrectly given to Southwest Airlines which began service in 1971and has been profitable every year since 1973[3]. With the advent of aviationderegulation the model spread to Europe as well, the most notable successesbeing Ireland's Ryanair, which began low-fares operations in 1990, and

easyJet, formed in 1995. Low cost carriers developed in Asia and Oceaniafrom 2000 led by operators such as Malaysia's AirAsia, India's Air Deccanand Australia's Virgin Blue. The low-cost carrier model is applicableworldwide, although deregulated markets are most suited for its rapidspread. In 2006, new LCCs were announced in Saudi Arabia and Mexico.

For holiday destinations, low cost airlines also compete with seat-onlycharter sales. However, the inflexibility of charters (particularly as regardslength of stay) makes them unpopular with many travelers.

This has led to the establishment of low-cost routes by existing and new

operators such as Hungary-based Wizz Air, which took its first flight on May19, 2004 and Slovakia-based SkyEurope, which took its first flight onFebruary 13, 2002. From 2004 to 2007 routes have been established intoAustria, Bulgaria, Croatia, Slovenia, Slovakia, Poland, Romania, Hungary,Czech Republic, Turkey and Israel. By the end of 2007, there were over 45low-cost carriers operating almost 3,500 routes around Europe.
http://en.wikipedia.org/wiki/Boeing_737-700http://en.wikipedia.org/wiki/EasyJethttp://en.wikipedia.org/wiki/Pacific_Southwest_Airlineshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/1949http://en.wikipedia.org/wiki/Southwest_Airlineshttp://en.wikipedia.org/wiki/Low-cost_carrier#cite_note-2http://en.wikipedia.org/wiki/Deregulationhttp://en.wikipedia.org/wiki/Europehttp://en.wikipedia.org/wiki/Irelandhttp://en.wikipedia.org/wiki/Ryanairhttp://en.wikipedia.org/wiki/EasyJethttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/Oceaniahttp://en.wikipedia.org/wiki/Malaysiahttp://en.wikipedia.org/wiki/AirAsiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Air_Deccanhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/Virgin_Bluehttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Mexicohttp://en.wikipedia.org/wiki/Wizz_Airhttp://en.wikipedia.org/wiki/May_19http://en.wikipedia.org/wiki/May_19http://en.wikipedia.org/wiki/2004http://en.wikipedia.org/wiki/SkyEuropehttp://en.wikipedia.org/wiki/February_13http://en.wikipedia.org/wiki/2002http://en.wikipedia.org/wiki/Austriahttp://en.wikipedia.org/wiki/Bulgariahttp://en.wikipedia.org/wiki/Croatiahttp://en.wikipedia.org/wiki/Sloveniahttp://en.wikipedia.org/wiki/Slovakiahttp://en.wikipedia.org/wiki/Polandhttp://en.wikipedia.org/wiki/Romaniahttp://en.wikipedia.org/wiki/Hungaryhttp://en.wikipedia.org/wiki/Czech_Republichttp://en.wikipedia.org/wiki/Turkeyhttp://en.wikipedia.org/wiki/Israelhttp://en.wikipedia.org/wiki/File:Low.cost.carrier.easyjet.arp.jpghttp://en.wikipedia.org/wiki/Boeing_737-700http://en.wikipedia.org/wiki/EasyJethttp://en.wikipedia.org/wiki/Pacific_Southwest_Airlineshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/1949http://en.wikipedia.org/wiki/Southwest_Airlineshttp://en.wikipedia.org/wiki/Low-cost_carrier#cite_note-2http://en.wikipedia.org/wiki/Deregulationhttp://en.wikipedia.org/wiki/Europehttp://en.wikipedia.org/wiki/Irelandhttp://en.wikipedia.org/wiki/Ryanairhttp://en.wikipedia.org/wiki/EasyJethttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/Oceaniahttp://en.wikipedia.org/wiki/Malaysiahttp://en.wikipedia.org/wiki/AirAsiahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Air_Deccanhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/Virgin_Bluehttp://en.wikipedia.org/wiki/Saudi_Arabiahttp://en.wikipedia.org/wiki/Mexicohttp://en.wikipedia.org/wiki/Wizz_Airhttp://en.wikipedia.org/wiki/May_19http://en.wikipedia.org/wiki/May_19http://en.wikipedia.org/wiki/2004http://en.wikipedia.org/wiki/SkyEuropehttp://en.wikipedia.org/wiki/February_13http://en.wikipedia.org/wiki/2002http://en.wikipedia.org/wiki/Austriahttp://en.wikipedia.org/wiki/Bulgariahttp://en.wikipedia.org/wiki/Croatiahttp://en.wikipedia.org/wiki/Sloveniahttp://en.wikipedia.org/wiki/Slovakiahttp://en.wikipedia.org/wiki/Polandhttp://en.wikipedia.org/wiki/Romaniahttp://en.wikipedia.org/wiki/Hungaryhttp://en.wikipedia.org/wiki/Czech_Republichttp://en.wikipedia.org/wiki/Turkeyhttp://en.wikipedia.org/wiki/Israel


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In India

India's first low-cost airline, Air Deccan started service on August 25, 2003.The airline's fares for the Delhi-Bangalore route were 30% less than thoseoffered by its rivals such as Indian Airlines, Air Sahara and Jet Airways onthe same route. The success of Air Deccan has spurred the entry of morethan a dozen low-cost airlines in India. Air Deccan now faces stiff

competition from other low-cost Indian carriers such as Jetlite, SpiceJet,GoAir and Paramount Airways. IndiGo Airlines recently placed an order for100 Airbus A320s worth 6 billion USD during the Paris Air Show, the highestby any India domestic carrier. After a year of operation, in 2006, KingfisherAirlines changed its business model from low-cost to value airlines.
http://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Air_Deccanhttp://en.wikipedia.org/wiki/August_25http://en.wikipedia.org/wiki/2003http://en.wikipedia.org/wiki/Delhihttp://en.wikipedia.org/wiki/Bangalorehttp://en.wikipedia.org/wiki/Indian_Airlineshttp://en.wikipedia.org/wiki/Air_Saharahttp://en.wikipedia.org/wiki/Jet_Airwayshttp://en.wikipedia.org/wiki/Jetlitehttp://en.wikipedia.org/wiki/SpiceJethttp://en.wikipedia.org/wiki/GoAirhttp://en.wikipedia.org/wiki/Paramount_Airwayshttp://en.wikipedia.org/wiki/IndiGo_Airlineshttp://en.wikipedia.org/wiki/Airbus_A320http://en.wikipedia.org/wiki/USDhttp://en.wikipedia.org/wiki/Paris_Air_Showhttp://en.wikipedia.org/wiki/Kingfisher_Airlineshttp://en.wikipedia.org/wiki/Kingfisher_Airlineshttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Air_Deccanhttp://en.wikipedia.org/wiki/August_25http://en.wikipedia.org/wiki/2003http://en.wikipedia.org/wiki/Delhihttp://en.wikipedia.org/wiki/Bangalorehttp://en.wikipedia.org/wiki/Indian_Airlineshttp://en.wikipedia.org/wiki/Air_Saharahttp://en.wikipedia.org/wiki/Jet_Airwayshttp://en.wikipedia.org/wiki/Jetlitehttp://en.wikipedia.org/wiki/SpiceJethttp://en.wikipedia.org/wiki/GoAirhttp://en.wikipedia.org/wiki/Paramount_Airwayshttp://en.wikipedia.org/wiki/IndiGo_Airlineshttp://en.wikipedia.org/wiki/Airbus_A320http://en.wikipedia.org/wiki/USDhttp://en.wikipedia.org/wiki/Paris_Air_Showhttp://en.wikipedia.org/wiki/Kingfisher_Airlineshttp://en.wikipedia.org/wiki/Kingfisher_Airlines


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BENEFITS FROM LOW COST AIRLINES

As an increasing number of low-cost airlines target the middle-class travellerthe pie in the sky gets bigger. With budget carriers in stiff competition with

each other, it is the passenger who is the gainer.

ADITYA Choudhury, a sales representative with a Delhi firm, sat munching a burger andFrench fries and sipping from a can of cola. In the past, it would have taken him 35hours to reach his home town, Guwahati. Used to travelling by train, it was an arduousjourney which he would undertake only once in years. The past seemed so far away, hethought, as he drifted to sleep. An hour later, he was nudged awake by his wife to put onthe seat belt as the flight was about to land at the Guwahati airport. Aditya disembarked


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Low budget

The potential of low-cost flying in the aviation sector is reflected by the fact that in thelast six months the countrys private airline firms have placed orders for 250 aircraftThis is 43 per cent of the total global orders for Airbus and Boeing. The concept of low-budget flying initially originated in the West and was quickly picked up in the East Asiancountries. Richard Branson of Virgin Airlines was the front-runner in the UK, while Qantastook the major chunk of the Australian budget skies. In the post-WTC days of aeriaterror, seat occupancies in established carriers crashed, leaving them to operate onlosses. That was the time when the wallet-friendly carriers took off and still operatedwith profit margins. The non-frillers were characterised by few on-board serviceselimination of catering and assistance services and little inflight glitz. Basically, abarebone mode of aerial transport, from Point A to Point B.

Train to plane

Taking the lead in the Indian skies, where air travel traditionally has been expensive, AirDeccan unleashed cut-throat competition in the aviation scene ith fares mostlycompeting with train fares. In response, leading domestic airlines like Indian Airlines, JeAir and Sahara Airlines slashed rates and unveiled advanced purchase schemes (Apex) totake up the new challenge. Competition, as always, brought the best to the customerand one year down the line there are already two more players in the race, with a few

more lined up to grab a piece of the cake of the air.

According to Air Deccan, 40 per cent of its first-time passengers say low fares are whythey have chosen to fly. Even poorly connected small towns benefit from the new trendSpicejet Director Ajay Singh says that exploiting the train passenger is the key to thelow-budget flying. That was the reason that his airline was presently looking aconnecting the small towns to the metros.

Stealing a march

The low-budget airlines have actually been stealing a march over the regular airlines witha load factor of over 90 per cent, an achievement in the lean season. Analysts point outhat the fares can be expected to decline further. After the Apex fares last year, regulaairlines this year have again come out with their low-fare schemes to increase its loadfactor. Private operators believe that the sales/passenger potential in India is huge with apopulation of more than a billion people, a majority of them train travellers. In the fiscayear that ended in March 2005, some 16 million plane tickets were sold in India. Thisnumber accounts for just about five days of air traffic in the USA. As far as India is


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concerned, even these 16 million seats reflected a 27 per cent jump over the yeabefore. Aviation experts believe that the business would continue to rise at about 25 percent every year over the next few years.

Investment opportunities

Low-cost carriers keep costs down by going in for rationalisation and revenueoptimisation. The new business opportunity has also made investors sit up and takenote. Air Deccan obtained venture capital funding of $40 million in late 2004 and plansan initial public offer of stock to raise at least $250 million. Kingfisher will invest $40million and SpiceJet will spend $28 million to build their fleet and train personnel. AirAsiaof Malaysia, which claims to be the worlds most low-cost airline, pays its flighattendants to clean planes instead of employing special crews. This lowers costs and cutsthe time spent on boarding at terminals to 25 minutesabout half as much taken by

major airlines. Its pilots are trained to land at a later point on the runway and at a slowespeed to conserve fuel and reduce wear and tear of tyres. And, half of AirAsias ticketsare sold over the Internet, eliminating travel-agent fees.

AIRLINES FACING PROBLEM OF INCREASED COST

REASONS FOR INCREASED COST

INTRODUCTION

India's Airlines Find that Fast Growth Has Its Ups

and Downs

Jet Airways currently has 60 aircraft and isexpected to increase that number to 90 in

two years. Such rapidly growing airlines are

where manufacturers like Boeing and Airbus

are filling their orders these days, tapping

into a civil aviation boom in both India and

China.


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Although it is starting from a low base, India's civil aviation passenger

growth stands at 20% -- among the highest in the world -- saturating most

metro airports and a handful of fast-growing smaller cities. Many airlines are

bulking up on capacity as well: Ten Indian carriers recently placed orders for

about 400 aircraft worth $15 billion. But this good news is marred bylooming overcapacity along with the fact that, given new competitive

pressures, most airlines are losing money.

India's civil aviation market has been severely underserved for several

decades. Less than 0.01% of the population used air transportation and,

until last year, this country of over a billion people had only 150 large jets.

Meanwhile, India's strong economy in recent years has lifted people's

disposable incomes, while increasing urbanization. In addition, more diverse

business investments in non-metropolitan regions have brought new

demand for air services.

Airsickness at Higher Altitudes

Despite this growth, Indian civil aviation's numbers are still small in absolute

terms compared to larger international markets. China's total air passengertraffic was expected to be 160 million in 2006, and is forecast to grow to 187

million in 2007, according to a report on the China Dailywebsite. The total

fleet size of all commercial aircraft in India is now about 263 compared to

roughly 8,000 in the U.S., according to aviation industry databases. China's

aircraft fleet is expected to grow to about 1,000 in 2007 with the addition of

155 planes currently on order, China Dailyreports.

Many of the Indian airlines are facing severely eroded pricing power due to

increased competition and investments in additional capacity, and almost allthe airlines are currently incurring losses. "This is a typical prisoner's

dilemma: Airlines add capacity and have to fill the planes and lower the

fares to do so," says W. Bruce Allen, Wharton professor of business and

public policy, and director of the Wharton Transportation Program.
http://www.wharton.upenn.edu/faculty/allen.htmlhttp://www.wharton.upenn.edu/faculty/allen.html


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Even as the airlines are battling over their discounting strategies, the chiefs

of all the large carriers met with India's ministry of civil aviation in mid-

2006to try and find a way out of their depressed profit margins.

NO REGULATION

Allen cites the case of the U.S. aviation industry to show the downside of

government regulation. "In the U.S., some LCC's have been successful, e.g.,

Southwest, JetBlue, AirTran -- but many would-be LCCs have gone

bankrupt, such as National, Independence and Hooters," he says. "Legacy

carriers have cut costs significantly and appear to be more successful.

Capacity cuts and greatly increasing demand have even made them

profitable, although it probably isn't sustainable because of the prisoner's

dilemma." If the government were to intervene and restrict capacity

additions, he adds, that "would protect the less efficient carriers; it's the

reason we got rid of government intervention."

When Costs, Too, Start Flying

Apart from the pressures of price wars and fleet acquisition debt, the airlines

are also finding costs rising significantly for fuel, manpower and aircraft

leasing. Staff costs at Jet Airways grew 107% in the April-June quarter of

2006 over those in the corresponding period a year ago.
http://www.forbes.com/home/2008/06/02/aviation-airlines-fuel-biz-logistics-cx_db_0603aviation08_lander.html


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Almost all the major cost areas are up, but on the revenue side it is a

downward slide, unlike the U.S., Indian companies don't enjoy Chapter 11

protection from creditors as they reorganize themselves: If they don't pay

up, they go under. This will make market consolidation a reality instead of

prolonging things. The last round of consolidation in Indian civil aviation wasabout a decade ago, when several new airlines went bankrupt under the

weight of overcapacity.

The growth mood has traveled the entire aviation chain. Two of the country's

largest airports -- Mumbai and New Delhi -- were privatized earlier this year.

Two greenfield airports are being built at hubs in the southern part of the

country. Investments are pouring into almost all aspects of the industry,

including aircraft maintenance, pilot training and air cargo services.

Hike In Fuel Surcharge

Remedial measures are not taken to provide some interim relief, the impactof rising ATF prices hit airlines. Already, ATF is around 45% of the total

operating cost and a further rise in prices will make aviation sector unviable.It will be a big negative for the Indian economy.

The aviation ministry is expected to demand a central sales tax at 4% taxapplicable across all states, in place of its earlier demand of 12% sales tax.It also proposes relaxation in norms for allowing domestic airlines to fly onprofit international routes.

Low-cost airlines hit by recession

When the chill wind of recession blows and the fuel price escalates, theyprepare for take-off. Instead of sitting tight, they buy more aircraft, increaseservices and cut fares.

The rampant growth in air traffic is not sustainable and the business modelmust change. It's not only the incumbent flag-carriers that are threatenedbut the new low-cost carriers that thrive because of two market miracles -


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LOW COST AIRLINES GRAPPLE WITH SOARINGAIRFARE

Some advance planning, coupled with smart

calculations and cheap air tickets - you and

your family could cruise to any destination in

India even with a small budget. Cut to the

present, air travel, it seems, it has taken a

full circle.

The Great Indian Middle Class dream of

getting air-borne looks dashed and probably

good times may not come back ever.

So what went horribly wrong? Is it only soaring oil prices?

Or an innovation which just didnt work? Whatever. The dynamics of budget

air travel have changed for good, as more airlines find themselves stuck on

the tarmac. In fact, forget about booking profits, now they are just

struggling to stay in the business

Airways panicked

THE sacking of Jet Airways staff is a case of mismanagement and a blot onthe Indian aviation canvas. Only two years back civil aviation was a buoyantsector with 40 per cent growth and unprecedented opportunities.

The government decision, permitting 40 per cent equity and 100 per centinvestment in aviation without any prior approval led to the mushrooming ofnew airlines and hectic buying of aircraft.

India was one of the largest buyers in the market and tourism seemed toboom. Jet had been in dire financial straits till it got the rights to fly abroad.

Under bilateral agreements with different countries Indian aviationcompanies could fly to foreign destinations and those countries airlines werepermitted to fly into India.


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These slots had remained unutilised due to Air Indias limitations. As aDirector on the Board of Air India, I had in the past opposed this non-utilisation as a loss to the country.

With the government decision, fresh opportunities opened up. Jet started

growing ambitiously and Kingfisher followed. Thousands of young peoplepitched their dreams on this growing sector with opportunities to see theworld.

Air Indias market share went down and the government continued tosubsidise it purely for the personal benefit of politicians and bureaucrats,who are the major beneficiaries of its privileges.

Foreign players attackThere could also be the possibility of some airlines adopting unfair means togarner passengers. Here the role of the Directorate General of Civil Aviation(DGCA) and that of the Ministry of Civil Aviation would become crucial. Thefight in the low-budget sector is not expected to remain within the countrybut would soon extend to foreign skies. According to industry insiders, twoof the leading names in the low-cost airline business from Southeast Asia Singapore-based Valuair and Qantas subsidiary JetStar have alreadyfirmed up plans to enter the Indian skies.

MEASURES TO BE TAKEN FOR REDUCING

COST

BY GOVERNMENT

ATF PRICES

We are deeply concerned over rising ATF prices and the subsequent lossesbeing suffered by domestic airlines. the Prime Minister and the finance


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minister and seek some interim relief for the sector. We shall look at alloptions to keep the industry viable, airlines were suffering huge losses andcant pass the entire burden (of ATF price rise) on users as it negativelyaffected their number of passengers carried by them. Underlining the factthat ATF prices in India were priced at nearly 70% higher compared with

international benchmark, the basic price of ATF was very high against othercountries and it needed to be reduced, as a result, loss-making airlinecompanies might soon prune their operations and rationalise their servicesfor various sectors, which may affect connectivity for smaller cities and somenon-profit-making routes.

The airlines would fly less to suffer lesser losses. The very concept of makingaviation affordable for the masses and not the classes is becomingirrelevant. ATF price has increased 5-6 times since 2005, and airlines are notin a position to pass on the burden to customers, which may lead to a majordrop in passenger load and make operations of many airlines unviable,.

GOVERNMENT INTERVENTION

Civil aviation minister Praful Patel is planning to meet Prime minister

Manmohan Singh over the hike in aviation turbine fuel prices. The civil

aviation secretary will also approach the Cabinet secretary to convene a

review meeting with all concerned ministries to discuss ATF tax and other

issues.

If remedial measures are not taken to provide some interim relief, the

impact of rising ATF prices will hit airlines. Already, ATF is around 45% of

the total operating cost and a further rise in prices will make aviation sector

unviable. It will be a big negative for the Indian economy.

The aviation ministry is expected to demand a central sales tax at 4% tax

applicable across all states, in place of its earlier demand of 12% sales tax.

It also proposes relaxation in norms for allowing domestic airlines to fly on

profit international routes.

The airlines would fly less to suffer lesser losses. The very concept of making

aviation affordable for the masses and not the classes is becoming


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irrelevant.

FDI to cap in aviation

The government has to liberalised the Foreign Direct Investment Policy (FDI)by bringing in new areas like aircraft maintenance, commodity exchangesand credit information for overseas investment.

The amended FDI policy, which was deferred several times earlier andapproved by the Cabinet Committee on Economic Affairs (CCEA) today, put anumber of areas on automatic route, especially in the Civil Aviation Sector.

The amended policy allows 100 per cent FDI in maintenance, repair andoverhauling (MRO) facilities for aircraft as also aviation training units,Information and Broadcasting Minister Priya Ranjan Dasmunsi toldnewspersons after the CCEA meeting, chaired by Prime Minister ManmohanSingh here.

Low-cost airlines are now the new major

players

Flexible design in airports essential for courting them

Leading low-cost airlines with a preference for small, inexpensive airportsare now the largest airlines in INDIA, according to an MIT expert on airportdesign and operations, who said that airport planners in major metropolitanareas need to accept this paradigm shift and build flexibility into airportdesign.


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MIT Department of Civil and Environmental Engineering said that airportplanners have been slow to grasp the reality that the business model of theirlargest customers has changed dramatically. Low-cost airlines requireterminals about half the size of those of the legacy airlines, because theyuse space more intensivelyshared gate lounges, and none or few retail

shops and restaurants. The reduced commercial activity results in fewerairport employees going through security checks and helps cuts passengerturnaround time in half.

Airport planners are still building airports with fancy architecture and lots ofretail space, but the low-cost airlines often won't use them. And the low-costairlines are not necessarily small anymore; they are a growing sector thatrepresents the future. They want smaller, cheaper airports that increaseefficiency, in general, smaller airports have fewer ground and air trafficcontrol delays than large airports.

OTHER MEASURES WHICH COULD BEADOPTED

PAY MORE, FLY LESS


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Costlier aviation fuel has driven up more than just the fares for flying. Passengersare being made to shell out for services, such as refreshments, which were

hitherto free

THE smooth flight of the aviation industry in India seems to have hit a

turbulent patch and with that the customer-is-king attitude, too, seems tohave been grounded. With rising fuel and infrastructure costs, the era ofcheap airfares seems to be over, at least for the time being. On July 31,several airlines hiked domestic airfares for the fifth time this year to meetthe increasing cost of aviation turbine fuel (ATF). With the last increase theairfares have almost doubled during 2008. The cheapest Delhi-Mumbaiticket, which was earlier available for between Rs 2,800 and 3,000, nowcosts about Rs 5,000.

This has clipped the wings of the aviation industry, which had expandeddramatically in recent years with the entry of several new players and low-cost carriers. Until last year many of these airlines, especially the low-costcarriers, were going overboard to woo more and more passengers byoffering attractive bargains. So much so that the competitive rates made railand road passengers switch to flying.


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But for now, the problem is there. Andit is big enough to evoke the concernof Prime Minister Manmohan Singhand Civil Aviation Minister Praful Patel,who are trying to save Indias

sunshine industry from crash-landing.

Cutting corners

The odds are loaded against the low-cost airlines operating in the domesticsector. ATF prices have gone up fromRs 21,000 per kl in 2004 to about Rs70,000 kl now. ATF accounts for 40

per cent of the operating costs ofIndian carriers against 20 per cent forinternational carriers as in India ATF iscosts much more than in theinternational market.

Indian air carriers pay 60 per centmore for ATF as compared to theinternational benchmark countries.The 50 per cent increase in ATF pricesover the past few months has put an

additional burden of $1 billion onIndian carriers this year.

Since ATF accounts for a major part of operational costs, and the more anaircraft weighs, the more jet fuel it consumes, airlines are trying everypossible way to reduce in-flight weight and save on fuel.

Ways to reduce fuel consumption, including good operational andmaintenance practices, are being explored. Airlines are towing airplanes torunways to cut pre-flight fuel consumption, reducing passenger service and

entertainment items, monitoring weather and air traffic at airports to adjustspeed of planes to prevent circling overhead.

Currently Air India and Indian are in the worst financial health. NationalCompany of India Ltd (NACIL) the company formed after the merger of AIand Indian Airlines is in such deep trouble that its losses have tripledduring 2007-08 from Rs 688 crore last year.

Photo by Pradeep Tewari.Location courtesy: Flying Cats

FARE PAIN: Air travel is no longer

within the reach of many who

had got used to it in recent years Photo by Mukesh Aggarwal


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Recently, the Civil Aviation Ministry asked AI to rationalise capacity and cutdown loss-making unprofitable routes with immediate effect and save atleast Rs 1,000 crore in 2008-09.

Travel tail spin

Hike in domestic airfares is influencing leisure travellers. Once again there isa shift towards train travel, private vehicles and buses for short distances.

Due to rising fuel costs, domestic carriers have cut back on capacity by 20per cent and stopped short distance flights as passengers now prefertravelling by trains, coaches or cars. With the low-cost carrier concept, airtravel became affordable, and tour packages clubbing three to four or moredestinationswere introduced in the market. But due to rising ATF costs,inflation and reduction in flight options, air travel is being reconsidered by

leisure and SME travellers. Earlier, a package for Rajasthan covered multipledestinations by air. Now it has become a combination of air, land and traintravel. Similarly, where earlier several tourists opted for a Mumbai-to-Goaflight, now they prefer other options.

Internationally, too, the scenario is not completely stable. In the past twoyears international leisure travel had witnessed an unprecedented increase.But now more and more people are preferring destinations closer home.Travel and tour agents have also suffered losses due to the price hike andthe zero per cent commission problem, explains Sikri.

Fuel costs and taxes have caused a huge setback to the airlines, which aretrying to maintain steady overall cost to ensure that air travel remains withinthe reach of a large number of people. Travel agents can still benefit fromthe increasing volumes. But this has also forced agents to look beyond theplain vanilla air ticket industry and concentrate on more lucrative travelproducts like leisure holidays and hotels," he adds.

Faultlines


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The international aviation sector is expected to double its accumulatedlosses this fiscal to $2 billion. IATA forecasts the industry loss at $2.3 billionwith average oil price of $106.5 per barrel and $6.1 billion with average oilprice of $135 per barrel.

IATA says industrys total fuel bill for 2008 will be $176 billion with oil at$106.5 per barrel. In contrast, the total fuel bill for 2002 was $40 billion.Keskar adds that everytime the price of fuel goes up by one dollar, theindustry costs increase by $1.6 billion.

In India the cost of ATF has doubled in the past one year. Losses for theindustry in 2008-09 are estimated at Rs 8,000 crore, double of what itsuffered during 2007-08. Experts say operators too are responsible for thisfinancial mess. The tendency of the airlines to operate more than therequired number of flights in a particular sector often forces it to sell ticketsat discounted rates while incurring losses.

Kaul says the airlines are losing more money because of their inefficienciesin terms of supply chain, capacity management, distribution system andinfrastructure constraints.

Help at hand

The ATF price for domestic airlines includes customs duty of 10 per cent andexcise duty of 8 per cent, while different states levy sales tax rangingbetween 4 to 30 per cent. Andhra Pradesh and Kerala are among the states

that have reduced sales tax on ATF to 4 per cent.

While the ministry is asking all states to peg taxes on ATF at four per cent,its attempt to include ATF in declared-goods list has failed. And apparently,the Finance Ministry has also rejected its proposal to levy a specific exciseduty on ATF.

At present the ATF attracts excise duty of eight per cent and the ad valoremduty. Which means the actual levy goes up every time the price of thecommodity is hiked. However, analysts say specific duty can soften net fuel

price only when base price is too high. In case of low base price, whichwould happen when crude price falls, it may not have the desired affect.Recently the Prime Minister also approved setting up of a committee toexamine issues relating to the financial crisis being faced by airlines. Thecommittee will assess financial difficulties faced by operators and examineinternational scenario and practices followed by other countries and airlines.It will make short-term and long-term recommendations for sustained


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growth and health of the industry. The ministry is planning to pursue taxissue with the committee.

Hanging on hope

In spite of the present scenario the civil aviation major, Boeing, is upbeatabout India. The company predicts that Indian market for new airplanes willbe valued at $105 billion over the next two decades.

In its 2008 current market outlook, Boeing says India will require 1,001 newcommercial airlines, both passenger and freighter, worth more than $105billion at current list prices, between 2008 and 2027.

Rising ATF costs and stricter emission regulations envisaged in future arealso making the industry work on cheaper and greener alternatives to fossil

fuel.

Worlds leading airlines and manufacturers of commercial airliners aretesting ATF derived from bio-fuel sources. Virgin Atlanta recently testedbiomass-derived fuel on an engine during a demonstration flight. JapanAirlines Corporation, too, is planning to test a flight next year.

BIBLIOGRAPHY:-

http://www.kansascity.com/business/story http://www.indipendent.ie/business/reccesion-

will-prove-test-for-airlines http://www.voanews.com/bangla/story/archiev

e/2008-10-3
http://www.kansascity.com/business/storyhttp://www.kansascity.com/business/story


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http://www.euerekaalert.com/public_release

arun eco term paper

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