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Domestic airlines think global

Airlines are obsessed with flying abroad. The six-month-old Kingfisher Airlines is irrepressible in its ambition of starting flights to international destinations.

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MUMBAI: Why are India’s new private sector airlines so eager to hit the foreign trail when the money’s not all that hot? On the Mumbai-London route, for example, at average two-way passenger fares of Rs 24,000, the revenue per km works out to just Rs 1.62. As opposed to that, even in the highly competitive Mumbai-Delhi segment, revenues are as much at Rs 4.23.

But airlines are obsessed with flying abroad. The six-month-old Kingfisher Airlines is irrepressible in its ambition of starting flights to international destinations.

Promoter  Vijay Mallya never loses any opportunity to put forth his demand for an amendment of the present government rule which requires an airline to fly a minimum of five years on domestic routes before it can start flying overseas.

Considering that the industry benchmark for long-haul flights are around 50% lower at 5.1 cents per km as compared to 11 cents per km for short-haul flights, one wonders what cost economics is driving Mallya’s interest in international operations.
The answer, it seems, lies in the big picture. “Yield is only one part of the big picture.

With Indian carriers having a big cost advantage in terms of workforce, ticketing, catering and other such services, they can easily wean away a major chunk of the market from existing airlines like British Airways (BA), bmi (formerly British Midland Airways), Cathay Pacific and others, who have higher operational costs,” says Nikhil Vohra of SSKI.

Vohra says in another three to four years Indian carriers will become more meaningful in the international aviation arena. “Jet’s Mumbai-London flights, which have an average 70-80% load factor, are already doing well,” says Vohra.

Jet Airways investors relation manager KG Vishwanathan reiterates Vohra’s view: “Our international operations support and supplement the growth in the domestic market. We are building volumes on the international sectors to make our presence felt in the overseas market.”

Kingfisher Airlines general manager (sales) Manoj Chacko explains that longer flights have lower costs per flying hour. He says the biggest draw is the origin and destination (O&D) concept, which allows an airline to fix fares based on the market particulars.

“Under O&D, an airline can charge a higher fare on the London-Mumbai-London leg while it can have a lower fare on the Mumbai-London-Mumbai leg. The fare differential between two markets can be as much as 30%. It means that much extra revenue for the airlines,” says Chacko.

Many analysts, however, disagree with Chacko. They believe not only do long-haul international routes offer lower revenues per kilometre (RPKM = faresdistance) but they also involve higher costs. Overseas flights have higher landing, handling, parking and navigation charges than domestic flights.

The handling charges for passengers and ramp at premium airports like London could be as high as $5,000 per turnaround flight (Boeing 747-400) as compared to Rs 35,000-40,000 (less than $1,000) per turnaround flight (A320) at domestic airports.

The crew requirement on international flights is also bigger, and they have to be provided accommodation at hotels as their turnaround is usually the next day. Another cost that is peculiar only to international flights is overflying charges, which airlines pay for flying over different territories to reach their destination.

Say, when an airline does the Mumbai-London leg, it flies over Pakistan, Afghanistan, Eastern and Western European countries.

These countries charge a fee to airlines for overflying their territories. However, not all international routes are low yield. While RPKMs on the Mumbai-London route are poor, the West Asian routes are more lucrative because they are short-haul.

RPKMs on the Mumbai-Delhi and Mumbai-Dubai routes, which are almost the same distance, are on a par at around Rs 4 per km. And these RPKMs have been under pressure with tumbling fares.

“While our costs have been hitting the roof, our fares have come down from a level of £ 500-600 in the mid-90s to around £ 300 today,” says Air India company secretary S Venkat.

But these cost economics are getting buried under the Indian carriers’ dream to leap into the international market and wrest the market from established international carriers.

Air Deccan Ltd, the low-cost airline that will be able to fly to overseas destinations before the rest, also wants to expand its volumes through international market. “If the government cuts the minimum number of years required to start flying overseas from five years to three years then we can launch our international flights from 2006,” says Air Deccan finance director Mohan Kumar.

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