THE GLOBAL AVIATION INDUSTRY SCENERIO

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LOW COST AIRLINES(LCAs) AIR DECCAN Submitted By Anshu Agarkar Bharati Babbar Bharat Arya Chintan Shah Harpreet Arora

CONTENTS

· The global Aviation Industry Scenario

o Key Findings

· The History of Indian Civil Aviation

o Growth Analysis

· Low cost airlines in India

· Air Deccan

o History

o Current scenario in terms of growth

o The low cost business model

o Acquisition by Kingfisher

o STP Strategies

o The challenges faced

· Suggestions for probable solutions

· Conclusion

o Death by taxes

THE GLOBAL AVIATION INDUSTRY SCENERIO

As Richard Branson the founder of Air Virgin once said, “The safest way to become a millionaire is to start as a billionaire and invest in airline industry.”

In 2005, the global scheduled airline industry generated US$ 395 bn of revenues. After incurring huge aggregate losses for three consecutive years (2000 to 2003), the world Aviation Industry has witnessed a strong growth in passenger traffic since 2004. However, there is still some time before airline Companies start making profits. As per IATA’s (International Air Travel Association) latest estimates, the industry will book a smaller aggregate loss in 2006, before returning to modest profit in 2007.

History of the Aviation Industry: The air travel market grew up originally to meet the demand of business travelers as companies became increasingly wide-spread in their operations. On the other hand, rising income levels and extra leisure time led holidaymakers to travel to faraway places for their vacation. A further stimulus to the air travel market was provided by the deregulation and the privatization of the aviation industry. State-owned carriers that hitherto enjoyed monopoly status were now exposed to competition from private players. However, one development that changed the entire landscape of the industry was the emergence of low cost carriers (LCCs). These carriers were able to offer significantly cheaper fares on account of their low-cost business models and thereby attract passengers who might not otherwise be willing to fly. LCCs have achieved rapid growth in market share in the U.S. domestic market, short-haul market in Europe and recently in Asia. Since 1970, the international passenger traffic has grown by an average rate of more than 6%, compared to a 7% increase in the domestic passenger traffic.

Recent developments: The aviation industry is highly cyclical. However, in times of recession, the decline in the industry growth rate is much sharper when compared to the world economy. After witnessing a strong growth during the late 1990s, the industry saw a sharp reversal in fortune as a result of a global economic downturn in 2001. The situation was further aggravated by 9/11 attack, the Iraq war and the SARS epidemic. The huge financial losses incurred by the scheduled carriers during this period led to a long-overdue restructuring among the full service carriers (FSCs). Many airlines embarked upon severe cost-cutting and fleet-rationalization programmes as they struggled to remain afloat. The conditions for FSCs were further worsened with the advent of budget carriers in the U.S. and Europe.

There was however a strong rebound in traffic in 2004, led by a strong recovery in the world economic growth and which continued for the next two years (2005 and 2006). According to ICAO (International Civil Aviation Organization), the revenue per passenger kilometers (calculated as the number of seats multiplied by the kilometers flown) for international services has grown by 8.5% in 2005 and is estimated to have grown by 6% in 2006. The strong growth in the traffic and recovery of higher fuel cost through surcharges resulted in strong revenue growth for airline companies. However, this did not translate into a recovery in profitability, primarily on account of a significant increase in fuel costs. According to IATA, the combined losses posted by the world’s scheduled carriers amounted to US$ 6 bn in 2005, following a cumulative loss of US$ 36 bn in the previous four years.

KEY FINDINGS

· Global aviation industry is expected to grow at a CAGR of 5.6%for the period between 2004-2024

· The major conventional matured airlines market like US and Europe will see their cumulative market share going down from 61% in 2005 to 52% in 2025.

· Emerging markets like China, India, Middle East, possess great opportunities for the civil aviation sectors, especially for regional carriers.

· However, market like India and Middle East are highly regulated markets which bar entry of foreign players.

· Regional Aviation Industry, in US is on rise growing at a CAGR of 3.9% for the period of 2001-2005.

· New models like air taxi, Boutique regional catering to niche travelers are picking up.

THE HISTORY OF INDIAN CIVIL AVIATION

The history of Indian aviation industry dated back to the early 1930s when one of the leading Indian business houses, the TATAs established Tata Airlines. There was limited activity in the sector over the next two decades despite of eight more private companies entering the airline industry. In 1953 the Air Corporation Act (ACA) came into force and all the assets of the then existing nine airline companies were transferred to two corporations, Indian Airline Corporation (IA) and Air India International (AI). While Air India offered international services, Indian Airlines offered domestic services. The ACA, 1953, prohibited any person or company to operate any schedule air transport services from, to or across India. Therefore two corporations enjoyed a monopoly status in the scheduled air transport services market. In 1962, AII was renamed as Air India Ltd.

In 1986, the winds of change blew and private airlines were allowed to operate chartered and non-scheduled services under an ‘Air Taxi Scheme’. The scheme was introduced to boost tourism and augment domestic air services. The carriers were, however, not allowed to publish time schedules or issue tickets to passengers. The government’s aviation policy was progressively liberalized in the early 1990s. In 1993, the ACA, 1953 was abolished, which put an end to the monopoly of IA and AI in the scheduled air transport services market. After the abolition of the act, there was a considerable change in the Indian Government’s Aviation Policy.

From March 1994, the market was opened to any company that fulfilled the statutory requirements of scheduled airline services. The government approved 8 private carriers to start domestic operations. They were Jet Airways, Air Sahara, Indian International, Archana Airways, East-West Airlines, NEPC Airlines, Modiluft and Damania Airways. While Indian International was the first licensee after the Open-Skies Policy came into force, East-West was the first scheduled private airline to take-off from the ground.

In 1995, the Airport Authority of India (AAI) was formed after the merger of National Airports Authority (NAA) and the International Airport Authority of India (IAAI). The AAI offered infrastructure facilities to all airlines. There were five international airports, Delhi, Mumbai, Kolkata, Chennai and Thiruvananthapuram for scheduled international operations by Indian and foreign carriers.

By late 2000, however, most private players went out of business after incurring heavy losses. The reasons included lack of experience, inadequate planning and poor promoter support. According to analysts, none of the private carriers had the staying power or the professional expertise required for the Aviation Industry. Rasheed Jung, an aviation consultant said, “all of them, bar none, where riffraff. All of them were financially extremely weak and almost all of them had extremely poor management.” As a result, by mid 2001, only JA and Sahara managed to stay afloat among the private carriers. In fact, they went a step ahead by grabbing a major market share from IA, which had been enjoying a monopoly.

By mid 2001, JA commanded 42% of the domestic market and Sahara claimed another 7% leaving 51% for IA. The September 11, 2001. Terrorist attacks in the U.S. adversely affected the global Airline Industry. Reportedly the industry suffered a loss of $18 billion and about 400,000 aviation related jobs were lost. However the Indian Aviation Industry was not badly hit by the attack.

In early 2003, the Indian Government expressed concerns that the Civil Aviation Industry remained a part monopoly, with only three players. To introduce more reforms, in August 2003, the government established a committee under the Chairmanship or Naresh Chandra, former Cabinate Secretary, to prepare a roadmap for a Civil Aviation Policy.

The committee recommended that the FDI limit in the domestic civil aviation sector should be increased to 49% from the permitted 40%, which the government accepted. The committee also stressed the need for making air travel more affordable. The recommendations were accepted and the Excise Duty on ATF was cut to 8% from 16%. The government also did away with the 15% in land air travel tax. By August 2004, the government started reviewing other guidelines pertaining to the aviation sector including the ban on financial arrangements with foreign airlines for lease finance, hire-purchase and other loan arrangements. The existing policy prevented any such financing arrangements. Industry Analysts realized that the government was clear in its intention of bringing air travel within the reach of the common man. Taking advantage of the liberal policies, Air Deccan started operating in short haul routes in southern India.

GROWTH ANALYSIS

· Indian Domestic passenger air traffic is bound to grow at CAGR 7.5%for the period 2001-2010

· While international passenger traffic is bound to grow at CAGR 5.7%for the period 2001-2010

· This represents a very healthy scenario for growth of air travel industry

Regional Air Travel in India

· As per the civil aviation minister the regional air connectivity is still very low

· Air travel is still confined to a very small segment of the population

· Therefore there is a vast scope for expansion of civil aviation in the country in which low cost carriers will play an important role

· Airlines like Kingfisher , Spice Jet, Air Deccan have started operations to many regional destinations like Jammu, Varanasi, Tirupati from Bangalore.

· While airlines like paramount airways are serving especially south Indian market like Chennai, Trivandrum etc. only in business class configuration.

LOW COST AIRLINES IN INDIA

· Air Deccan

· Go Air

· IndiGo

· Indus Airways

· Jagson Airlines

· JetLite

· MDLR Airline

· Spice Jet

· Kingfisher Airlines

HISTORY OF AIR DECCAN

Gopinath was in the Indian army till 1980, when he left his job and started trying his hands at various things like multicultural farming, seri-culture and agri-consultancy. In the early 1990s, Gopinath was in Singapore, where he read about a helicopter company, founded by a girl in Vietnam. The company was setup to carry tourist in the US to Vietnam after the war had destroyed the infrastructure in the country. The story reportedly inspired Gopinath to do something similar in India. In 1995, Gopinath started Deccan Aviation Pvt. Ltd. (DAPL), a private helicopter charter company, providing helicopter services for company charters, tourism, medical evacuation, off-shore logistics and a host of other services. DAPL soon emerged as a pioneer in helicopter tourism in India while serving tourists the company encountered demand for flights for many smaller tourist places. Gopinath claimed that government representatives from the states of Andhra Pradesh and Karnataka met him and asked, whether DAPL could provide air links to smaller cities in these states. Following this Gopinath mooted the idea of setting up an LOW COST AIRLINE (LCA). After finding the business idea lucrative, he wrote in two of his friends Captain Samuel and Jainath Pooviah for the project. Air Deccan was born and Samuel held the post of Executive Director, while Pooviah became the company’s vice-president.

Gopinath and Samuel held an equity stake of 26% each, while Vishnu Raval, a Hongkong based friend of Gopinath held 10% equity. Golden Ventures, which was promoted by an NRI group, held another 20% equity stake and rest 20% was held by the Bangalore based Brindavan Beverages. On

August 25^th 2003, the first flight of Air Deccan took off from Bangalore to Mangalore. Rudy, former defense minister of India, George Fernandes and former Chief Minister of Karnataka S.M. Krishna flagged of the first flight. On the same day, a flight from Bangalore to Hubli was also flagged-off. The company had started its 2 flights with only two 48-seater aircrafts, which it had obtained on dry lease from the French Based Aviation major ATR in September 2003, Air Deccan introduced flights for various cities in Andhra Pradesh and Tamil Nadu.

In December 2003, Air Deccan announced that it would fly long haul routes in India such as Delhi-Mumbai, Delhi-Bangalore and Chennai-Delhi. Disclosing the company’s plans to media Gopinath said “we have major expansion plans and are going to increase our operations by April 2004. The airline is going to break the image of a regional, low frills airline and enter the trunk route market.” Gopinath promised that Air Deccan would maintain its fair at 50% less than economy class tickets of other FSAs. The company said it had least A-320 aircraft from the leading European manufacturer Airbus. The aircraft had the capacity to seat 140 passengers.

Apart from low fares, Air Deccan also stresses that it would take all necessary safety measures. The airline claimed that the leased aircraft were modern and did not have any safety problem. It further said that it had employed experienced engineers, crew and administrators. Air Deccan also made public the guidelines for safety and security on flights. In early July 2004, Air Deccan stunned its competitors and industry analysts by announcing that the lowest fare on various long haul rules would be just Rs. 700/- the average economy class fare of FSAs on a typical long haul route was about Rs. 7500/- and Air Deccan was offering tickets at virtually 10% of these rates. Several analysts and customers took the announcement in disbelieve saying there must be some hidden costs.

There was a clause. To be eligible for the Rs. 700/- fare, the tickets would have to be bought and confirmed atleast 90 days in advance. Further, the company kept 25% of the seats priced between Rs. 700/- to Rs. 1500/- for all major trunk routes. Another 50% seats were reserved at 50% of the fares of the FSAs economy class. The remaining 25% seats were at 70% of the price of economy class tickets of FSAs .the different rates were to be charged depending on when the customer actually got his ticket booked. Gopinath explained, “The earlier you book, the cheaper the fair will be. For instance, if you book 90 days in advance, it will be the cheapest: If u book 80 days in advance, you will pay a little more. The fare gets progressively costlier closure to the date of journey. If a passenger buys a ticket on the day he wants to fly, he would have paid more than many fellow passengers.”

Industry experts felt that by adopting this pricing model, Air Deccan ensured that the average cost of flight from one destination to other on major trunk routes remain at about 505 of economy class fares of other FSAs. The pricing strategy was good enough to stimulate demand for the company’s service.

CURRENT SCENERIO OF AIR DECCAN IN TERMS OF GROWTH

THE LOW COST BUSINESS MODEL

Air Deccan’s business model was inspired by the globally successful low cost model pioneered by the US-based south west airlines in the 1970’s in the fiscal year 2003-2004, the LCAs commanded a global market share of 25% and their revenues had grown by 40%. LCAs were continuously offering lower flying rates by inventing innovative ways to cut operational costs. Analysts claimed that the overall costs for LCAs were 45% to 60% to that incurred by FSAs.

To keep overall costs of the company low, Air Deccan took the following measures:

FOOD: Unlike FSAs, Air Deccan did not provide any food on board. However, it sold snacks and water bottles on its flights for a price. Serving and consumption of alcohol were not permitted. The company felt that for short distance domestic flights, most passengers did not want food. It said the savings on food were passed on to passengers I in the form of lower fares.

EXTRA SEATS: Since Air Deccan did not provide food, it did not require space for storing meals. The saved space was utilized for putting in extra seats. The company also reduced leg space compared to an FSA. This helped increase the seating capacity by another 20%. Gopinath explained, “An A-320is having 140 seats in case of existing airlines. We have an advantage of over 20% extra seating capacity as our air craft will have 180n seats. ”

TURNAROUND TIME: Air Deccan preferred operating small planes, which took less time to be maintained and be ready again for flights after landing. As no food was served, it took less to clean the aircraft. Moreover, the air craft did not have to wait for food loading or unloading. Compared to FSAs, which took an hour after landing, Air Deccan’s aircraft took only 20 minutes to be prepared for flying. This enabled extra trips. On average, FSAs flew for 8-9 hours a day whereas Air Deccan flew for 11 hours a day. The company used the same kind of aircraft in its fleet. This helped in quickly moving cabin crew and the company did not have to worry about carrying spare parts for different aircrafts. This too reduced the turnaround time.

DISTRIBUTION COSTS: Air Deccan did not sell tickets through travel agents but did so through its web sites and call centres. At the time of booking, passengers got a booking number, which they had to quote to the Air Deccan

staff at the air port and show an ID with a photograph to collect a boarding pass. This system did away with commission charges for agents, printing charges for tickets and saved the company close to 11-15% of total costs. Air Deccan outsourced its call center connectivity to Bharti and Internet Reservation System to the Delhi-based InterGlobe Enterprises.

LOWER EMPLOYEE COSTS: Air Deccan operated with a small crew size, which ranged between four and six and used only one air hostess per flight. The company recruited employees on contracts. This helped reduced employee costs significantly. Moreover, the compensation package of Air Deccan was also 20% less than that of FSAs.

ON FLIGHT ADVERTISEMENTS: To generate additional revenues, Air Deccan decided to carry advertisements of other companies on its flights. It tied-up with Cutting Edge Media for this. Air Deccan utilized spaces such as baggage tags, ladder steps, cockpit doors, headrests, full centre aisle carpet and the reverse of boarding pass for putting up advertisements.

CONNECTING FLIGHTS: Air Deccan did not provide any connecting flights. The company felt that flights of airlines which offered connecting flights could not leave from one place unless all the flights connected to it had arrived. This many a times resulted in flight delay. Air Deccan offered point to point service in which passengers flying from point A to B and willing to take another flight from B were issued two different tickets. Once the flight landed at the point A, the passengers were supposed to carry their luggage on their own and board another flight from point B. Air Deccan made it clear that it was not answerable if passengers missed their onward flights, in case, the first flight got delayed.

Therefore, this service did not require flights at point B to wait resulting in lesser turnaround time.

OTHER MEASURES: Air Deccan did not hire any consultants for its various operations or for preparing the company’s project report, thus saving on project costs. Gopinath claimed that saving costs was an obsession with Air Deccan. He said in an interview, “Now because of this obsession to cut costs, you would use every element in the organization to the least. We tell the pilots: Don’t break earlier than required. Go to the end of exit and only then turn. You will save the tiers.”

ACQUISITION OF AIR DECCAN

Kingfisher Airlines parent company United Breweries Group's acquired 26% of Air Deccan parent Deccan Aviation, including, that the promised offer to acquire an additional 20% of Deccan will be priced at the same INR155 ($3.82) per share. The initial stake cost UBG INR5.46 billion. UBG will be the largest shareholder in Deccan and will nominate three directors to the 12-member board. The combined fleet of 71 A320 family and ATR aircraft will operate 537 flights to 69 Indian cities, “whilst taking advantage of unparalleled synergy benefits arising from a common fleet of aircraft” according to Kingfisher. "For the near future, Kingfisher will continue to serve the corporate and business travel segment while Air Deccan will focus on serving the low-fare segment, but with improved financial prospects for both carriers," Kingfisher said.

THE TARGET MARKET AND POSITIONING

Analysts felt that there was a huge growth potential for LCAs in India due to the country’s huge 200 mn middle income group population. Gopinath expected that at least one-fourth of this population would use LCAs in the near term. He pointed out that India had 15mn rail travelers every day. Of these 170000 travelled in the air conditioned class and were potential customers for Air Deccan owing to comparable prices.

The U.S had 40000 commercial flights every day whereas India had only 400 flights a day. But India had 4 times more population than the U.S., so it could theoretically run 16oooo flights daily. One per cent of this potential was already tapped whereas 1600 more flights per day were required. Therefore, there was a need of quadruple jump in the number of commercial flights.

Air Deccan defined its target segment as upper middle class in the short term but planned to tap the lower middle class aggressively in a couple of years. The company targeted middle level corporate employees, small and medium enterprises and visiting friends and relatives (VFR). The VFRs had always been price conscious and would extensively utilize air Deccan’s services. There were several companies in India which sent their employees for corporate trips by train. It was hoped that these employees would now switch to Air Deccan and save time.

Air Deccan also attempted to position its services for the common people of India. The company roped in Orchard Advertising, an Indian subsidiary of Leo Burnett: the US- based advertising company, for all its promotional activities. Orchard highlighted the low cost advantage of Air Deccan flights. It came up with a television advertising featuring a cardboard cutout of a well built super hero.

Air Deccan concentrated more on the print media to save costs. The print advertisements essentially focused on the company’s low fares. After giving details of the flights, the advertisement discussed how ‘Dynafares’ worked. Analysts appreciated the airline for not going in for glossy ads, and targeting the common man. Orchard claimed that the ads positioning philosophy was ‘Empowerment’ as for the first time; flying was possible for many Indians. The advertisements did not harp on the low air fares but rather highlighted that the company had given an opportunity for many Indians to fly. Nitish Mukherjee, managing director, Orchard Advertising, explained the rationale behind the company’s ad strategy, “Air Deccan was giving many their first flight ever. Therefore, it wasn’t just a ‘low fare airline’ but an airline that was empowering a nation. Hence, the ad about real people who wished to fly, and an airline that is making it possible.” An advertising expert commented,”despite the communication essentially being about ‘saving money and travelling smart’ the agency chose not to simply hammer in the brand’s value-for-money proposition.

All Air Deccan advertisements carried the tag line, which read”simplify”. The advertisements were simply and significantly different from traditional airline advertisements, which featured smiling air hostess, plush seats, elegant atmosphere and a comfortable journey. Analysts felt Air Deccan successfully projected itself as an inexpensive carrier.

The advertisement showed people of different walks of life, taking turns to stand behind the cardboard cutout. These people included a school girl, a housewife, a business man, a small boy and a young motorcyclist. As they came behind the cut out, positioning their heads in place of super hero’s head, it was shown that they were ready to fly. The advertisement ended with a punch line, “Now everyone can fly-Air Deccan up to 50% lower airfares.”

The media reported that passenger feedback for Air Deccan was largely positive. A few passengers felt that they had a similar experience to that in FSAs. They said that though there was only one air-hostess per flight, she was very efficient. One traveller commented, “The best part of Air Deccan is their air hostess. There is only single air hostess and yes she manages well” the air hostesses were instructed to behave with utmost politeness to everybody. They were advised to speak to passengers in whatever regional languages the passengers were comfortable with and hence multi-lingual air hostesses were recruited.

Travellers found seats comfortable and the in-flight magazine fine. Some travellers, accustomed to the low sound in FSA flights, complained that the noise by the propeller of the ATR air craft was unsettling. However, they agreed that the service quality was acceptable and it was offered at 50% of FSA fares, Air Deccan was worth flying.

Industry analysts agreed that the low fare business model of Air Deccan would attract many customers. However, they felt that the passengers must be told in advance of the “no frills “experience on Air Deccan flights. Analysts felt that the company faced a tough task in conditioning prospective customers for the rather rugged in-flight experience without allowing any blow on the airlines image.

THE CHALLENGES FACED

Even before Air Deccan started operating on long haul routes, leading newspapers in India reported that all air tickets in the Rs. 700 category were sold out for 2004. The response for the flights was reportedly such that Air Deccan’s website was jammed and the call centre flooded with calls requesting booking. Since the announcement of the Rs. 700 category tickets, the airline received 10,000 calls a day as against 5,000 a day earlier.

In response to Air Deccan’s plans to offer services on major trunk routes, the FSAs quickly announced a fare reduction on these routes. Sahara announced its “Apex Fare Scheme” for metros and reduced its fares by 30%. Jet Airways followed by cutting prices on major metro routes by as much as 69%. Indian Airlines also launched a Super Apex Scheme and cut its prices to match of JA.

Air Deccan’s success encouraged many other companies to establish LCAs prominent among them being Kingfisher Airlines launched by the UB Group, Royal Airlines, which was a modified version of Modiluft, Air India Express launched by AI and Air One and Visa to be launched by a group of former IA pilots.

Industry analysts felt the entrance of new player and reduction of fares by the three FSAs would put pressure on Air Deccan. However, Gopinath was confident. He said, “I am ready for the war. Already my fares are low. I can afford to bring it down further, I will break even. They are already losing money and they will bleed. What they have to realize is that this is a different business module.”

Notwithstanding his optimism, industry analysts cautioned that there was a long way to go for the LCA module to be successful in India. A few analysts expressed doubts whether what was a success in the U.S. and European countries could be so in India. One analyst commented, “operating an LCA in India isn’t as simple as transplanting a model. It will mean reworking the module for the Indian context.”

Analysts pointed out various pitfalls in the globally acceptable LCA module for India. They argued that since the wage rates were high in foreign countries, LCAs globally were able to cut a major portion of their costs by keeping a few crew members. On the other hand, manpower costs in India was very less compared to that in other countries so the Indian LCAs were not expected to reduce their costs significantly by keeping the crew size small. On the contrary, reducing the crew below the threshold level could in fact backfire and affect customer service.

Analysts also commented that it would be difficult for LCAs in India to cut distribution costs significantly. They argued that internet penetration in India was just 1.65% of the population by January 2004. Further, the fuel costs accounted for 20% of the total cost of FSAs. In India, flying was still perceived as a luxury and the government had imposed higher taxes on ATF. So, Air Deccan could not save much on fuel costs which formed a substantial part of the total cost. They also pointed out the problem of airport charges in India. Airlines in India had no option but to use AAI airports, while in other countries airlines could use secondary airports where airport charges were less.

Analysts also said that the mortality rate in the airline business was very high. They said that the business was not as profitable as it might seem. In this regard, they quoted Richard Branson, the founder of Air Virgin, who said, “The safest way to become a millionaire is to start as a billionaire and invest in airline industry.” Analysts felt that the LCAs must have the financial strength as usually an LCA had to incur losses in the first few years.

FUTURE OUTLOOK

As per the estimates of aircraft manufacturers and other industry bodies, the world passenger traffic is expected to grow at 5% p.a. in the medium to long-term. The growth will however be slower in matured economies, but faster in under-penetrated and growing economies like India and China. The primary reason for the increase in passenger traffic over the years has been decline in airline passenger yields. As per an estimate, after adjusting for the general inflation, the average airline yields (revenue per passenger kilometers) have almost halved since 1970. During the same period, the real revenue growth (by combining growth in traffic and decline in yields) has averaged only 2% to 3%. Since aviation industry is a high fixed cost industry, a small increase in operating cost can have a sharp impact on the profitability of the companies. High fuel prices, congestion cost, higher security and insurance cost can increase the overall cost of operations and thereby impact the demand for air travel services. However, there is room for cost reduction in the form of distribution cost and cost synergies from industry consolidation. Overall, we believe that consolidation is the only solution for addressing the problem of excess capacity and poor financial ratios of the company.

SUGGESTIONS FOR PROBABLE SOLUTIONS

From the technical point of view, the 4 engines aircraft should be reduced to 2 engines aircraft , this would reduced the jet fuel consumption of the aircraft, so it would reduced the cost for the company.

The fit and fast solution for the airline company is to understand the demand for the customer, they want to fly at the cheapest rate possible so for that the company should increase the business class seats in the aircraft and fulfill the demand for the customer.

Increasing cost, and competitive market, to survive in this scenario the company should cut the cost by cutting the unnecessary jobs in the organization. The unnecessary jobs increase the cost of the organization so providing right job to the right person is the better solution for the company.

The company can attract the customers by providing better services to them at attractive rates, this would increase the customer satisfaction with low cost.

The feasible solution for the organization is to increase the productivity of employees by motivating them to work hard and build trust within the organization. The company should increase the relationship with travel agents and provide them profitable commission rates to increase the sales of the company.

The company should increase the courier flight services which provide them additional profit other than ticket rates.

CONCLUSION

After giving a number of suggestions for solutions to promote low cost airlines, following information discusses the recent problem faced by the aviation industry which is the government’s unwillingness to cut high levies on ATF bleeding the aviation companies dry, its reasons and the probable solutions to that.

DEATH BY TAXES

Indian aviation companies are creating headlines again, but this time the news is not of their making. They are victims of rising global crude prices and an indifferent Indian government. Few Indians will deny that the opening up of the skies have been a visible success of this government. Deregulation of the sector and enhanced competition meant new aviation companies blossomed, new jobs were created, and new destinations were added to the airline map.

In a sense, it was a full circle for Indian aviation, which was amongst the first airlines in the world, and rated among the best a few decades ago. Today, Singapore Airlines and Emirates are miles ahead in terms of service and facilities and Indian aviation companies are busy playing catch up. The good news is that they are doing so in earnest. Yet, this very government runs the risk of undermining its very success and the main reason is the adamant attitude of the central and state governments in refusing to cut taxes on Aviation Turbine Fuel (ATF).

The price of ATF has gone through the roof and threatens to go higher. The primary reason is the cost of crude which is hovering around $140 per barrel. But ATF in India is the most expensive in the world and the reason is the slew of the taxes imposed by the central and state governments and the commission cost of state owned oil marketing companies.

In late June, ATF cost in India was around Rs. 68,000 per kiloliter; in Singapore it was Rs. 41,500 per kiloliter. The difference is due to high taxes and commission costs. In India, 95% of the around 2.5 million tonnes sold annually comes from oil marketing companies. The Central Government’s duties involve 5% customs ( cut from the earlier 10%) and 8% excise, state governments levy sales tax of around 22% on the landed price and oil companies’ margins are 20%. Only Kerala and Andhra Pradesh have cut their taxes to 4%.

Moreover, since the taxes and commissions are on percentage basis, every time the price of crude goes so do the duties leading to a double whammy for aviation companies. This is a akin to exploitation, where the government and oil firms make money from rising crude prices even as aviation firms sink deeper into the red and risk closure in April the low cost careers shut down in the U.S., hit the rising crude and the looming recession in the U.S. the situation in India is no different.

It is worth noting that in India, ATF costs account for 50% of all costs wherein Europe, fuel accounts for 33% of all costs. Granted labour in India is cheaper, but then companies tend to hire more employees. Despite pleas from various airlines, the central government has so far turned a deaf ear to further reducing its taxes and has instead asked the state governments to cut their levies. In retaliation, state governments have said, they’ll make the cuts only after the central government does so. In this game of one-upmanship, the airlines continue to breath. If oil companies are loath to cut their high margins, they atleast have a valid reason. They are already in definancial trouble, forced as they are to subsidize kerosene, diesel and LPG. These are politically sensitive subjects, and to make up the losses the oil companies have been forced to initiate the price of ATF.

An India, that is growing, at a rate of 8% GDP, needs strong aviation sector. High taxes were acceptable in the past when flying was seen as luxury; today flying is seen as corporate necessity in a highly competitive world. Thousands of jobs are at stake, and unlike the west, there is no social security if tomorrow morning the employees suddenly find themselves on the streets. If that were to happen across the sector, it would only make a bad situation worse. It is time the central government took a decisive step. Granted it has concerns over the yawning fiscal deficit, but no government can fill its exchequer by destroying aviation companies. Moreover, governments are sensitive about inflation because it costs votes. Sooner than later, people will realize that it is the government’s high taxes that is to blame for killing low cost fares rather than some distant oil producing nation. And when they do, they will penalize the government for its actions.

It is our job to inform the public that the fault here is not merely because of rising crude prices but because of the taxes pegged to the prices.