Mumbai: International Air Transport Association’s (IATA) director general and chief executive Alexandre de Juniac, a former chairman and CEO of Air France-KLM, and seventh person to lead the global association of airlines comprising about 290 carriers, says that the rise in fuel prices has hit Indian airlines more adversely than their international competitors. Fuel makes up 34% of an Indian carrier’s costs, while it is 24.2% globally, due to the high tax structure in India, Alexandre de Juniac said in an interview with Mint. Edited excerpts:
Indian airlines are suffering not only from high oil prices but also a depreciating rupee and at the same time are unable to pass down the cost fully to the passengers. Have you discussed the challenges with the government?
The Indian government needs to reduce taxes that are levied on airlines. Aviation turbine fuel (ATF) should be brought under the GST (Goods and Services Tax) regime. We have suggested several ideas and solutions to the Indian government as we discussed the issues faced by airlines here. I found the government very open to the suggestions. The government is worried about the situation of the airlines as nobody is making money. This is not sustainable in the long run. The politicians want the sector to be able to cope with the enormous growth that it is seeing. There is strong demand from Indians when it comes to air travel. The government will need to take the right decisions on taxation, building the appropriate infrastructure, and set up the right regulation, which will be a boost up to the industry instead of being a barrier or constraint (to its growth). But, all over the world, decisions on taxations by government doesn’t always come quickly. The federal structure of India adds to complexity as part of taxes go to state. But, we hope ATF will eventually come under GST.
What did you suggest to the government?
Indian authorities will have to focus on taxation, infrastructure, and regulation related to the aviation sector, to boost the sector. India doesn’t have enough infrastructure, enough airports, enough air traffic control to cope with the growth the aviation market is seeing here. We urged the government to make the right decisions. Indian airports could see delays leading to capacity constraints which we have seen in other parts of the world including in cities like New York. This is the reason why we are urging the government to take decisions regarding infrastructure quickly. But, we also know that everywhere in the world, taking such decisions by government is often politically difficult and takes time.
You have said that the rise in fuel prices impacts Indian airlines more than foreign ones as fuel accounts for 34% of an Indian carrier’s costs, while it is 24.2% globally.
The reason for this is that the taxation structure on airlines is much higher than those faced by most airlines across the globe. In other words, Indian airlines are hit harder by the taxation than any other global airlines. This is why we are requesting the Indian government to lower taxation on fuel and various other taxes associated with the sector.
Indian airlines aren’t being able to pass down costs completely to passengers. At the same time discounting of tickets still continue, causing a pressure on their yields. How long is this sustainable?
It is not sustainable for airlines to provide services without making money. So, I think the airlines here will change their behaviour and adapt to a different price strategy. There are thousands of price strategy that Indian airlines can explore like—you can segment your market differently, auction tickets, etc. However, it’s completely upto them to do so. We have seen the same situations in other parts of the world. The low-cost carriers worldwide has grown very fast. At the same time, the full service carriers have adapted, brought down their cost structure and are able to compete.
Can full service carriers compete with low cost carriers (LCCs) in India and still remain profitable?
Full service carriers in Indian can’t compete with LCCs on all market segments. We have seen other markets get segmented in terms of full service carriers and LCCs. The low cost carrier customers are typically those who are extremely price sensitive. But, there will still remain passengers, who would want better service offered by full service carriers. The Indian market, going ahead, will get segmented, passenger behaviours will change, there will be adaptation in the pricing strategy and cost. It will happen. The market forces will do their job.
A foreign airline can’t have more than 49% stake in an Indian airline. What are your views?
This kind of limit is seen across all major markets including in the US and Europe. This is for legitimate reasons as the governments want to protect their carriers. Whether we like it or not, this is the current situation across major markets which is unlikely to change in the short term. There are a lot of countries which are more restrictive than India in this aspect, as India shares a relatively high threshold with European Union of allowing a foreign airline to invest 49% in its own carriers. I don’t think this prevents investors from investing in Indian airline. What prevents them from investing is if they don’t get return on their capital.
How are the global airlines, especially ones from Europe and North America, addressing the issue of rising costs especially the oil price?
The rising oil price is a major problem for airlines across the world. Airline have seen about 25% rise in their fuel costs in the last year or so. Usually, when the fuel price increases very quickly during a given period of time, airlines levy a fuel surcharge which does face various levels of scrutiny by respective governments before it is allowed to be levied. On the long run, the industry is investing in much more fuel-efficient equipment, including aircraft, which brings down costs. However, different airlines have their own fuel strategies to handle the challenges.
What makes you optimistic about the future?
We are optimistic about the future. We are in the ninth year of the current aviation cycle. Aviation cycles usually lasts between 8-10 years. So, in our forecast we are reasonably and cautiously optimistic.