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News Analysis: Financial Crises in Aviation Sector

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Financial Crises in Aviation Sector

All India Radio News Analysis:

 

MAIN ISSUES AND GOVERNMENT POLICIES:

  1. There is no rationalization of jet fuel prices. So fuel cost is very high and it is one of the highest in the world.
  2. 40% of operating cost or expenditure  goes for fuel.
  3. Expenditure and costs in aviation industry has to be paid in dollars and our rupee is depreciating consistently.
  4. This brings the profit margin as low as 5 to 10%. So a slight deviation from the existing model to try for alternatives like reducing fare prices brings huge losses. So there is absolutely no scope for experimentation.
  5. Govt treats this sector as luxury commodity, so taxes are very high, which further increases the operating costs.

ITS LIKELY IMPACT ON PEOPLE AND ECONOMY:

  1.  with the growing middle class in India, who are increasingly depending on airlines for both their personal and business travels, increase in the airlines fares would hit them the hardest. They will be forced to go back to other means of transport which would not only handicap their commuting time but also leads to crowding in railways and roads which requires huge infrastructure. The responsibility of which again falls on the govt.
  2. India with large size and some of the places where connectivity is very hard like North east region, Ladhakh, kashmir etc. so without airlines connectivity it would take days for the people and logistics to commute.
  3. It also impacts badly during evacuation process during emergencies like natural disasters

In short aviation is the engine for development, so if the govt doesn’t take corrective steps then it costs us dearly in the near future.

 EXISTING BUSINESS MODELS FOLLOWED BY AIRLINES:

  1. Buying the aircrafts outright.(large capital is required but highly successful in terms of profit returns. Eg: Singapore airlines, shanghai airlines, pacific airlines etc.)
  2. Dry leasing.( long term leasing of the aircrafts. Not much profitable as most of the profit goes to the bankers and brokers. Most of the public sector and pvt sector airlines all over the world follow this model).
  3. Wet leasing. ( short term leasing. Totally unsustainable. Should be discouraged by the govt)

REASONS WHY AVIATION SECTOR IS DOING WELL ELSEWHERE:

  1. They start up with adequate preparations like large capital base to absorb the shocks and superior package structure in terms of technical support and trained people to run the aircraft
  2. Fuel cost and taxation is relatively less
  3. They don’t have to fight with dollar vs rupee.

REVIVAL STEPS THAT SHOULD BE TAKEN:

  1. Govt should ease FDI in aviation sector. So, the much required capital can be pumped in.

Eg:  some joint ventures: Etihad with jet airlines,        Singapore airlines with TATAS.

  1. Reduce the jet fuel costs, make the prices rational.
  2. There is huge potential both in terms of market and human resource base in India to set up aircraft and parts manufacturing units.
  3. So govt should follow up with setting up the industry either single handedly or in joint ventures with pvt sectors.
  4. Manpower training and R&D sectors which are required for the industry should be set up.
  5. More no of training schools for pilots should be set up along with additional facilities for mid career training for refreshing and upgrading skills.
  6. High time for govt to realize, aviation is no more a luxury sector and very critical for development, so taxation should be reasonable.