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On
September 28, 2006, the Minister of State for Civil Aviation,
Praful Patel, held a meeting with the heads of various domestic
carriers to discuss the problem of growing losses in the Indian
aviation sector.
The minister said that there would be closer scrutiny of new
applications before issuing licenses to new carriers. He also
said that the ministry would take up the issue of high aviation
turbine fuel (ATF) prices with the oil companies and the
petroleum ministry.
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The Indian aviation sector had witnessed strong
growth in 2005 with the entry of many low cost carriers (LCC).
The increased competition resulted in lower air fares for travelers and
the domestic air passenger traffic grew from 19.8 million during July
2004 and June 2005 to 27.5 million during July 2005 and June 2006.
However, in an effort to increase market share, the carriers had
resorted to offering tickets at highly discounted prices.
While the passengers were benefited due to the drop in air fares, the
industry as a whole was faced with mounting losses. In August 2006,
Spicejet had reported a net loss of Rs. 414.2 million for the first year
of operations.
In September 2006, Deccan Aviation Limited, which operates Air Deccan,
the largest LCC in India, reported a net loss of Rs. 3.4 billion for the
15 month period ended June 30, 2006.
Jet Airways, a full service carrier, had also reported a net loss of Rs.
1.0 billion for the half year ended September 30, 2006, against a net
profit of Rs. 1.6 billion for the same period of the previous year.
Analysts opined that a combination of factors such as high ATF prices,
rising labor costs, rapid fleet expansion, and intense price competition
among the players was responsible for the losses in this sector.
The problem was also compounded by new players entering the industry
even before the existing players could stabilize their operations.
It was estimated that the industry as a whole could face losses of upto
Rs. 16 billion in 2006-07. Some experts expected the industry to
consolidate in the near future, with three or four players in the full
service category and a similar number of players in the budget category.
Given the problems facing the aviation sector, on October 16, 2006, the
representatives of major carriers decided to set up the Federation of
Indian Airlines, an industry body that would take up common issues and
concerns with the government and also sort out any problems among the
members.
Though there was consensus among the members on issues like preventing
the withdrawal of exemption of withholding tax on lease rentals,
improving aviation infrastructure and reducing taxes on ATF, there were
major differences on the issue of fare structure.
While full service carriers wanted a check on the fare reductions
offered by LCCs and a hike in the fuel surcharge, the LCCs were opposed
to these proposals.
Analysts noted that it remained to be seen as to how the industry
players would withstand the turbulence in the sector.
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