Sunday, August 02, 2009

Strike, and then called off - Private airlines

In India, private airlines have a tough field. They have to pay high rates for their fuel (ATF costs in India are higher than most places in the world), the conversion to new airports run by private operators are loading user convenience charges that passengers do not like to pay, and it is a cut-throat business with high fixed charges and a variable market that has been severely affected by the economic slow-down.
So, most private airlines are in the red, owing money to fuel companies, to airports, to their debtors, and they do not see a solution in sight. The Government in the past has not provided them any solution in the form of lower taxes on ATF, or any kind of monetary hand-out.
Eventually, the Federation of Indian Airlines, comprising of 5 of the private airlines called for something unprecedented, a one day strike on August 18th where they would stop all operations, and refund all tickets. This was primarily meant as a pressure tactic, and they must have got bold after seeing Anil Ambani take on the Government and not suffer any apparent problems. However, the Government response was swift and harsh. The Government threatened to take strict action, including reviewing their licenses.
The airlines were not prepared to take on such an onslaught and have finally withdrawn this proposed strike. However, a fundamental question that is there for the operators is that this is a known business model. It was known that India has a high amount of taxes on ATF (since these are state level taxes and the Center is unwilling to take a stand on this), it is also known that the model followed by airlines of reducing costs can lead to cut-throat competition and lead to a downward spiral of costs. At the same time, at any reduction of fuel prices, the Minister applies pressure on the airlines to get them to reduce their fares. They also have to fly on routes that are not very remunerative, but are part of their license.
So where will this lead us ? If we continue in the situation where fuel prices remain high, and the economy does not improve (which means the general market remains depressed), then there will be a shakeout of airlines, and one will see ticket prices increasing, and more of them either combining or dying in the dust. Not good, but little that can be done.

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posted by Ashish Agarwal @ 7:49 PM