Human resources having bigger impact than fuel in India

New Delhi, Sep 8: Increasing pressure on airline bottom lines led by higher human resources costs pose a major threat to market development, the Centre for Asia Pacific Aviation (CAPA) said today just a week after Boeing upgraded its long-term aircraft sales forecast for India by 75 per cent.

According to Mr Kapil Kaul, CAPA's chief executive officer for Indian subcontinent and Middle East, the pressures from massive wages and overtime increases, fuel and constrained airport/air traffic management infrastructure will provoke significant structural changes in the sector in the next 12 months.

''India has flirted with the concept of consolidation -- unsuccessfully to date -- but that does not mean the issue will go away. On the contrary, some new partnerships between airlines must emerge in the months ahead to address overcapacity, skills and airport capacity shortages -- and to stop the bleeding.'' It is quite possible that a full service carrier may acquire a low cost carrier within the next 12 months, said Mr Kaul.

''The losses being racked up by the sector are unsustainable and will drive some new and potential entrants out. Despite this challenging environment, up to 12 start-ups are awaiting permission to launch. India cannot afford to have a repeat of the early 1990s when new entrants came and went and the sector reentered its slumber.'' But on this occasion, the market is vibrant and fast expanding.

Like any relatively free market, there will be casualties. This does not mean that the system is wrong; it needs time to find a dynamic equilibrium.

''But airline life in India will never be the same again, that is certain,'' said Mr Kaul.

The comments come as Boeing upgraded its long-term sales forecast to 856 new aircraft and boosted the projected value of these orders by 125 per cent compared to last year's forecast to 72 billion dollars or 84 million dollars per aircraft (up from 65 million dollars per aircraft in last year's forecast). Traffic growth is buoyant with a 48 per cent increase reported in domestic passenger numbers for the three months ended June 30.

Meanwhile, market leader, Jet Airways recently reported a net loss of 9.8 million dollars in the three months ended June 30 compared to a 21.9 million dollars profit in the previous corresponding period, despite a 24.8 per cent increase in revenue.

The carrier experienced a 48.5 million dollars negative swing at the pre-tax level, from a 35 million dollar profit in the June '05 quarter to a 12.9 million dollar loss in the latest period.

The key concerns for Jet are pressure on domestic yields from intense competition and a massive shift in the passenger mix. In the June '06 quarter, the carrier had a full fare-to-discounted fare ratio of 65:35 but this switched to 35:65 in the latest quarter, much worse than the budgeted 47:53 ratio.

Clearly Jet is having to discount to compete as savvy travelers hunt out bargains.

''The key problem for Jet Airways in the domestic market is personnel costs which more than doubled (despite only a 12.5 per cent increase in staff numbers) to account for 13.2 per cent of total costs in the June '06 quarter, compared to 9.3 per cent in the previous corresponding period,'' said Mr Kaul.

According to Jet, higher-salaried staff (pilots, cabin crew and engineers) received annual wage increase of 12 to 15 per cent while pilots racked up five million dollars more overtime payments than the same period last year.

''All carriers are under pressure to retain staff so that salaries for skilled staff are rising quickly. Overall, the short-term term outlook for airline profitability remains very challenging. This is of particular concern to the established carriers while the new entrants engage in deep discounting to capture a position in the market,'' said Mr Kaul.

''Another key issue faced by carriers is establishing strong management depth at senior and middle levels. It is not sufficient to employ a couple of expatriates and expect that the airline will run itself.''

UNI