Cut flab, not shut shop, KPMG tells India's loss-making aviation sector

According to KPMG, India's loss-making aviation sector should be ready to accept rising aviation turbine fuel (ATF or jet fuel) as a way of life at a time when global crude oil prices are touching record high levels.

Instead of exiting the sector, the carriers get theirs acts together and begin getting leaner so that they can even rake in profits, Marc Martin, senior adviser for aviation at KPMG, said.

Last month, Kapil Kaul, CEO, Indian Sub-Continent, Center for Asia Pacific Aviation (CAPA), said the losses incurred by the Indian aviation industry could surpass $2 billion and "shock almost everyone" even as soaring fuel costs and economic turmoil hit passenger numbers.

The losses suffered by the air carriers would be proportionate to the size of the fleet and operations, Kaul said.

According to Kaul, the Indian aviation industry is not likely to stage a recovery before 2010 and till then, the prudent thing for airlines to do would be to "rationalize" the networks and instead of competing with each other, work out a "package" to cut costs.

Aviation Minister Praful Patel also voiced his concerns last month, urging ministers and oil companies to find ways of bailing out the domestic air carriers.

India's aviation sector is "at a crossroad" and "it is a matter of time before this dynamic sector becomes unhealthy," Patel said, warning that if "a vital sector like aviation go belly up...it will have a cascading effect or multiplied effect on the entire economy."

ATF prices have doubled over the last year and now forms almost 80 percent of overall operating costs and almost three-fourths of a budget airline's ticket fare.

But most airlines, which are suffering losses in millions of dollars every day, are in a dilemma as hiking airfares could lead to dwindling of passengers and losing them out to Indian Railway which charges lower priced train fares.

For the time being, most airlines have resorted to cutting routes, issuing e-tickets and charging for items such as snacks and checked luggage to cut their losses. Some, however, have also hiked fuel surcharges to offset high ATF rates.

"I'm really happy this has happened, as it's shaken people up. People should wake up and smell the daisies and say: my god, it's not hunky-dory, we need to get our act together and start getting leaner as an organization," Martin said.

According to a KPMG report titled "Indian Aviation: Flying Through Turbulence," the industry's losses were due to huge investments made by the carriers on the fleet and support facilities and it would take 5-7 years to break even.

Support facilities come under indirect operating costs, which include marketing, distribution, ground handling, terminal operations, network operations, routing, administration, training, and cost finance and cost management.

"India operates one of the youngest aircraft fleet in the world and, with new and more efficient engines, airlines gain from low fuel burn and improved operating efficiency," the report said.

However, "Since a majority of India's airlines are today in their third or fourth year of running, it becomes near to impossible for break-even to occur any time before 2009 or 2010," it said.

ATF, the report said, accounts for about 35 percent of a carrier's operating costs and "an airline's expenditure on fuel is directly proportionate to occupancy and load."

"The airline business today is one of the most complex industries. Its profitability, revenue and yield are predominately driven by economic and external factors and this makes it most vulnerable to even the slightest variation in economic growth rates, national disasters, epidemic outbreaks, terrorism, war, currency fluctuations and most importantly oil prices," said Rajeev Batra, executive director, KPMG, in a press statement.

Agrees Martin. Rising fuel costs aside, Indian aviation sector, he said, should not expect to break even before 3-5 years from now.

Till then, he said, the carriers should get their act together and improve their operational performance by switching to leaner business models and cost-optimizing their business operations.

"If you have excess capacity, slow down a bit, deploy the aircraft in a sector which you realize will be a profit making sector," he suggested.

Despite rising inflation and slowdown of economic growth, KPMG is optimistic about India's aviation sector, projecting air traffic in India to rise to between 242.34 million and 313.72 million by 2012 from the current 116 million.

Especially, the firm noted, the rise in air traffic in Tier-II and Tier-III cities and towns in India indicates that people no longer consider air travel a luxury but a primary travel medium.