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Aviation demands cost containment
April, 05th 2007
The competitive nature of the industry often results in pricing that is more reflective of marketing strategy than of actual seat value. RON KUHLMANN, EDITOR-IN-CHIEF, SCORECARD

The latest publication about transportation, on www.unisys.com, is on `airline industry cost measurement'. Airlines are a truly global industry, sending, many times each day, its staff and equipment over great distances and multiple borders, begins the report. However, `socio-political realities also constrain their inherent potential and make most airlines not global entities, but rather local companies with a global reach.' Unlike many other commercial or financial entities, airlines contend with `a mixed bag of legal and regulatory standards that make the entire system considerably more complex than it might otherwise be.'

A section on India notes that the airline market here developed with little oversight or intervention, leading to `quite unfettered expansion and cutthroat competition', and proving costly for all the players. More problematic than the not-so-profitable environment are that `airports and facilities are inadequate and the large aircraft orders currently placed are unevenly matched with available pilots'. As a result, expensive measures are being undertaken to fill the gap, says Unisys. "It is likely that there will be considerable upheaval before equilibrium is achieved."

Talking to Business Line about the study, Ron Kuhlmann, Editor-in-Chief of the Unisys aviation publication, Scorecard, says that it would be a significant challenge to find any writing on global aviation in the 21st century that did not highlight the emergence of India and China. "Both are lands of rapid development, enormous populations, and untapped demand that put suppliers aflutter over the market potential."

Ron, who has worked with airlines for almost 30 years in a variety of positions and locations, rues that in India, the rate of expansion promises spectacular riches to any able to tap the well, though the reality thus far is at odds with the promise. "The past decade has shown that with the right business model and dedication to cost containment, the exercise can actually be profitable, repeatedly. But that is not assured," he observes. Why so? "In every geography, deregulation has spurred a flurry of activity as entrepreneurs rush towards new opportunities. While the list of start-ups in the last decade is long, many, perhaps the majority, have failed. Some have done so through flawed business plans and others have simply succumbed to bad timing."

Excerpts from the interview.

On the economics that comes to play in Indian aviation.

While surely elastic, demand for air travel is not infinite. Even if the airfare were free, the traveller still requires disposable income for other expenses as well as free time and the desire to use it by travelling. Even in a market as promising as India's, those constraints supply a finite number of consumers at any given moment.

On how costs tend to bloat.

Fuel, operational taxes and charges are exorbitant by comparison to other locales and the infrastructure is sorely taxed, but in a different way, making the cost of operations even higher through inefficiencies. Since time is money, delays are expensive by adding cost and customer dissatisfaction.

Like the constraints of demand elasticity, infrastructure limitations can make projections of potential a theoretical exercise.

On the public versus private players.

There is the inevitable governmental market influence of two national carriers, soon to be one. Whether intentional or not, the presence of a public player in a private market changes the baseline and infuses its own subtle political undertone. While there will surely be the opportunity of vast consolidation of staff and facilities, some of the projected synergies, scheduling for example, may fall short of expectations. An excellent connection over Delhi becomes meaningless if the Chennai passenger over flies the hub with a direct flight.

On the congestion problem.

The Indian carriers have not shown positive financial performance due to a number of factors, one of which is the inefficiencies of the infrastructure. If we look at the fuel surcharges that became widespread in 2006, this reflects the carriers' attempts to recoup additional and unforeseen costs.

Viewed in that context, the charges are completely justified. If the cost of the product is being driven up by external factors, then the users must share in the burden those costs involve.

That said, these charges are a coping mechanism rather than a solution to the problem. No one is being served by the status quo and all of the stakeholders need to participate in a long-term solution that offers reliable and manageable transport. Unless this kind of partnership is forged, dysfunctionality will persist.

On discounted/variable pricing structure versus fixed priced tickets.

In a pre-Internet world, fixed ticket prices were the only viable tariff solution. There was no medium available by which the changing value of seats could be communicated to potential buyers.

That system did not serve either the customer or the airline well, as customers often paid too much for plentiful seats and airlines were unable to generate additional revenue when the supply was diminished.

In theory, the current system of fluid pricing allows a much better alignment of the value of each seat based on the supply and demand for that particular time. I say "in theory" because the competitive nature of the industry often results in pricing that is more reflective of marketing strategy than of actual seat value. (Think fare wars.)

On low-budget airlines entering the market.

While in some ways this shows a very progressive competitive marketplace, other actions of the Government have indicated that some players are more equal than others. Merger between Indian and Air India is approved while the same activity between private sector partners is denied. Perhaps the Government's primary role should be in creating the infrastructure and oversight that promotes orderly industry development rather than being an active player in the mix of airlines.

On whether Indian aviation matches up to world-class service standards.

I am not sure how one defines a world-class standard. One needs only to read reviews of domestic travel in the US to see that most American customers find the current service standards appalling and the annual review of airline performance in the US (released on April 2), shows a further decline. In Europe, no one would look to Ryanair for a luxury vacation. In India, like most of the rest of the world, air travel has been associated with luxury and exclusivity and customers paid accordingly. The products that are being developed around the world, and in India, are designed for transport rather than "experience" and are being priced accordingly. Customers are due efficient service that is professionally delivered but expectations need to be adjusted with regard to "world-class" treatment.

On how the horizon looks like.

If pressed, I will side with the optimists provided the market is allowed to be messy for a while perhaps a long while if the rest of the world is any indication. Aviation in India was and regulated for four decades making for entrenched attitudes and policies and those die slowly. But the market is young and vibrant and aviation is an industry accustomed to change and innovation meaning that eventually, it will achieve its potential.

D. Murali

 
 
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