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Flying on a wing and a prayer

9 Jul. 2011 12:49 AM IST

While the unending woes of Air India continue to dominate the Indian aviation sector, globally too the industry is facing uncertain weather. At the International Air Transport Association’s (IATA) 67th annual general meeting in Singapore recently, 700-odd delegates representing 230 member-airlines that account for 93 per cent of global network carriers, were told to tighten their seat belts. A diehard optimist could of course argue that IATA’s 2011 projection of global profit was an improvement on the post-2000 period of general sluggishness and huge losses. But the profit projection has nosedived to $4 billion from the estimate of $8.6 billion made only in March 2011. The latest estimate is a quarter of the 2010 profit of $18 billion. And the profit margin of 0.7 per cent is too fragile for comfort.
Giovanni Bisignani, who as IATA Director General has piloted it through ups and downs, lamented that “sustainable profits” have remained an elusive goal for the industry. The average net margin over the past 40 years has been a dismally low 0.1 per cent.
In fact, global averages are misleading: they hide gloomier pictures in many regions. The Asia-Pacific region is posting over 50 per cent of the total profits. Even in this region, the robust growth of low-cost carriers implies that full-cost carriers are not in the pink of health.Two sets of factors are generally blamed for the state of affairs — volatile oil prices; and the impact of calamities such as the tsunami, volcanic eruptions, the earthquake in Japan, as well as political disturbances in West Asia and North Africa. Japan’s earthquake and its aftermath alone, for example, are estimated to have eroded $60 billion, or 10 per cent of aviation revenue.
Similarly, oil prices have risen by 15 per cent over 2010 levels. Jet fuel accounts for more than 30 per cent of the cost for airlines, the single largest item. In 2010 the industry spent $140 billion on jet fuel. It is roughly estimated that an increase in the price of a barrel of crude by a dollar leads to a staggering cost increase of $1.6 billion for the aviation business. Unfortunately, both these sets of factors are outside the industry’s control. It can only fly on a wing and a prayer. It can, however, take steps to mitigate the impact of natural catastrophes, and introduce cost-saving efficiency in its operations.
A year ago, at its Berlin meeting, IATA had piloted “Vision 2050.” The document identified “four pillars” of survival: suitable ATM (Air Traffic Management) infrastructure to attain sustainable profit; technology-based solutions for security and environmental challenges(airframe design, engine efficiency); operational efficiency and processes to meet the long-term annual demand estimate of 16 billion customers and 400 million tonnes of cargo by 2050; economic instruments and government policies to provide an impetus.
In the recent past, some of these measures — ranging from e-ticketing to creating efficient value chains for service providers — have slashed costs by nine per cent, increased fuel efficiency by 24 per cent and labour productivity by 67 per cent. These have added up to $60 billion in savings in the past decade. It is calculated that each new generation of aircraft that rolls off the production line is at least 15 per cent more efficient than the previous one.
Curiously enough, in 2010, when both passenger demand and cargo demand were revised downwards, capacity growth overtook demand growth. Capacity grew by seven per cent but demand grew only 4.4 per cent. Perhaps this will be justified in the long run. For the moment it adds to concerns of profitability.
The frustrating part of the story is that with all the efficiency measures and savings, things do not seem to become better at all. It is like the Alice in Wonderland riddle of running faster to remain in the same place. The future of aviation lies in the implementation of the measures outlined in Vision 2050— a combination of technology, good management and support from governments. ATM modernisation, for example, is estimated to lead to 10 to 12 per cent fuel efficiency a year. Improvements in air traffic control systems can save a lot of fuel. Even a one-per-cent saving can translate to 50 million barrels of oil a year.
The future also depends on government policies on fuel, taxation, encouraging structural changes and more commercial freedom. Britain’s Air Passenger Duty is the highest aviation tax in the world. Along with peers such as the departure taxes of Germany and Austria and India’s service tax, it has implications running into billions of dollars and affects passenger demand.
And one proposal that has taken the industry by storm is the European Union’s emissions trading system (ETS). From January 2012, all airlines flying to Europe will be given a baseline carbon emission credit. Carriers which emit more carbon than the fixed cap will be required to buy credits. IATA has estimated the cost to be $1.5 billion annually. That aside, the World Bank intends to ask G-20 governments to raise money to fight climate change by imposing a global levy on jet fuel. The EU’s commitment to the environment is not in doubt. The aviation industry is reportedly responsible for two per cent of the world’s carbon dioxide (CO{-2}) emissions and it needs to act. However, Eurocentric action may give rise to regional and fragmented measures and upset comprehensive global action. Climate-change populism can be risky. A few years back the tourism industry, a great engine of growth, had noted with alarm the German Chancellor’s suggestion that to curtail CO{-2} emissions, long haul flights should be stopped. This would have ruined tourism prospects for many countries. In some of them, tourism revenues actually pay for poverty alleviation programmes!
(The author is honorary permanent representative of the United Nations World Tourism Organisation. He retired from the IAS as Secretary to the Union Ministry of Tourism.)

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M. P. Bezbaruah