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Author:Devesh Agarwal
Director at Infomart
Director at Infomart
Fuel populism killing air transportation
Fuel populism killing air transportation
The one fuel that is truly free in pricing is Aviation Turbine Fuel (ATF). Thanks to the government induced haemorrhaging, and the traditional, but wrong view, of air travel being a luxury, oil companies are using deregulation on their favourite whipping boy -- ATF. In India, ATF costs double than prevailing international prices.
The results are plain to see. Despite being leaders in the global airline growth story, airlines in India, today, are bleeding, and bleeding bad. Losses in 2008-9 fiscal, are expected to cross $2 billion. Unable to sustain, in sheer desperation, airlines are hiking air fares, cutting back schedules, deferring aircraft deliveries, laying off staff, even considering importing their own fuel.......... in short, anything, to cut down losses.
This has resulted in air traffic crashing all across India. In Bangalore, the shining example of India's air traffic growth, from an annual growth rate of 33% year on year, for the first time since 2001, air traffic is actually falling to levels below that of the previous year.
Additionally, due to the remoteness of BIAL airport, regional air traffic is decimated, with air passengers switching to trains and buses instead. We might be tempted to say "so what". But we overlook the productivity aspects in the slower transit time of trains and buses. And in today's globally competitive economy, productivity matters.....a lot.
The operators of the Bengaluru International Airport, BIAL, now face an additional quandary. The airport terminal is reportedly, under capacity, and needs immediate expansion. Till now, their primary source of revenue, has been landing charges levied on flights. Thanks to a reduction in flight operations by the airlines, their income stream and cash flows have been reduced. So BIAL is increasingly forced to rely on passenger based User Development Fee (UDF), which has both the Government and passengers united in their opposition.
An imposition of UDF by BIAL on domestic passengers will only aggravate the already bad situation, and result in a further compression of air traffic. A downward spiral into a bottomless pit.
A possible solution requires bold decisions. Something both the political and administrative establishment in India are not known for.
Government has to pledge at least 10% of its fuel taxes towards public transportation infrastructure. My friends in the auto industry will hate me for this suggestion, but our cities are choking in their own growth.
ATF pricing should be reduced to international price parity. Ex-refinery, and taxes, union and state. Everyone should share the burden, including the airports and airlines. They must pass on the savings and re-invigorate the market, not use it to butress their bottom lines. The downstream impact of the aviation industry is far greater than the losses sustained by price reduction. We must not forget, every aircraft purchased by India, results in huge "offsets" i.e. mandatory exports of other goods and services.
A moratorium on UDF for at least 12 months by all airports in India. Keep costs low. It will pinch, but the increase in flight operations will butress some of the revenue loss.
Allow HAL airport to handle regional air traffic. By sticking to its hardline, BIAL will only continue to drive passengers away from the air, to trains and buses. A negative for all stake holders, including the citizens of Bangalore.
Diverting part of the regional traffic to HAL will also give BIAL breathing room, and delay the need for investment in a costly second terminal, till global economic conditions improve.
Forget a "temporary terminal". Passengers will not accept travelling 50km, paying a UDF, and then using a "tent".
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India, the world's largest democracy, has a sorry record in sound and bold economic administration. Populist measures abound, and nothing is sacred or immoral in the perpetual quest to obtain and then secure the "gaddi".
Fuel pricing in India is a prime example.
Officially, the "Administered Price Mechanism" was abolished in 2002, but today, the Indian government has a greater control on the fuel market and prices than ever before. Private operators have been driven out of the market, and only the Government owned companies survive.
Government have become addicted to their windfall fuel tax income. In the last 6 years, fuel tax collections have increased almost 250% to a staggering Rs. 170,000 Crores (Rs. 1.7 trillion or US$ 41 Billion).
Indian bureaucrats have learnt well from the Europeans and their "tax and spend" Keynesian economic models. Fuel taxes are greater than the cost of the fuel. In Bangalore, when we pay Rs. 57 for a litre of Petrol, Rs. 32 is taxes, only Rs. 25 is the cost of the actual fuel. Internationally, the cost High Speed Diesel ex-refinery (excluding taxes, duties, levies, etc), is marginally higher than Petrol. Yet, in India, Diesel costs 35% less than Petrol, thanks to lopsided tariffs and populist driven subsidies.
The one fuel that is truly free in pricing is Aviation Turbine Fuel (ATF). Thanks to the government induced haemorrhaging, and the traditional, but wrong view, of air travel being a luxury, oil companies are using deregulation on their favourite whipping boy -- ATF. In India, ATF costs double than prevailing international prices.
The results are plain to see. Despite being leaders in the global airline growth story, airlines in India, today, are bleeding, and bleeding bad. Losses in 2008-9 fiscal, are expected to cross $2 billion. Unable to sustain, in sheer desperation, airlines are hiking air fares, cutting back schedules, deferring aircraft deliveries, laying off staff, even considering importing their own fuel.......... in short, anything, to cut down losses.
This has resulted in air traffic crashing all across India. In Bangalore, the shining example of India's air traffic growth, from an annual growth rate of 33% year on year, for the first time since 2001, air traffic is actually falling to levels below that of the previous year.
Additionally, due to the remoteness of BIAL airport, regional air traffic is decimated, with air passengers switching to trains and buses instead. We might be tempted to say "so what". But we overlook the productivity aspects in the slower transit time of trains and buses. And in today's globally competitive economy, productivity matters.....a lot.
The operators of the Bengaluru International Airport, BIAL, now face an additional quandary. The airport terminal is reportedly, under capacity, and needs immediate expansion. Till now, their primary source of revenue, has been landing charges levied on flights. Thanks to a reduction in flight operations by the airlines, their income stream and cash flows have been reduced. So BIAL is increasingly forced to rely on passenger based User Development Fee (UDF), which has both the Government and passengers united in their opposition.
An imposition of UDF by BIAL on domestic passengers will only aggravate the already bad situation, and result in a further compression of air traffic. A downward spiral into a bottomless pit.
A possible solution requires bold decisions. Something both the political and administrative establishment in India are not known for.
Government has to pledge at least 10% of its fuel taxes towards public transportation infrastructure. My friends in the auto industry will hate me for this suggestion, but our cities are choking in their own growth.
ATF pricing should be reduced to international price parity. Ex-refinery, and taxes, union and state. Everyone should share the burden, including the airports and airlines. They must pass on the savings and re-invigorate the market, not use it to butress their bottom lines. The downstream impact of the aviation industry is far greater than the losses sustained by price reduction. We must not forget, every aircraft purchased by India, results in huge "offsets" i.e. mandatory exports of other goods and services.
A moratorium on UDF for at least 12 months by all airports in India. Keep costs low. It will pinch, but the increase in flight operations will butress some of the revenue loss.
Allow HAL airport to handle regional air traffic. By sticking to its hardline, BIAL will only continue to drive passengers away from the air, to trains and buses. A negative for all stake holders, including the citizens of Bangalore.
Diverting part of the regional traffic to HAL will also give BIAL breathing room, and delay the need for investment in a costly second terminal, till global economic conditions improve.
Forget a "temporary terminal". Passengers will not accept travelling 50km, paying a UDF, and then using a "tent".
This is just one view point. Other constructive suggestions are welcome via the comments section. Devesh Agarwal http://aviation.deveshagarwal.com
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Comment 1: By tarun khushalani on 16th Jul 2008
I think it has become a fashion to crib about the
infrastructuire and problems in getting to BIAL ,
Belive me its not as bad ride to new airport as
some people are making it and I am sure all those
who have travelled to auirport also have realized
thats the reasion the voices have died down !!! We
were spoilt by having HAL so near to city , no
where in India the airport was so near to city
center as ot was in BLR
Comment 2: By Devesh Agarwal on 16th Jul 2008
"Funny, it is hard to make out what author is
trying to say. On one hand, he is cribbing at the
start about subsidy and then in the middle of
article he is asking people and govt to subsidise
airlines."
I have proposed that the taxes and the over-inflated prices on ATF be reduced, AND that the reduction go direct to the consumer NOT to the bottom lines of airlines. Oil companies are over pricing ATF as a milking cow to recover some of their losses caused by lopsided taxation structures of the government.
By lowering the price for the consumer, it will drive demand, and the airlines can address their losses by increased operations.
"Regarding Airlines, why crib "It is market driven isn't it. The basic rule of demand and supply."
I am in agreement with you on market forces. By that measure, BIAL should compete on equal footing with HAL. Let both airports run, and may they both win, but for sure, the best.
I have proposed that the taxes and the over-inflated prices on ATF be reduced, AND that the reduction go direct to the consumer NOT to the bottom lines of airlines. Oil companies are over pricing ATF as a milking cow to recover some of their losses caused by lopsided taxation structures of the government.
By lowering the price for the consumer, it will drive demand, and the airlines can address their losses by increased operations.
"Regarding Airlines, why crib "It is market driven isn't it. The basic rule of demand and supply."
I am in agreement with you on market forces. By that measure, BIAL should compete on equal footing with HAL. Let both airports run, and may they both win, but for sure, the best.
Comment 3: By Sanjay Pandey on 16th Jul 2008
Funny, it is hard to make out what author is
trying to say. On one hand, he is cribbing at the
start about subsidy and then in the middle of
article he is asking people and govt to subsidise
airlines.
Oops, I got it. This is a typical corporate response. If subsidy is given to common man then it is bad economics but if it is given to corporates then it is sound economics.
Regarding Airlines, why crib "It is market driven isn't it. The basic rule of demand and supply." That is what corporates say when we talk about common man and PSUs. So why crib now.
Oops, I got it. This is a typical corporate response. If subsidy is given to common man then it is bad economics but if it is given to corporates then it is sound economics.
Regarding Airlines, why crib "It is market driven isn't it. The basic rule of demand and supply." That is what corporates say when we talk about common man and PSUs. So why crib now.
Comment 4: By Devesh Agarwal on 15th Jul 2008
Regional air traffic has dropped by almost 35%.
The primary factors cited are BIAL location and
air fare increases.
Check this Deccan Herald story http://aviation.deveshagarwal.com/2008/07/bial-dis couraging-regional-flight.html.
Talking about road traffic, we are comparing our recollections when HAL handled 10.2 million passengers. Regional traffic will constitute only about 2.5~3 million. Out of this too, I expect airlines will operate about 25% of their flights from BIAL to cater to North Bangalore travellers.
Nature abhors a vacuum. Already airport road is getting full up by the traffic of the ITPL and EPIP Whitefield companies.
Check this Deccan Herald story http://aviation.deveshagarwal.com/2008/07/bial-dis couraging-regional-flight.html.
Talking about road traffic, we are comparing our recollections when HAL handled 10.2 million passengers. Regional traffic will constitute only about 2.5~3 million. Out of this too, I expect airlines will operate about 25% of their flights from BIAL to cater to North Bangalore travellers.
Nature abhors a vacuum. Already airport road is getting full up by the traffic of the ITPL and EPIP Whitefield companies.
Comment 5: By Pranitha Raj on 15th Jul 2008
If HAL comes into function then BIAL will
suffer,as huge amount has been spent in developing
it and making it functional. More over it has
reduced the traffic movement in the city specially
near HAL. I know its bit difficult for people but
that hasn't stopped them from flying to their
respective destinations.. Has it..?
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