Billion dollar aid package from government for domestic airlines

The Indian Government is reported to be finalising a $1 billion (Rs4,500 crore) relief package for domestic airlines, in order to give them a leg up during what has been the darkest chapter in the country's aviation history.

The package, to be unveiled during the coming months, reportedly involves some cash infusions, with Air India alone seeking $286 million in cash plus additional soft loans, as well as deep discounts in airport charges and the abolition of excise duties on jet fuel.

The reported government package appears to be large, although precedents are not readily available.

In the aftermath of September-11 attacks, the US government's Air Transportation Safety and System Stabilization Act set aside $5 billion in compensation for US airlines for the ground stop order issued by the Secretary of Transportation and incremental losses incurred between 11-Sep-01 and 31-Dec-01, as a direct result of the terror attacks. In 2000, the US domestic airline industry handled 537 million passengers.

By contrast, Indian airlines handled 43.5 million passengers in the 12 months ended 31 March 2008, and is facing a very different set of factors than September-11. While September-11 was essentially a demand shock with significant ongoing security ramifications, in India, the fuel cost crisis – magnified by India's state fuel taxation system – has evolved into a demand shock, as fares and surcharges have risen to such levels that passengers are turning to cheaper alternatives.

The global economic slowdown is exacerbating the problems being faced by India's international airlines, Air India, Jet Airways and now Kingfisher Airlines.

Airline losses in India could double this financial year to around $1.5 billion, led by Air India. Other subcontinent governments are contemplating their own bailout packages as flag carrier losses mount. Air India, Pakistan International Airlines (PIA), Biman Bangladesh Airlines and SriLankan Airlines reported combined losses of approximately $715 million in the 12 months ended 31 March 2008

According to a report by the Centre for Asia Pacific Aviation (CAPA), in the interim, the biggest cost saving measure these airlines can implement is to reduce their flying operations.

Air India has already cut its three worst performing routes and more cuts are possible, while it is unlikely to resume its expansion programme until Winter 2009, around the same time as Jet Airways launches its second phase expansion.

The CAPA says that 2008-09 will be known as the lost year for Indian aviation, in which traffic stalled and red ink flowed.

On the positive side, it has exposed the massive taxation imbalances on the sector, which the government is now seeking to redress, which could have long-term benefits.