Taking on the budget carriers, full-service airlines on Thursday demanded that the government should regulate prices and suggested that higher entry barriers for new players could be a way out of the present financial cauldron facing the industry.
The move, however, was vehemently opposed by budget carriers, which stated that the excess capacity was only a temporary phenomenon and would pass as the market grew on lower fares.
The government, which called a meeting with airlines to work out a method to solve the sector's financial problems, told the carriers that it would not interfere in pricing, which will be left to market forces.
The budget carriers are Air Deccan, SpiceJet and GoAir, while the full-service carriers include Jet Airways, Indian and Kingfisher.
There was a lot of concern over capacity building in certain routes and this was seen as a major reason for a large number of airlines bleeding, said Ajay Singh, director, SpiceJet, who attended Thursday's meeting. Singh also said the carriers raised questions on rationalisation of fares.
According to industry estimates, the domestic carriers together are expected to make staggering losses of Rs 2,500 crore in 2006-07.
The meeting was attended by Jet Airways Chairman Naresh Goyal, Kingfisher Chairman Vijay Mallya, Air Deccan Managing Director G R Gopinath, SpiceJet's Singh, Paramount Airways Managing Director M Thyagarajan, and Air Sahara President Alok Sharma.
The government, on its part, is planning a slew of steps to bring financial health back into the sector. The government is putting stiff conditions on the entry of new airlines that want to fly in the domestic skies.
These include enhancement of the minimum paid-up equity capital requirement, prior approval of business and fleet plans before permission is given to fly and directly linking an increase in fleet size with a commensurate increase in the paid-up equity capital norms laid out for carriers.
In order to ensure that the financial health of a carrier does not lead to bankruptcy, and also to curtail any example of predatory pricing by carriers, the government has proposed that it will review the business plans as well as the financials of the airlines every quarter and suggest corrective measures if required. This was a model the government said it was borrowing from the US.
The paid-up equity capital norm for new carriers will be hiked from the current Rs 30 crore to Rs 50 crore. For every five new aircraft inducted in a fleet, the airline's paid-up equity capital will be enhanced by Rs 20 crore.
So for instance, a carrier that increases its fleet strength from five (which is the minimum needed for starting operations will have to enhance its paid-up equity capital to Rs 70 crore if it has 10 aircraft.
In case it starts operation with 10 aircraft, it also has to pay the same amount. Earlier there were no such norms.
According to Civil Aviation Minister Praful Patel, the government has decided to step in to ensure that the Indian carriers remain in good financial health.
"There is massive growth, but at the same time, there are losses, too. We want to ensure better business conditions. The government does not want a repeat of 1991," said Patel. In 1991, a number of private airlines went belly up due to bad business plans and mounting losses.
New applications to start airlines will have to wait for some more time for licences, as the government wants to evaluate the business viability of these companies before awarding them permission to fly. This has been done to ensure that only sound players enter the sector.
The government came under fire from the private players on higher jet fuel prices. The airlines had pointed out to the government that while prices were high, oil marketing companies passed on the increased price to the carriers, but no such step was taken when fuel prices were down.
According to airlines, the civil aviation minister has assured the carriers that the civil aviation ministry is taking up this issue with the oil and finance ministries. The contribution of jet fuel prices to a carrier's costs is about 40 per cent.
In addition, the civil aviation ministry is also proposing a tax package to the finance ministry, including long-term waiver of aircraft leasing tax, financial transaction taxes and abolition of services taxes.