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The domestic airline industry is caught in an air pocket and it seems nothing, except a bailout by the government, could alter the fortunes of the fledgling industry.

That is because, in the current market environment, running an airline is unviable. Airlines have little control over costs (higher fuel and labour) while yields continue to remain under pressure as supply exceeds demand.

Take budget carrier Air Deccan for example. Despite increasing yields by 10 per cent year-on-year in February and reducing costs, Deccan still needs to increase yields by another Rs 300-400 per ticket to break even. It’s unlikely to bridge the gap anytime soon.

It’s the same story with other budget carriers—Indigo, SpiceJet or GoAir—who still have to scale up their operations to reduce per unit costs. Full-service carriers like Kingfisher and Jet Airways have higher yields but also a higher cost structure.

Jet has to contend with a legacy cost structure while Kingfisher spends a lot of money in trying to better Jet. The result is that everyone is losing money as they keep adding new planes—Indian carriers (with 310 planes today) have added 135 planes in the last two years and plan to add another 480 planes by 2012.

Not all of them will come in a year or fly on domestic skies; many of them will fly on international routes. “It is difficult for a market to absorb so many planes in such a short time,” said Kapil Kaul, head of Indian subcontinent for Centre for Asia-Pacific Aviation (CAPA), a Sydney-based consulting firm.

CAPA predicts consolidation in the medium term. Airlines may cease operations, could go under, or go for mergers—a few weaker and smaller players lacking focus could be the first to blink. ‘‘Some carriers may just cease to operate then there would be additional airline mergers,’’ said Indigo CEO Bruce Ashby.

Indian carriers are likely to, together report losses of Rs 2,250 crore though they may cut losses by selling planes or doing other deals. ‘‘The appetite of promoters here to absorb losses is huge; I thought consolidation would have started last year,’’ said Deccan’s COO Warrick Brady.

The government can help by cutting fuel prices, where taxes are 60 per cent higher than other countries or relax foreign ownership norms that can help airlines sustain the cash burn longer. It could allow foreign airlines to invest in Indian carriers or raise the ceiling of foreign holding from 49 per cent to 74 per cent.

These could help airlines turn around and sustain lower fares. At stake is not just private investment in airlines but also the money being invested in building new airports and modernising existing ones.

What do we want? Do we want few people to travel at exorbitant fares like earlier? Or, do we want goods and people to travel faster and cheaper? The government has done well in allowing new airlines and setting in mode the modernisation of airports.

To sustain the boom, it needs to now quickly get its taxes in sync with the goal of making air travel more affordable.

Email author: ranju.sarkar@hindustantimes.com