‘Merging A-I And IA Into One Airline Would Provide Beneficial Economies Of Scale’

With the domestic aviation scenario taking off on a competitive note, Sunil Arora, chairman and managing director, Indian Airlines, in an exclusive with Anindita Chattopadhyay, talks about the airline’s current and future strategies

IA has been in the red for the past three years, though losses have come down. What are the factors contributing to the losses?

IA's performance has to be seen in the context of the environment it operates in. The past few years have been difficult not just for IA, but the industry as a whole. Even as the demand remained depressed, capacity induction continued in the market, resulting in lower occupancies and pressure on yields and profitability.

Simultaneously, on the cost side, input costs have been steadily rising - ATF and insurance being notable examples. The ATF price shot up from Rs 14,520 per kl to Rs 18000 per kl in March 2000, again to Rs 22,000 per kl in September and then stabilised at Rs 21,530. Increased security costs as well as increases in airport user charges (incidentally, it is amongst the highest in Asia) have also added to the burden. IA's finances have, therefore, been under strain. The Iraq war and the SARS crisis have not helped matters either, further adding to the pressure on the bottomline.

What steps have you taken to contain losses?

Significantly, IA was able to contain its losses in 2002-03 to Rs 196.56 crore, which is substantially lower than the revised budget estimate of Rs 245.50 crore. In fact, it is lower than our nearest competitor whose losses stood at Rs 242 crore. IA already has comprehensive budgetary control and detailed cost-benefit analysis system in place to keep costs in check. A high-level committee oversees the cost control exercise, identifying and implementing economy measures. The estimated cost savings from the cost control and economy measures implemented over the past few years have increased from around Rs 58 crore in 2000-01 to around Rs 102 crore in 2002-03.

The attempt, overall, is to maintain a balance between profitability and market share, while at the same time retaining connectivity to the extent possible.

Are you worried that A-I's market share has been dropping?

Market share is correlated with capacity and frequency. During the past few years, IA has been unable to increase its total capacity offering as it has phased out seven A300 aircraft from our fleet of 11 and has lost one B737 in the Patna crash. While IA's capacity has remained stagnant at 26 million ASKMs per day, Jet Airways has increased capacity by 72 per cent to 24.4 million ASKMs per day and Air Sahara by 177 per cent to 8.3 million ASKMs per day. Consequently IA's market share has also dropped. For instance, in the Bangalore-Mumbai sector IA has four flights compared to Jet's seven. But in sectors where capacities are comparable, IA's market share is sizable.

IATT has recently been abolished and excise duty halved, but the benefit is not being reflected on the ticket price. Why?

The abolition of IATT, which was 15 per cent of the fare, was passed on directly to the passengers, which resulted in a decline in domestic fares across the board. The reduction in fares has obviously been welcomed going by the 14 per cent growth in domestic traffic in Jan 2004 over Jan '03.

The reduction in excise duty on ATF has only a marginal impact on the overall costs of the airline’s operations. The cost saving is only around one per cent of the overall cost outlay of the airline. In the past IA has not passed on all cost increases to its passengers, choosing instead to revise airfares only when it became absolutely necessary to do so. It is therefore fair that, given the severe burden of losses that the industry is reeling under, the airlines be allowed to retain whatever little relief they have.

With private airlines being allowed to fly on international routes, competition will be tough? What are the odds against IA?

If international routes are to be opened up and the icing on the cake has to be shared, then why shouldn’t the cake be shared too. In Category III routes, IA flies 68.5 per cent as against stipulated 50 per cent, while in category II routes 15.9 per cent as against stipulated 10 per cent.

With the skies being opened up partially, what would you suggest - amalgamation of IA and A-I to make way for a strong national carrier or, privatisation to bring in more funds?

The government has been following a liberal policy with regard to grant the of bilateral access and capacity entitlements for the past few years. Of late, SriLankan Airlines have been offered far greater access by being allowed to operate a daily flight to each of the six metros as well as unlimited capacity to 18 other points in India. In such a scenario, privatisation of the two national carriers becomes imperative in order to able to generate the resources required to acquire aircraft and expand network, even as margins come under increased pressure due to increased competition.

Further, in this era of alliances and mergers, merging A-I and IA into one airline would provide benefit of 'economies of scale', while the major challenge would be the merging the two different organisational cultures. Already IA and A-I have been working together in certain areas to tap the synergies in their network and operations. The operations of the two airlines complement each other and together they command over 30 per cent share of the international air market to/from India. In my view, this should be at least 50 per cent. The two airlines should be taking on the competition jointly, complementing each other's operations and supporting each other wherever necessary.

When the tourism ministry is on an aggressive promotion mode, IA is closing down operations in some places. Don't you think that as a national carrier IA should support the move by offering better connectivity?

IA links a much greater number of city pairs than its competitors. For your information, IA today links 162 city pairs whereas IA's competitors together link only about 100 city pairs, most of which are linked by IA as well. Also, our network covers all places of tourists interest in India that can be served with the jet aircraft available on the IA's fleet. We maintain this network even at the cost of certain routes that have more balanced demand throughout the year.

For the current tourist season, IA had operated a large number of additional flights to Port Blair, in order to support the efforts of the tourism department to project Port Blair as a prime leisure destination. Direct international routes have also been established with Gaya in order to promote Buddhist tourism from South East Asia. We have also recently commenced operations to two new destinations-Lilabari and Shillong. The wholly-owned subsidiary, Alliance Air has recently acquired four ATR turbo-prop aircraft and has increased the number of flights in the Northeast sector.

How do you perceive the aviation scenario in India in the next three years?

In my perception, the aviation sector is poised to grow at a brisk pace. The international air travel to/from India has grown at a healthy rate of 10 per cent in 2003. The tourism department is optimistic that the growth in tourist arrivals at 15 per cent in 2003 will go up to 20 per cent in 2004. The liberal grant of access should see increased capacities on international routes, new flight connections, and a greater choice of flights on existing international routes. International airfares are bound to be more competitive than they are today.

The domestic air connectivity in India is poised to expand with the emergence of low cost carriers like Air Deccan. The civil aviation policy being contemplated by the government will also encourage more players to enter the fray. The domestic market has shown impressive growth of about nine per cent in the current year due to the sales thrust of the domestic airlines. The Apex fares and other promotional schemes of IA and other carriers have served to broaden the domestic market, while the recent abolition of IATT has further brought down the cost of air travel, bringing it within reach for a larger section of the populace.