Mumbai: Peter Harbison, executive chairman of the Centre for Asia Pacific Aviation (CAPA) termed the last four years of airline restructuring and expansion in India as ''truly remarkable''.

In his opening address to the 4th India Aviation Outlook Summit, Harbison said that it was always going to be difficult to accelerate Indian aviation to achieve the levels it should be achieving, as over a decade of neglect and stagnation meant that the industry was ill-equipped to deal with growth during good times, let alone when external factors turn ugly. ''We have barely even scratched the surface of this nation's air travel growth potential yet,'' said Harbison. ''There is still a massive growth gradient for India, but this will not be an even, or easy, process.''

Harbison said that the global aviation industry was in for critical times, with 2008 likely to be a formative year where the global airline business will change irreversibly. ''But it is simply not enough to engage in collective hand-wringing and to leave it to the airlines to try to find a way out of the current difficulties,'' he warned.

A large part of the current problem is a global one, said Harbison, which is largely beyond the control of any airline. Fuel prices, since the beginning of 2007 has alone added between 10-20 per cent to the cost of operations, and without that massive increase, there would be no crisis now, he said.

''Yet, unlike the oil crisis of the 1970s, the airline business today is also at a pivotal time in its history. Back then, apart from the US carriers, almost all airlines were government owned. While the crisis bit hard, the bottom line was that there was no bottom line. Governments generally subsidised their airlines through the storm, fares went up and traffic slowed.''

''That can't happen today. Since then, the airline industry is dominated by private investment, subject to consumer trends and is quickly evolving towards a more rational business. But it is in many ways still neither fish nor fowl,'' he said.

Talking about the regulated state of the industry, Harbison said that although much of the original government protection has been removed, its freedom to move – notably by consolidating internationally – is still absent. He said the movement for change ''is on everyone's lips, including many governments'; some airlines, notably Air France-KLM, have used the relaxed mood to move towards rationalising.''

The point that emerged from last week's meeting of IATA's airline heads in Istanbul was the overriding priority to eject governments out of the airline business – to remove regulations, to stop taxing it to death and to stop meddling in the commercial running of the industry. ''As a result of those factors, airlines have never returned their cost of capital, even in good times. So, in future, unless they are able to, many will simply not survive, meaning they will be unable to able to deliver the massive economic social and economic benefits that flow from aviation activity,'' said Harbison.

Harbison said that there are many influences central to Indian aviation's future that need to be addressed urgently, and if the responses are right, ''this crisis will in fact offer a welcome opportunity.''

Acknowledging the prevalent view, Harbison said that there exists such a high level of institutionalised inefficiency in India's marketplace that it almost becomes an advantage at a time like now, ''because it means there are areas where governments can make a difference. But that doesn't mean more intervention. In most cases it means simply getting out of the way. In others, like delivering infrastructure, it means becoming a lot more responsive to real world forces.''

He said that there is a real danger that India will merely revert to type and that the old voices will now re-emerge, promoting protectionism and negative government intervention, which would compound a crisis into a disaster. ''The airline industry is potentially so important to India's economy that creative action is essential,'' he said.

India's market realities

Fuel prices: The high price of jet fuel in India has long been a major barrier to airline profitability, because of the unfriendly operating environment and their own intrinsic inefficiency, airlines in India were barely profitable in 2002 when oil was below $20 a barrel.

''Profitability with fuel at over $130 a barrel can be no more than a dream. The current record price levels of jet fuel threaten strategic and long term damage to the entire air transport value chain - and undo much of the good work done by the incumbent ministry of civil aviation,'' said Harbison.

The fiscal background: ''Since 2004, the sector witnessed long overdue reforms, and the aviation growth we have since seen has been a highlight of this government,'' he said, adding that ''the most necessary long term changes in the fiscal regime for the airlines have been overlooked. India still maintains its position with one of the world's highest underlying cost environments for airlines.''

Harbison said that here, stakeholders have failed in their challenge to work together meaningfully to reduce the industry's high structural costs. Airlines failed to present a united and urgent voice where they needed to engage the ministry of finance and state governments consistently to highlight these critical issues and press for some relief. ''This has been a chance missed.''

Is there a future for low fares?: Harbison answeres this question saying that the answer will always be ''yes''. The potential upside in India is still extreme, but on short haul sectors today, low fares are temporarily a thing of the past.

He said that these short haul sectors have contributed significantly to the overall growth of the airlines in India. With their disappearance, growth rates are slowing, and airlines will soon have to cut services on many routes.

For example, the fare between Delhi-Jammu in September 2006 was Rs1700, against the present fare of Rs4000, which compared very unfavourably with the second class train fare of Rs1200. ''As a result, these communities are now being deprived of access to this new world.'' The story on larger, more competitive metro routes is a little more positive, with fares still low, though often on sectors like Delhi-Mumbai or Delhi-Bangalore. ''Sometimes the fares on metro routes are lower than short haul routes. Unless there is major correction in capacity, this should continue – but, in today's environment, even these are fragile,'' said Harbison.

The airline outlook:

Projected airline losses for 2008 – 09 are close to $2 billion;

Low cost carrier (LCC) valuations, which have halved since the beginning of 2008, will remain under pressure;

There will probably be another 12 months of blood letting, with capacity reductions and cancellation of orders and fleet plan reductions;

There will be fundamental changes in size, shape and character of the industry if fuel prices continue to rise; this will include further consolidation, beginning as the coming peak season ends and cash dries up;

Once it becomes clear that the industry is taking the right steps – and so is the government – these negatives will start to soften. But, for the time being, capital providers will be reluctant to commit to domestic new entry or growth plans;

International operations are generally a brighter spot for airlines. Premium growth remains good and profitability is a realistic prospect, despite the influx of new capacity over the past two years, as the government has liberalised access.

The needs:

Infrastructure must remain a top priority for government policy. This implies a clear long term framework for investment, with no arbitrary decisions which undermine foreign investor confidence. Central to this is a clear and transparent pricing regulatory regime for airports;

Aviation taxes and input costs must be addressed aggressively. State and Central government legislators need to be made aware that the benefits of an efficient and low cost airline industry far outweigh short term grabs for cash. These indiscriminate taxes undermine operating viability and greatly reduce the advantages of efficiency necessary to develop a world class industry;

Foreign investment in India's airlines will be an essential part of developing a world class industry. In the current difficult times, this can be a very valuable option to entrench viability. (There looks to be little immediate prospect of a change of attitude on this issue however.)

Airline - and government – restructuring is a clear prerequisite to establishing a strong system for the long term. The government may be tempted to make special provision for its national airline(s), still embedded in a difficult merger and on the brink of some heavy losses. If so, it is vital that any measures taken do not distort the competitive processes in moving towards a post-crisis marketplace.

Summing up, Harbison said ''Overall, the progress of the past few years - even if it appears to be souring temporarily now - is a notable achievement, and one to be treasured. Any short term temptation to try to turn the clock back should be staunchly resisted.''