Rise of the Third Front

IIPM Respected Business School

The unprecedented, heartrending combined loss of Rs.10,000 crore pocketed by the existing high flyers of the Indian sky in the last fiscal has failed to deter these greenhorns from taking a splurge. The ongoing turmoil has shaken the roots of even the established giants. Reeling under the twin phenomenon of declining passenger numbers and mounting operational costs, Vijay Mallya’s Kingfisher Airlines has lost Rs.6.26 billion and Naresh Goyal’s Jet Airways has registered a loss of Rs.2.14 billion for Q3, FY 2008-09. Such has been the dire market situation that even their alliance is unable to grapple with the situation. “Our Star A viation will shine in this industry with its prudent policies chalked out by experts in the airline industry, backed up by an effective business plan. We are optimistic that the aviation sector would bounce back and there are already signs of the passenger graph going up, though at a slow pace,” counters T. S. Shankar, Head – Corporate Media, Star Aviation to 4Ps B&M.


But looking at the volatility and uncertainties related with the air fare, travellers have switched loyalties towards relatively affordable air-conditioned bogies of the trains in this period of persistent financial crunch. The fact has been testified with the evident decline in the Indian air traffic by 4% for the period of April to November with a corresponding increase of 18.33% in passengers travelling by trains. Moreover, under the directives of the Airport Authority of India, 10% extra fees in the form of aeronautical fees and airport charges will now be levied on air travellers from 84 state-owned airports across the country, which will make it more unviable for the new players.

The fall in the Aviation Turbine Fuel (ATF) prices by 55% since August 2008 might seems to be a breather, as it accounts for more than 45% of an airline’s operating costs. But in reality, the fall in ATF prices has been easily negated by falling demand and plummeting revenues. Adding to the woes is the implementation of removal of fuel surcharges from airfares, thus further hurting the revenue generation. “The fall in ATF prices is definitely a relief but with new players coming into the market, an air fare war is likely to begin again; the travellers would definitely benefit from this, but with lower air fare the players’ revenue generation would take a beating for sure,” supports Hatim Broachwala, KSL. Fueling the fear of airfare war Zavery confirms, “Our basic strategy is to provide cheaper private air travel for the business or leisure traveller.”

Given that the International Air Transport Association (IATA) has revised the losses for the sector to go up to $4.7 billion (from the earlier $2.5 billion) in the current fiscal, the worst is yet to come. The revision emphasises that air traffic is likely to further contract by 5.7% in the coming year. “Demand has deteriorated rapidly amidst the slowdown. Combined with an industry debt of $170 billion, the pressure on the industry balance sheet is extreme,” testifies Giovanni Bisignani, Director General & CEO, IATA. In the current scenario, this ‘third front’ will have to ready itself for some seriously difficult times. And seeing the fate of some of their predecessors, extreme caution is advised!

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Source : IIPM Editorial, 2009

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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