DSIJ Mindshare

Check-In Baggage: Heavy On Travellers?

The Indian Aviation space is turning more vibrant with every passing day. The distraught sector which was once inundated with negative news, has now witnessed some positive actions. Be it the increased FDI limit, arrival of AirAsia or the closure of the much awaited Jet-Etihad deal, the government seems to favour the sector by all means. In line with these, the Ministry of Civil Aviation has come out with a new set of regulations that allows airline companies to unbundle their service and charge passengers separately for additional facilities which includes check-in baggage.

An official release from the Ministry of Civil Aviation stated, “Civil Aviation Ministry has decided to permit scheduled airlines to unbundle certain services and to charge fees for these services separately”. The services for which the airlines would be free to charge passengers include preferential seating, meals, snacks, drinks (excluding drinking water), check-in baggage, use of airline lounges, carrying sports equipment, musical instruments and valuable baggage which have higher carrier liability.

The move is in line with global standards where this practice was instigated in 2008 by some US-based carriers which were facing a financial crunch on account of a global meltdown. Their decision to charge passengers even for the first checked baggage had then received flak from air travellers, but the practice still continues with the airlines generating revenue worth millions of dollars.

Delta Airlines earned 10.50 per cent of its revenues from other services in CY12. Even Air Asia, in its Q4CY12, earned more than seven per cent of its revenues from baggage fees. It has thus become a major source of revenue for aviation players globally. Rather, AirAsia has witnessed a consistent increase in its revenues from baggage fees in the past few years. On the basic premise of charging check-in baggage, the airline has managed to maintain lower fares and has similar plans for India too. The noticeable factor here is that this regulation has been announced just ahead of the AirAsia’s entry into the Indian markets, thus raising some critical questions.[PAGE BREAK]

So how will this move impact the Indian aviation sector? Let’s first look at the premise presented by the ministry. The release said that the ministry’s decision is based on the recommendations of an independent consultant. It stated, “Unbundling of services has become a necessary aspect of exercising more control over operational costs and running a successful airline”. While, “the objective of the decision is to facilitate airlines to offer low base fare for price sensitive travellers, while at the same time offer choice to service seekers at a price. This will allow passengers to benefit from lower base fares and to customise the product to better suit their requirements and budget while allowing airlines to develop more sustainable operations in an environment of wafer-thin margins”, it added.

Although the ministry thinks that it is a win-win situation for travellers and aviation companies, we beg to differ. While it is acceptable that business traveller will benefit from this step, the leisure travellers are likely to suffer. This will become clearer when the airline companies come up with the charges for these services, which will ultimately amount to higher aggregate charges for a leisure traveller.

This move brings with it a major opportunity for the airline companies. If they can manage to bring down their costs even by 15 to 20 per cent, they can compete with the railway fares of AC-II travellers. This may lead to a volumes growth of the Indian airline companies.

We are of the opinion that the aviation stocks will be at an advantageous position on account of this regulation with a volumes growth and an improvement in realisations. One of our earlier reports had mentioned that the airline companies are already working on their margins as thin as a boarding pass. The recent move would help these aviation companies bring in some improvement on the bottomline front. After these charges are levied, there would not be any difference between a no-frill and a full service carrier.

The companies will provide complete details of the services they are willing to unbundle and the fees they are likely to charge for them to the aviation regulator - Directorate General of Civil Aviation (DGCA) in another six months. Although the DGCA may not fix the fees for these services, it will have the right to intervene if regulatory principles are violated by the airlines. A fixed amount would be charged on these services and it will be announced well in advance. The charges shall not vary with the base fare for a particular flight. The complete guidelines would be declared around six months from now. So the impact of the above regulation may not be seen until Q3FY14. While it will come as a welcome change for business travel in terms of volume growth, it will bode ill for the leisure traveller.

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