- I think it would be fair to summarize the state of the airline industry here in India today as being one of disequilibrium. Several years ago, an equilibrium existed, when there were a handful of full service carriers, charging relatively high fares. With the advent of low-cost carriers, that equilibrium was disrupted. Fares fell dramatically, and passenger volumes increased dramatically as well. By virtually any measure – aircraft, fuel usage, passenger volumes, number of departures - the industry has roughly doubled in size since 2002.
- In the U.S., a similar transition occurred during the late 1990s. Over a period of several years, traffic volumes grew rapidly due to lower fares. A few low-cost carriers achieved regional or national prominence – particularly Southwest Airlines, JetBlue, and AirTran. The full service carriers found that their cost structures, which had been developed over years in a higher-fare environment, were to constrictive for the new level of fares, and consequently they found their cash resources draining away.
- In the U.S., most of the full service carriers have as a result gone through significant financial restructuring, many under bankruptcy court protection, and have brought their costs more into line with their revenue potential. While I would not characterize the industry there as fully healthy, it has certainly turned a very significant corner.
- In the world today, it appears that equilibrium has been reached with the economic co-existence of two types of airlines – global long haul full service carriers offering a range of both economy and premium products, and low-cost short haul carriers offering a no-frills product.
- While I believe that we are in a state of transition here in India that is tracking this same global trend, I do not wish to draw too close a parallel with the U.S. Conditions in India are different in many ways – to touch on some major differences, there is significantly more pent-up demand for air travel here in India, and the economy is growing at a much more rapid rate –which indicates both the need for additional transportation options, and also indicates that stable profits are possible, and indeed likely, for a much larger industry size than exists today. On the other hand, the infrastructure available to airlines is less developed than in the U.S., which puts somewhat of a braking action on growth in the near term.
- As our Chairman pointed out, we airlines are not asking for any sort of financial regulation, or for any sort of bailout. The current state of affairs is a result of healthy competition, a competition which has benefited the traveling public.
- However, due to the growth in the size of the industry, tax revenues from airlines have grown substantially in these last few years, and are expected to continue to do so.
- The result of the Indian taxation policies is that airlines face many taxes on the inputs to production – as has been discussed, fuel, aircraft leases and airport charges being three significant ones, but also maintenance costs, expatriate labor costs, and other items subject to service taxes.
- These fees and taxes on inputs are either not present in the U.S. and most of Western Europe, or are much lower there.
- The result is that, to the outside world, the Indian airline industry appears to have very high costs and large operating losses.
- To make an absurd oversimplification, if those taxes and fees were suddenly put into line with international rates, but fares and passenger volumes remained exactly the same as they are today, we would have a profitable industry that paid income taxes. For example, if the price of fuel alone were reduced by 40% (e.g., by reducing or eliminating Indian oil company premiums over global price and/or state taxes), that would translate into roughly a 15% reduction in the industry’s operating expenses.
- The result of that would be the perception that the airline industry in India is not ailing and unprofitable, but rather healthy and growing, which in turn would attract foreign capital for equity and debt financing, as well as promoting additional investments for much-needed infrastructure.
- Obviously we realize that only a carefully balanced set of trade-offs between rates of taxation and volume will be practical. We would need to ensure that tax revenues are not reduced, but at the same time we would want to ensure that tax windfalls are not created due to investments being made by the airlines in building a competitive transportation network.
- We believe that opening a productive dialog in the spirit of sharing the benefits of a healthy transportation industry would be in both of our interests.
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