aviation sector problems

• Oil and taxes. The biggest issue with India is that not only is our oil very expensive, the Govt. also taxes ATF very heavily. In India, ATF forms anywhere between 40-50% of the cost, whereas it is 25-30% for airlines in the US, Europe, and even S.E. Asia. It also seems that airlines in India don't hedge their fuel. Fuel hedging is an important risk management tool and open exposure to the volatile fuel market is not a good thing for airlines, since ticket prices can't be made to reflect market reality, especially at that frequency. Efforts are being made in this direction, though. The Govt. is considering making sales tax on ATF uniform by including it under a certain category. The Govt. was planning to allow direct import of fuel by airlines, but storage and distribution is only handled by OMCs (oil marketing companies), so I can't see how that will be overcome.
  
  Bankruptcies due to oil costs have been witnessed even in American aviation companies. Southwest was probably the only airline which was able to mitigate losses through some aggressive hedging. United may not be alone with fuel hedge losses. The effect is worse in India because of a very sensitive market.
  
• Dollar vs Rupee. Our depreciating rupee hasn't helped matters either. All our aircraft are leased from abroad and have to be paid for in dollars. Most aviation firms have a lot of staff from abroad, especially good pilots and top level executives, who have to be paid in dollars. This is obviously a strain on our airlines who earn in rupees. Again, can be prevented to some extent through some good financial practices like hedging, but most companies don't have the required expertise.
  
• Infrastructure, or the lack thereof. We don't have enough airports and the ones we have are incapable of handling the increasing air traffic. A lot of flights get delayed which leads to fuel wastage, among other things. There is a huge need for capacity building so that busy routes may be fully utilized. The Navi Mumbai airport seems to be a step in the right direction, if it gets completed, that is. More such initiatives are required.
  
• The low cost model is not conducive for loyalty programs like sky miles etc. The market is extremely price sensitive and passengers jump to the airlines with the lowest price, even if it means flying a schedule which is not particularly convenient. The steep competition is such that only LCCs (low cost carriers) can really survive. IndiGo is a great example of this. FSCs (full service carriers), or at least the companies that started off as such, are the ones actually making losses, since they've had to adapt to low cost models. Jet Airways went into losses, even though it was and remains the top carrier in India, because it was a full service carrier which had to adapt to the low cost model. Kingfisher went out of business because of that. More on this later.
  
• As pointed out by Balaji Viswanathan, aviation companies in India haven't become experts at operations. This is a phenomenon that really does plague the entire logistics and transportation industry in India.
  

The best way to operate a profitable airline in India is seemingly to keep it as simple as possible. Spicejet and IndiGo (and perhaps even Go Air) are the profitable airlines in India as of a recent report. They all provide basic transportation; fly profitable routes (lesser routes are served by connecting flights, for improved occupancy and better fleet utilization); don't do fancy things like frequent flyer programs or executive lounges; and stuff the aircraft with as many seats as possible, again to improve occupancy. They appeal to the middle class, which is where the volumes are. They operate small fleets and utilize them to the fullest.

Now, since KFA has been specifically asked in the question, let's see where they went wrong. 

KFA was launched with an aim of giving passengers, or "guests" as they were known, not just a means of transport but an "experience". The longest flight in India would, at best, be 3.5 hours. I really don't think you can give me an experience worth remembering in 3 hours, unless you do dutch rolls with your airplane or allow me to plug a mic and start karaoke. 

Trying to make a very basic civic amenity look sexy is a great idea but in a ruthless environment like the Indian aviation industry, you need volumes and you need to accept the price sensitivity of even the most elite customer. Getting brand new planes, giving lots of leg space, serving meals, having separate aircraft for weird routes (for a long time, KFA was the only service operating from Delhi to Dehradun) and having swanky lounges is not what most domestic flyers are looking for. I am in Mumbai and want to go to Delhi so just effing get me there. I don't care about your pretty air-hostesses, or your beautifully packaged food, or your 6" of extra leg space, or your movie which I've either already watched or will not be able to complete in the 1 hour 20 odd minutes of viewing time available to me. Not unless you can do it in 3000 bucks, which is what XYZ is offering me. No? Too bad.

"With many airlines bringing prices down to below the cost of producing the airline seat, the government is looking at issues of predatory pricing," Ballantyne said.

"Yields are very tight anyway and pricing is seriously affecting the airlines. The government is looking at setting up a regulatory body to make sure that Indian airlines are operating on a proper basis."

But on average, fuel costs are around 60% higher in India than in other countries. This is because of a mosaic of state taxes, some as high as 35%, making India one of the costliest places in the world to run a fleet of planes.

"The states are unwilling to give up a good source of revenue," said Ballantyne. "Combing that with rising fuel costs and this further cuts into the slim margins and yields on which these airlines already operate."

He said India's central government may soon be forced to address this problem if the country is to have a functioning aviation industry.

"The government has already had to step in to back credit for Air India whose suppliers were demanding that it pay upfront before they would make deliveries of aviation fuel," Ballantyne said.

Fueled by India's stellar GDP growth and a growing middle class, passenger numbers handled at Indian airports exceeded 120 million, making it one of the ten largest markets globally, according to CAPA.

But by 2008, the sector was in trouble.

where once Indian aviation suffered from too little competition, now it suffers from too much."There were just too many low-cost carriers and this created a situation where there are simply too many seats flying through air," he told CNN. "It's a problem of over-capacity.

"Air India has debts of more than $8 billion and Kingfisher has debts of more than $2 billion. All of them are losing money with the possible exception IndiGo," Ballantyne said.

India's aviation industry leaders lay much of the blame at the feet of Air India which they accuse of unfairly competing with India's newer airlines, slashing fares while at the same time enjoying the luxury of government subsidies.

 The Tata Group also has announced an intention to partner with Singapore Airlines (SIA) to create a new, full-service airline, Tata SIA Airlines Limited with Tata Sons as the majority partner with a 51 per cent stake. These developments reflect confidence on the part of the airline industry that there is as-yet unmet demand for air traffic to be served to and from and within India.

Air carriers face other challenges in the web of national and state regulation and taxation. Indian carriers operate with some of the highest fuel costs in the world. India imports a huge percentage of Aviation Turbine Fuel (ATF) from foreign sources and prices are set by Government-owned PSUs that exclude competition from private sources. State surcharge on fuel vary widely, from four to 30 per cent, and are not under effective control of the Central Government. Further pressure is a consequence of the fall in the value of the rupee relative to the dollar. According to some estimates, as much as 70 per cent of the costs of airline operations in India are dollar-based.

The negative movement of the rupee may prove transitory. The Central Government is aware of the financial difficulties of the airline industry and may show forbearance from new charges and efforts to mitigate existing levies. Also, there are some signs of restraint on the part of state governments. Five states reportedly have agreed to reduce their taxes to as low as four per cent. Bengal recently announced a three-year sales tax waiver on ATF at some of the airports as an incentive to operators.

For some time, the Central Government has pledged to take necessary steps to replace the Director General of Civil Aviation (DGCA) criticized as lacking in authority and resources, with a new and more powerful central aviation administration, the Civil Aviation Authority (CAA). CAA would have independent funding and improve upon recruitment and retention of trained aviation personnel. Though the Union Cabinet has approved the proposal to replace the DGCA with the CAA, and the commercial aviation community has expressed widespread support for this change, it will take several years to occur. However, the DGCA has taken several positive steps recently. Most important is the decision to extend by one year the term of Arun Mishra, the head of the DGCA and also its plans to hire 100 airworthiness officers to improve its staffing of safety oversight