Strike Ends, but India's Airline Woes Continue

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By late last year, as struggling airlines started to raise prices, passengers went right back to the welcoming arms of the state-run Indian Railways, where subsidized tickets on air-conditioned coaches mean a Delhi-Mumbai train ticket could be had for as little as $15. In April 2009, airlines sold about half a million fewer airline tickets than in April 2008, the lowest number in more than two years. By last month, the trends had improved only marginally, as airlines started to drop prices again. "Look, I will fly for business if the ticket is about $100," says Agneesh Yadav, a 27-year-old accountant who lives in Delhi, a 16-hour train ride from his family in Pune, near Mumbai. "But to go see my grandmother? If I can get a ticket for $30 or so, fine. Otherwise, I take a train and enjoy the scenery."

Competing with a State-Run Airline

The airlines insist the problem lies with an overregulated industry where they are forced to compete with the deep-pocketed state-run Air India, circle crowded airports for hours waiting for a spot in the landing queue, and deal with exorbitant parking fees. In August, they threatened to go on a one-day strike unless the Indian government lowered taxes on jet fuel—they eventually capitulated but continued to grumble. "Our losses are no longer sustainable," Kingfisher Chairman Vijay Mallya, who has funded the airline's losses from the seemingly never-ending profits of United Breweries, his beer and liquor empire, told reporters last month. "It costs us more to fly than to stay on the ground." (Kingfisher did not respond to e-mailed questions.)

The Jet Airways strike, which cost the airline about $2.2 million a day in lost revenue, underscored the fact that Indian skies could do with fewer planes. Air India, the much-maligned state carrier, absorbed as many as 70% of Jet's passengers. The airline, which could receive $500 million of a nearly $4 billion government-sponsored bailout, is often pointed to as the chief villain in India's airline industry. In 2006, the government spent about $11 billion on 111 new Airbus and Boeing (BA) planes for the carrier, which has tried hard to shake a reputation for late arrivals and indifferent customer service. The carrier has about 15% market share and monopolies on several foreign routes but has been a perennial loss-maker, prompting private carriers to single it out as a price-spoiler; for instance, Air India often sells last-minute tickets at throwaway prices, bucking a global ticketing practice and forcing private carriers to drop last-minute prices, too. "If Air India goes out of the system, it will be good for the industry in the short term," says Kaul, the CAPA analyst. "But it isn't clear that the private airlines are healthy enough to take over the very important role of a national carrier."

Years of losses have meant that the airlines have burned through much of their equity and must now sell stakes to keep flying. Jet Airways, which shelved a fund-raising plan as the global markets melted down last year, has revived a $400 million equity-for-cash offer that might come through qualified institutional placements, a common practice in India where companies sell small stakes for as little as $10 million to help fund operations. Kingfisher has been on the lookout for about the same amount of money, but complains that foreign investment rules that limit overseas ownership to 26% make it difficult for it to find buyers.

With Air India propped up by the government, the coming year could be tougher still. Indian passengers are overwhelmingly choosing low-cost carriers for travel, helping IndiGo to break even and even post meager profits. The larger private airlines, which have staked their reputations on lush, full-service offerings, must convert more and more of their flights to the lower-revenue, low-cost, no-frills options such as Jet Airways' Jet Konnect or Kingfisher's Red service. Eventually, that would mean a smaller—in terms of revenue—Indian airline industry. It may not be glamorous and include salmon lunches prepared onboard, but it might just be profitable.

Srivastava reports for BusinessWeek from New Delhi.

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