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‘Can’t increase fares due to competition and can’t reduce fares due to costs’

  • 18 February 2015

S. Venkat, Director – Finance, Air India speaks with T3 about the progress on Air India’s recovery strategy

How was the year 2014 for Air India and how much of its loss recovery was the airline able to achieve?

The year 2014-15 was better than 2013-14. We were able to achieve most of the parameters under the Turn Around Plan (TAP) except the on-time performance, which was affected only recently due to a host of factors. Apart from that, Air India notched good load factors, almost 70-80 per cent on domestic and 73-74 per cent on international routes. In all, the airline achieved 74 per cent load factor across the network, which is in line with the TAP. Yields have also been good with the domestic sector achieving revenue of nearly Rs. 6 per km and international touching Rs. 3.75 per km. As far as aircraft utilisation is concerned, narrow body has recorded 10-11 hours a day, and wide body about 14-15 hours a day.

In addition, we have been able to induct the 787 on major routes such as Europe, South East Asia, Far East and UK. This has resulted in improved margins because the aircraft has been a game changer for us in terms of fuel consumption. In fact, some of the routes that were showing losses have now been able to cover our variable costs.

We have also been able to hive off certain non-core activities such as ground handling and engineering into two separate subsidiary companies. So, aircraft to manpower ratio has also come down to 1:100 as opposed to the earlier 1:250.

Last but not least, we have been able to bring down our cash losses, though as per the TAP we will be cash positive only in 2018-19. We are now trying to bring that to an earlier financial year. The fuel rate reduction is certainly going to work in our favour. We are also hoping RBI will take a more benevolent stand and reduce their lending rates, allowing us to borrow at a much lower cost. Today the interest rates are quite high – nearly 10-11 per cent, and they significantly affect our bottomline. If they come down to 7-8 per cent we will certainly see airlines return to a more profitable status.

Will your recovery plan going forward depend solely on yields or will there be more capital infusion?

Capital infusion is related to the attainment of certain targets and government guaranteed loans. It is an important ingredient to Air India’s recovery plan, and so far the government has been very generous with us in bringing in the right size of equity at the right time. Starting this year the equity, which is spread over the years to 2021, will begin to a lower figure.

Does Air India plan to add new routes or increase capacity on any existing routes this year?

As part of the Star Alliance network we do consult internally as well as with our partners before adding to the network. But there is optimism in the air following the reduction in fuel prices in terms of connecting certain points in the US with a stopover in Europe or UK. There is also a possibility of reconnecting Canada as tourism exchange volumes are high from there. However, all of this is still in the drawing board stage.

Domestically we are trying to ramp up capacity as we are adding to our fleet, and furthermore, yields are higher and costs are lower on domestic routes. We recently took delivery of one A320, with four more to follow till September. Similarly, three more dreamliners are expected this year. We have also issued a tender for 14 more A320 aircraft, and have received good response.

In your opinion, why has FDI been slow to take off in India?

FDI will come in provided the industry is profitable. The structure has to be profitable. The cost structure in India is not very healthy with the ATF rate being the highest, airport charges being high, banking industry being shy to lend to us, and the tax structure not being a friendly one. I am sure the govt is working towards it and the FDI will increase if all this changes. India is starved of two things: It can’t increase fares due to competition and it can’t reduce fares due to operational costs. However, I am optimistic that the industry will be profitable soon.

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