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When the MRTPC gets down to its task of evaluating the Jet-Kingfisher deal on whether it really is a monopolistic alliance, the overriding reality in its mind would pertain to the bright red on the balance sheets of every airline in business today. The year 2008 was of open distress and agony for Indian aviation players; a year when their dreams crashed; a year when they reaped disappointing losses in return for their colossal investments; a year when even the 3Gs of the industry – Glamour, Girls and Gizmos – failed to entice consumers and moneybags. Here’s a look at what prompted the two competitors to rub shoulders and announce this sweetheart deal.
First things first – the red dot of a mind-numbing Rs.10 crore per day for each of their airlines is what instigated Goyal and Mallya to move into a huddle. It is sad to even contemplate sustaining such massive losses continually, especially when even government policies are seemingly unfavourable for aviation players. In view of this, their alliance (spanning areas such as joint fuel management, common ground handling, route rationalisation and cross-selling of flight inventories) not only makes sense but also enables them to save millions of dollars each.
However, government policies were not made in a day. They have been the same ever since Goyal and Mallya started their respective air operations. What has changed now are the skyrocketing Air Turbine Fuel (ATF) prices, which have reached an all time high of 50% of the operating costs, as opposed to just about 25-30%, say even about a year back. From thereon, it has become a vicious cycle. The high fuel price increases operating costs, which in turn cause a sharp rise in air fares, resulting in a decline in overall passenger traffic. Analyse fuel prices and you find that on every Rs.2,000 ticket, about Rs.2,900 is levied as fuel surcharge (with passenger service fee, transaction surcharge and congestion fee charged separately).
Had the fuel cost impediment not been there, the sector would still have witnessed losses, but the financial bleeding would not have been so intense. In India, ATF is sold at almost 70% higher prices as compared to international markets like Singapore et al. This price differential is due to the sales tax ranging from 4-30% levied on ATF in India. Any reduction in this tax would spell glad tidings for aviation players. And it is this price differential and other operating cost expenses that compelled Mallaya and Goyal to sign the deal.
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Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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